                        T.C. Memo. 1998-262



                      UNITED STATES TAX COURT



         ESTATE OF KEVIN J. LORENZ, DECEASED, ELIZABETH J.
                LORENZ, PERSONAL REPRESENTATIVE AND
                 ELIZABETH J. LORENZ, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent

                 COMET PRINTING, INC., Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 12138-96, 12140-96.1     Filed July 16, 1998.



     Charles Henry Hammer, for petitioners.

     Michelle K. Loesch, Lisa M. Oshiro, and Gregory Hahn, for

respondent.




     1
      The cases of docket No. 12138-96 and docket No. 12140-96
were consolidated for trial, briefing, and opinion by order of
this Court dated Aug. 28, 1996.
                               - 2 -

                        MEMORANDUM OPINION

     COLVIN, Judge:   This matter is before the Court on

respondent's motions for entry of decision filed in Estate of

Lorenz v. Commissioner, docket No. 12138-96, and in Comet

Printing, Inc. v. Commissioner, docket No. 12140-96.     Petitioners

filed objections to respondent's motions, and respondent filed

replies to petitioners' responses.     No party requested a hearing,

and we conclude that none is necessary.

     When these cases were called for trial, counsel for the

parties reported that they had reached a basis of settlement,

which they stated for the record.    They now ask the Court to

construe the basis of settlement on two points:

     1.    Whether the fraud penalties for Elizabeth Lorenz and

for the Estate of Kevin J. Lorenz for 1989 and 1990 should both

be computed based on the entire deficiency, as respondent

contends, or on one-half of the deficiency, as petitioners

contend.   We hold that they should both be computed based on the

entire deficiency.

     2.    Whether the depreciation deductions for Comet Printing,

Inc., should be increased by $19,432 for 1989 and $22,863 for

1990 from the amounts determined by respondent in the notice of

deficiency.   We hold that they should not.
                                 - 3 -

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.

                           Background

A.   Petitioners

     Elizabeth J. Lorenz (Mrs. Lorenz) lived in Spokane,

Washington, when she filed the petition on behalf of herself and

the Estate of Kevin J. Lorenz (Mr. Lorenz).   Mr. Lorenz was Mrs.

Lorenz's husband when he died.

     The principal place of business of Comet Printing, Inc.

(Comet), was in Spokane, Washington, when it filed its petition.

Mrs. Lorenz owned Comet when it filed its petition.

B.   Respondent's Determinations

     Respondent determined a deficiency in income tax for Mr. and

Mrs. Lorenz of $31,880 for 1989 and $60,258 for 1990, and

determined that they are liable for a fraud penalty of $23,910

for 1989 and $45,194 for 1990 under section 6663.

     Respondent determined a deficiency in income tax for Comet

of $34,710 for 1989 and $64,915 for 1990, and determined that

Comet is liable for a fraud penalty of $26,032 for 1989 and

$48,686 for 1990 under section 6663.

C.   The Settlement

     Charles Hammer (Mr. Hammer) represented petitioners and Lisa

Oshiro (Ms. Oshiro) represented respondent when the cases were
                               - 4 -

called for trial.   They told the Court that they had reached a

basis of settlement.   Respondent's counsel stated the following

basis of settlement for the record:

          MS. OSHIRO: Your Honor, the parties are pleased
     to announce a basis for settlement has been reached in
     this case. There's some question as to whether we have
     the correct starting number. There's an adjustment
     that respondent believes was conceded before the notice
     of deficiency was sent, and we will need to clarify
     that. But otherwise, it's -- respondent is willing to
     make the concession; it's a question of whether it was
     made before the notice went out.
          The basis for settlement, with question as to
     whether this is the proper starting number for Comet
     Printing in 1989, starting number is $127,023.
          Respondent concedes there was a duplication of an
     income item in the amount of $2,300.
          Respondent concedes additional cash expenses in
     the amount of $20,000.
          Respondent concedes additional cash postage in the
     amount of $5,000.
          Respondent also concedes a technical adjustment to
     take the petitioners from cash basis to accrual basis
     in 1989. The adjustment is $8,660.
          For the tax year 1990 -- oh, a fraud penalty will
     be asserted in full for the 1989 tax year.
          With respect to petitioner Comet Printing in 1990,
     the original amount for the notice of deficiency was
     $211,699.
          Respondent concedes additional cash expenses in
     the amount of $15,100, and additional cash postage in
     the amount of $5,000.
          The civil fraud penalty will be asserted in full
     with respect to Comet Printing for the year 1990.
          With respect to petitioners Kevin -- estate of
     Kevin Lorenz and Elizabeth Lorenz, the starting number
     per the notice of deficiency for 1989 was $105,019.
          Respondent concedes additional capital
     contributions in the amount of $23,000, additional cash
     expenses for the corporation -- it's a flow-through
     adjustment -- of $20,000, and the additional postage
     for the corporate expenses of $5,000.
                                - 5 -

          The civil fraud penalty will be asserted in full
     with respect to the estate of Kevin Lorenz, and at a
     reduced rate of 20 percent with respect to petitioner
     Elizabeth Lorenz.

     Petitioners' counsel then said that he had a question and

asked to go off the record to clarify it with the revenue agent.

When the parties went back on the record, they announced they had

answered petitioners' counsel's question but had still not agreed

to the "starting number" for Comet; i.e., its gross income for

1989.   The parties had agreed to certain adjustments, but had not

agreed on whether the amount of gross income to which they should

apply those adjustments was the amount in the revenue agent's

original report or amended report.      The following discussion

occurred next:

          MS. OSHIRO: * * * There was a [sic] original
     revenue agent's report and an amended revenue agent's
     report. In the amended revenue agent's report, a
     $15,000 concession was made. The question is whether
     the statutory notice of deficiency was based upon the
     original revenue agent's report or upon the amended
     revenue agent's report. If the notice of deficiency
     was based upon the original revenue agent's report,
     then respondent will then concede the $15,000; if it is
     based upon the amended revenue agent's report, then
     petitioners agree that that number does not get
     conceded again.

           MR. HAMMER:   That's correct.

     Following another recess requested by the parties,

respondent's counsel stated that the parties had reached the

following basis of settlement for 1989:
                               - 6 -

          With respect to Comet Printing, Inc. per the
     examination, the adjustment was $127,023.
          Respondent concedes a duplication of income item
     in the amount of $2,300.
          Respondent concedes additional cash expenses in
     the amount of $20,000.
          Respondent concedes additional cash postage in the
     amount of $5,000.
          Respondent concedes an adjustment to the accrual
     basis of accounting in the amount of $8,660.
          Respondent concedes additional legal fees in the
     amount of $4,000.
          And respondent concedes an equipment loss in the
     amount of $7,000.
          The fraud penalty will be imposed in full with
     respect to petitioner Comet Printing.
          With respect to petitioners the estate of Kevin
     Lorenz and Elizabeth Lorenz, the initial adjustment for
     the 1989 tax year for the notice of deficiency is
     $105,019.
          Respondent concedes an additional capital
     contribution in the amount of $23,000.
          Respondent concedes additional cash expenses for
     the corporation in the amount of $20,000.
          Respondent concedes additional postage for the
     corporate expense in the amount of $5,000.
          Respondent concedes legal fees, reducing the
     constructive dividend, in the amount of $4,000.
          The fraud penalty in full will be asserted against
     the estate of Kevin J. Lorenz, and a reduced fraud
     penalty will be asserted against petitioner Elizabeth
     Lorenz at the amount of 20 percent.



     Petitioners' counsel then said, "We're in agreement, Your

Honor", and said that petitioners agreed to settle the cases on

that basis.   Respondent's counsel and petitioners' counsel then

added:

          MS. OSHIRO: Yes. And for the record, the
     settlement with respect to the 1990 tax year is as was
     read into the record earlier.
                                - 7 -

          MR. HAMMER: That's correct, Your Honor. We're in
     agreement -- full agreement on both 1989 and 1990 as to
     the corporation and the individual.

The Court gave the parties 45 days to prepare and file decision

documents.

D.   Respondent's Proposed Decisions

     Respondent sent proposed decisions to petitioners which

stated that Mrs. Lorenz and the estate of Mr. Lorenz have a

deficiency in Federal income tax of $14,720 for 1989 and $54,630

for 1990.    The proposed decisions also stated that Mrs. Lorenz is

liable for the fraud penalty at the reduced rate of 20 percent

and the estate of Mr. Lorenz is liable for the fraud penalty at

the rate of 75 percent, as follows:

                 Joint Liability at 20-Percent Rate

                                   Penalty Under
                 Year                Sec. 6663
                 1989                 $2,944
                 1990                 10,926


                     Additional Amount Due From
                Estate of Kevin J. Lorenz, Deceased,
                         at 75-Percent Rate

                                   Penalty Under
                 Year                Sec. 6663
                 1989                 $8,096
                 1990                 30,046

     Petitioners' accountant told respondent's counsel that he

thought respondent had calculated the fraud penalty for Mrs.
                               - 8 -

Lorenz improperly.   Petitioners' accountant wrote the following

to respondent's counsel:

          It was crystal clear to me that the agreement with
     respect to the fraud penalty was that a 20% penalty
     would be asserted against Mrs. Lorenz with respect to
     her share of the additional tax. It is incredulous for
     me to believe that you would not inform us as to the
     impact of such an agreement (i.e., the government would
     collect the entire 75% from both the estate and the
     individuals) if the estate has sufficient assets. You
     should have been acutely aware of the fact as all of us
     that the estate possessed sufficient assets from which
     to collect the difference between the 20% and the 75%.
     Any reasonable person would conclude that we would
     never agree to such an application as you now attempt
     to explain to us.

     Petitioners' counsel wrote a letter to respondent's counsel

in which he said:

          The only clear and rational interpretation of the
     negotiated penalty concession was that Mrs. Lorenz was
     to pay a 20 percent fraud penalty on her one-half and
     the Estate of Kevin Lorenz was to pay the full 75
     percent penalty on its one-half.

                            Discussion

A.   Fraud Penalty

     1.   Computation of the Fraud Penalty

     The parties agree that the estate of Mr. Lorenz and Mrs.

Lorenz had a deficiency in income tax; i.e., total underpayment,

of $14,720 for 1989 and $54,630 for 1990.

     Respondent calculated the fraud penalty to be paid by the

estate of Mr. Lorenz by applying the 75-percent rate to Mr. and

Mrs. Lorenz's total underpayment for each year in issue.
                               - 9 -

Respondent calculated the fraud penalty for Mrs. Lorenz by

applying a 20-percent rate to Mr. and Mrs. Lorenz's total

underpayment for each year.

     Petitioners contend that respondent should have computed the

fraud penalty by applying 20 percent of one-half of the total

underpayment for Mrs. Lorenz and 75 percent of one-half of the

total underpayment for the estate of Mr. Lorenz.   We disagree.

     Section 6663 imposes a 75-percent fraud penalty.   Section

6663(b) and (c) provides:

          (b) Determination of Portion Attributable to
     Fraud.--If the Secretary establishes that any portion
     of an underpayment is attributable to fraud, the entire
     underpayment shall be treated as attributable to fraud,
     except with respect to any portion of the underpayment
     which the taxpayer establishes (by a preponderance of
     the evidence) is not attributable to fraud.

          (c) Special Rule for Joint Returns.--In the case
     of a joint return, this section shall not apply with
     respect to a spouse unless some part of the
     underpayment is due to the fraud of such spouse.

     Mr. and Mrs. Lorenz filed joint returns for the years in

issue.   Thus, Mrs. Lorenz and the estate of Mr. Lorenz are

jointly and severally liable for the penalty for civil fraud if

respondent establishes that Mrs. Lorenz is liable for the fraud

penalty independent of the liability of the estate of Mr. Lorenz.

See Meier v. Commissioner, 91 T.C. 273, 303 n.34 (1988) (for sec.

6653(b)); Stone v. Commissioner, 56 T.C. 213, 227-228 (1971).

The basis of settlement provides that the civil fraud penalty
                               - 10 -

will be asserted in full against the estate of Mr. Lorenz and

that Mrs. Lorenz is liable for a reduced fraud penalty at an

amount of 20 percent.   By agreeing that the fraud penalty applies

both to Mrs. Lorenz and to the estate of Mr. Lorenz, they have

each conceded that a part of their underpayment is due to fraud.

Therefore, liability for the fraud penalty is joint and several

because part of the underpayment is due to the fraud of each

spouse.   Sec. 6663(c); Meier v. Commissioner, supra.

     The parties agreed to a reduced rate for the fraud penalty

for Mrs. Lorenz, but did not reduce the base to which the penalty

applies for either petitioner.   It follows that respondent

properly calculated the fraud penalty for the estate of Mr.

Lorenz by applying the 75-percent rate to Mr. and Mrs. Lorenz's

total underpayment for each year in issue and for Mrs. Lorenz by

applying a 20-percent rate to Mr. and Mrs. Lorenz's total

underpayment for each year.

                2.   Petitioners' Arguments

     Petitioners contend that (a) the parties had previously

orally agreed to apply the fraud penalty separately to the estate

of Mr. Lorenz and Mrs. Lorenz based on only one-half of the

underpayment, and the failure of the basis of settlement to so

provide was a mutual mistake; (b) respondent's counsel knew that

the estate could pay the difference between the 20 percent and
                                   - 11 -

the 75 percent and a reasonable person would not have settled the

case on the terms respondent claims; and (c) respondent should

have told petitioners that the Government would collect the

entire 75 percent from both the estate and the individuals.

           a.     Mutual Mistake

      General principles of contract law govern the compromise and

settlement of Federal tax cases.       Dorchester Indus. Inc. v.

Commissioner, 108 T.C. 320, 330 (1997); Robbins Tire & Rubber Co.

v. Commissioner, 52 T.C. 420, 435-436 (1969); Brink v.

Commissioner, 39 T.C. 602, 606 (1962), affd. 328 F.2d 622 (6th

Cir. 1964); Saigh v. Commissioner, 26 T.C. 171, 177 (1956); Davis

v. Commissioner, 46 B.T.A. 663, 671 (1942).

      Mutual mistake occurs when both parties to a transaction

share an erroneous belief and their acts do not accomplish their

mutual intent.     Healy v. Rich Prods. Corp., 981 F.2d 68, 73 (2d

Cir. 1992).     We may reform a contract if there is clear and

convincing evidence of mutual mistake.       Id.   Unilateral mistake

occurs when only one of the parties to a transaction is in error.

Id.   We do not reform a contract based solely on unilateral

mistake.   Id.

      Petitioners contend that mutual mistake occurred here

because the parties had agreed that the fraud penalty for Mrs.

Lorenz and the estate of Mr. Lorenz would apply to one-half of
                                - 12 -

the underpayment.    There is no evidence, much less clear and

convincing evidence, that the parties made a mutual mistake.     All

we have is competing contentions of counsel.   We conclude that

the basis of settlement for fraud should not be reformed based on

mutual mistake.

          b.      Nonsensical Result

     Petitioners contend that respondent's interpretation of the

statement of the basis of settlement in the transcript is

nonsensical because, under respondent's interpretation,

petitioners did not benefit by having a 20-percent rate apply to

the fraud penalty for Mrs. Lorenz.

     Petitioners' contention that the basis of settlement in the

transcript is nonsensical is based on their contention that

respondent's counsel knew petitioners' financial status.

Respondent's counsel denied that they knew petitioners' financial

status; petitioners' counsel contends that they did.    There is no

evidence to support petitioners' allegation that respondent's

counsel knew that the estate of Mr. Lorenz had sufficient assets

to pay the fraud penalty on the entire underpayment.

Petitioners' accountant alleged in a letter to respondent's

counsel that respondent's counsel should have known that the

estate of Mr. Lorenz had enough assets to pay the fraud penalty
                                - 13 -

on the entire underpayment.    He did not say that respondent's

counsel actually knew.

          c.   Respondent's Duty To Inform Petitioners

     Petitioners contend that respondent should have told them

that the fraud penalty rates applied to the full underpayment

under the basis of settlement.    We disagree.   The fraud penalty

rates apply to the full underpayment because of section 6663(b)

and (c), as discussed at par. A-1 above.    Petitioners had the

advice of counsel and an accountant during the negotiation of the

basis of settlement.     We disagree that respondent had a duty to

inform petitioners of the law applicable to the settlement.

Stamm Intl. Corp. v. Commissioner, 90 T.C. 315, 320-321 (1988).

     3.   Conclusion

     We conclude that the fraud penalties for Mrs. Lorenz and the

estate of Mr. Lorenz should both be computed based on the entire

deficiency.

B.   Comet's Depreciation

     Petitioners contend that the depreciation deduction for

Comet should be increased by $19,432 for 1989 and $22,863 for

1990 from the amounts stated in the notice of deficiency.

Petitioners contend that respondent had agreed to this change,

but that, by mutual mistake, this agreement was not read into the
                               - 14 -

record.   Petitioners also contend that these amounts of

additional depreciation are properly allowable under the law.

     Respondent contends that the basis of settlement stated for

the record was complete.    Respondent also contends that the

amounts of additional depreciation claimed by Comet are not

correct and that respondent did not agree to those amounts.

     We are not convinced that mutual mistake is present in these

cases because both parties said that the basis of settlement

represented the full settlement agreement.    The basis of

settlement used the amount of gross income for Comet as

determined by respondent as a starting point.    If respondent had

agreed to make any additional concessions, petitioners' counsel

should have identified them to the Court when the settlement was

presented.   See Stamm Intl. Corp. v. Commissioner, supra; Korangy

v. Commissioner, T.C. Memo. 1989-2, affd. 893 F.2d 69 (4th Cir.

1990).    The parties are bound by the basis of settlement as

stated on the record and may not rely on extrinsic evidence to

prove that they had agreed to something else.    Woods v.

Commissioner, 92 T.C. 776, 780-781 (1989); Constitution Publg.

Co. v. Commissioner, 22 B.T.A. 426, 427-428 (1931).

     We conclude that Comet is not entitled to deduct more for

depreciation than respondent allowed.

     For the foregoing reasons,
- 15 -


          An order will be issued

     granting respondent's motions

     for entry of decisions.
