                        T.C. Memo. 1998-181



                      UNITED STATES TAX COURT



                   MUN LI FONG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5217-96.                Filed May 14, 1998.



     Belan Kirk Wagner, for petitioner.

     Christian A. Speck, for respondent.



                        MEMORANDUM OPINION


     SWIFT, Judge:   This case is before the Court under Rule 1211

on petitioner's motion for summary judgment.



1
     Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
year in issue.
                               - 2 -


     As a matter of law, petitioner contends that respondent’s

notice of deficiency in income tax to petitioner for 1986 in the

amount of $375,173 is barred by the 3-year period of limitation

under section 6501 and that the mitigation provisions of the Code

(specifically the circumstance of adjustment described in section

1312(7)) are not applicable.   Respondent objects to petitioner’s

motion for summary judgment on the law and also on the ground

that material facts remain in dispute.

     The underlying substantive tax adjustment reflected in

respondent’s notice of deficiency involves an increase of

approximately $1.9 million in the amount of taxable gain

petitioner realized in 1986 on liquidation and distribution of

the assets of Lee Yuen Enterprises (Hong Kong) Ltd. (LY

Enterprises), a Hong Kong corporation authorized to do business

in California, in which corporation petitioner was the sole

shareholder.

     In 1986, LY Enterprises was engaged in the business of

owning and operating grocery stores in the United States and

investing in land development in California and in Hong Kong.

     On December 31, 1986, pursuant to a plan of complete

liquidation, LY Enterprises distributed its assets to
                               - 3 -


petitioner.2   Among assets distributed to petitioner were four

parcels of real property located in Sacramento, California

(the properties).

     On petitioner's 1986 individual Federal income tax return

that was filed on April 15, 1987, petitioner reported a total

cumulative net value of $147,262 for the properties and other

assets she received on liquidation of LY Enterprises, a basis of

$75,000 for her stock in LY Enterprises and a capital gain of

$72,262 relating to the liquidating distribution she received

from LY Enterprises.

     In 1987, petitioner contributed the properties that she

received in 1986 on liquidation of LY Enterprises to the Lily

Company, a California limited partnership in which petitioner

owned a partnership interest (the Lily Partnership).

     On the Lily Partnership’s 1989 U.S. Partnership Return of

Income (Form 1065), based upon total claimed depreciable tax

bases of $1,912,764 in the properties, a total depreciation

expense of $89,285 was claimed relating to the properties.

     On her individual 1989 Federal income tax return, petitioner

claimed a proportionate share of the $89,285 depreciation expense



2
     The distribution appears to have been made to a revocable
trust that petitioner established. The parties herein and the
Court treat the properties as if distributed directly to
petitioner, and we make no further reference to petitioner’s
revocable trust.
                               - 4 -


reflected on the above return of the Lily Partnership based on

the same total claimed tax bases in the properties.

     On audit for 1989, respondent disallowed in its entirety the

Lily Partnership's claimed depreciation deduction of $89,285

relating to the properties.   Respondent’s disallowance of the

Lily Partnership’s claimed depreciation expense relating to the

properties was, among other things, based on the inconsistency

between, on the one hand, the $147,262 that petitioner had

reflected for the value of the properties on her individual 1986

Federal income tax return (that was used to compute petitioner's

gain relating to the liquidation of LY Enterprises) and, on the

other hand, the total $1,912,764 tax bases reflected on the Lily

Partnership’s 1989 return with respect to the properties (that

was used for the computation of depreciation claimed with respect

to the properties on petitioner’s 1989 Federal income tax

return).

     On April 15, 1993, consistent with respondent’s disallowance

of the claimed depreciation expense relating to properties on the

Lily Partnership’s 1989 return, respondent mailed a notice of

deficiency to petitioner for 1989 in which respondent disallowed

the depreciation expense claimed on petitioner's 1989 Federal

income tax return with respect to the properties.

     In Fong v. Commissioner, docket No. 15292-93 (the 1989 Fong

case), petitioner contested respondent’s disallowance of the
                              - 5 -


depreciation expense claimed on her 1989 Federal income tax

return relating to the properties.

     Respondent alleges (and for purposes of acting on the

instant motion for summary judgment we assume) that during

settlement negotiations regarding the 1989 Fong case, petitioner

argued that the properties she received on liquidation of LY

Enterprises had a value of approximately $2 million and that the

Lily Partnership and petitioner properly used that figure in

computing the depreciable taxable bases of, and for computing

depreciation on, the properties.

     In February of 1995, in the 1989 Fong case, petitioner and

respondent entered into an agreement to settle, among all other

issues, the issue regarding the proper depreciation expense to be

allowed for 1989 to the Lily Partnership and to petitioner

relating to the properties, and (we assume for purposes of

petitioner's motion for summary judgment) the proper total tax

bases of the properties.

     On February 6, 1995, in the 1989 Fong case, petitioner and

respondent filed with this Court a stipulation of settled issues

reflecting, in pertinent part and with regard to the depreciation

issue that was settled, only the specific amount of the reduction

to petitioner’s claimed depreciation expense for 1989 relating to

the properties (namely $21,160).
                               - 6 -


     Paragraph three of the stipulation of settled issues states

simply as follows:


          Petitioner and respondent agree that the revised
     adjustments identified in Exhibit A attached hereto and
     incorporated herein by reference are the correct
     adjustments to the income and expense items appearing
     on the Form 1065 filed for Lily * * * [Partnership] for
     the taxable year ending December 31, 1989. * * *


     The above-referenced Exhibit A indicates simply, with regard

to the depreciation adjustment at issue for 1989, that

petitioner’s claimed depreciation expense relating to the Lily

Partnership is adjusted downward by $21,160.

     On March 30, 1995, based on the above stipulation of settled

issues, a decision in the 1989 Fong case was entered by the

Court.   The decision reflects a tax deficiency for petitioner for

1989 in the total amount of $1,386.

     Nowhere in the stipulation of settled issues that was filed

or in the decision that was entered by this Court in the 1989

Fong case is there any explanation or information provided as to

the grounds for, the nature or terms of, or the underlying

agreement between petitioner and respondent that resulted in an

adjustment of $21,160 to petitioner's deductible share of the

depreciation expense of the Lily Partnership.   Neither document

specifies the properties to which the agreed depreciation

adjustment relates, the tax bases of the properties, the

depreciation method agreed upon, the capitalization of expenses,
                                - 7 -


or any allocation between capitalized and deductible expenses

relating to the properties.

     In their agreement to settle the 1989 Fong case, petitioner

and respondent did not enter into a closing agreement under

section 7121.   Further, petitioner and respondent did not agree

that the settlement agreement reached in the 1989 Fong case would

be treated as a final determination for purposes of the

mitigation provisions of the Code, nor did petitioner and

respondent agree that the effect of the settlement of the 1989

Fong case would be to open up, under the mitigation provisions,

the period of limitations with regard to petitioner’s 1986 year.

     Despite the fact that the general 3-year period of

limitations under section 6501(a) for respondent to assess a

deficiency against petitioner with respect to 1986 expired on

April 15, 1990 (3 years after the filing, on or before April 15,

1987, of petitioner's 1986 Federal income tax return), on

December 20, 1995, respondent mailed to petitioner a notice of

deficiency determining a $375,173 increase in petitioner’s 1986

Federal income tax liability.   At the time the petition was

filed, petitioner resided in Sacramento, California.

     Respondent’s notice of deficiency against petitioner for

1986 is based on respondent’s determination that the Court's

decision in the 1989 Fong case that was entered on March 30,

1995, constituted a determination under the mitigation provisions
                                 - 8 -


of the Code and that thereunder petitioner's Federal income tax

liability for 1986 was open for 1 year from June 29, 1995 (the

day the Court’s March 30, 1995, decision became final),3 in order

for respondent to mail to petitioner a timely notice of

deficiency for 1986.

     The underlying basis for the $375,173 income tax deficiency

reflected in respondent’s notice of deficiency to petitioner for

1986 is based on respondent’s recomputation of the taxable gain

petitioner realized on receipt of the properties received in

liquidation of LY Enterprises.    Based on the alleged underlying

grounds for settlement of the depreciation adjustment that was

involved in the 1989 Fong case (that petitioner had total tax

bases in the properties of approximately $2 million), respondent

determined that on December 31, 1986, when the properties were

received by petitioner, the properties had a fair market value of

$2,033,000 and that such value, reduced by petitioner’s $75,000

tax basis in the stock of LY Enterprises, produced a taxable gain

of $1,958,000 to petitioner for 1986.

     With regard to the substantive merits of respondent’s

underlying tax adjustment for 1986, petitioner alleges that on

liquidation of LY Enterprises and on receipt of the properties in

1986, corporate liabilities of LY Enterprises were assumed by

3
     Under sec. 7481(a) and Rule 190, where no appeal is filed, a
Tax Court decision becomes final 90 days after the decision is
entered.
                               - 9 -


petitioner (or that petitioner received the properties from LY

Enterprises subject to such liabilities) and that such

liabilities offset or reduced the gain that otherwise would have

been realized if petitioner had received the properties without

assuming or taking the properties subject to any corporate

liabilities.   Thus, petitioner argues with regard to the

underlying merits of the issue in this case that the $147,262

value and the $72,262 gain she reported on her 1986 Federal

income tax return, on receipt of the properties from LY

Enterprises, are not inconsistent with the approximate $2 million

tax bases that she and the Lily Partnership claimed, and that

respondent agreed to, as the proper total tax bases for purposes

of calculating the amount of depreciation allowable on the

properties for later years, specifically for petitioner’s 1989

year that was involved in the 1989 Fong case.

     The existence, validity, and amount of alleged liabilities

that might explain the $72,262 gain reported by petitioner for

1986 raise issues of fact relating only to the underlying

substantive tax issue in this case, and such issues of fact are

not relevant in deciding petitioner’s motion for summary

judgment.   In other words, for purposes of ruling on petitioner's

motion for summary judgment, we assume that in settling the 1989

Fong case, petitioner and respondent agreed to the approximate

total $2 million as the total tax bases for the properties.   We
                              - 10 -


agree, however, with petitioner that she is entitled to judgment

as a matter of law.

     The relief available under the mitigation provisions of

sections 1311-1314 is limited, and the statutory provisions do

not purport to permit the correction of all errors and

inequities.   United States v. Rushlight, 291 F.2d 508, 514 (9th

Cir. 1961); Olin Mathieson Chem. Corp. v. United States, 265 F.2d

293, 296 (7th Cir. 1959); Bolten v. Commissioner, 95 T.C. 397,

403 (1990); Bradford v. Commissioner, 34 T.C. 1051, 1054 (1960);

Brennen v. Commissioner, 20 T.C. 495, 500 (1953).   The limited

conditions under which the mitigation provisions will be

applicable may be described generally as follows (with limited

exceptions not here applicable):


     1. A final "determination", as defined in section 1313(a),
     must have occurred;

     2. The determination must fall within one of the specified
     "circumstances of adjustment" or "doubling-up" situations
     described in section 1312;

     3. The party against whom the mitigation provisions are
     invoked or a related party must have maintained, with
     respect to the treatment of the item in question for the
     determination year, a position inconsistent with the
     treatment of the item in another year of the same or related
     taxpayer, which year is barred by the generally applicable
     period of limitation or by some other rule of law. Sec.
     1311(b);

     4. The party who seeks to utilize the mitigation provisions
     must act timely thereunder and in the proper manner to make
     a corrective adjustment. Sec. 1314.
                               - 11 -


     In support of the instant motion for summary judgment and as

a matter of law, petitioner argues primarily that the fact

situation presented to us in this case does not qualify under any

of the specific circumstances of adjustments described in section

1312 and therefore that the second of the above conditions is not

satisfied in this case.    Petitioner does not concede that the

other requirements of the mitigation provisions are satisfied.

     More specifically, petitioner argues that under section

1312(7), the particular circumstance of adjustment on which

respondent relies, the alleged determination that occurred under

section 1313(a) (namely, the Tax Court decision) must itself

"determine the basis" of the property in question.    Petitioner

then argues that the particular stipulation of settled issues

that was filed and the decision that was entered by the Court in

the 1989 Fong case based on such stipulation (that reflected a

$21,160 adjustment to petitioner's 1989 claimed depreciation

expense from the Lily Partnership) cannot, as a matter of law, be

regarded as a determination under section 1312(7) of the tax

bases of the properties.

     In order for mitigation to apply under the particular and

specific circumstance of adjustment described in section 1312(7),

the existence of each of the following additional conditions must

be established:
                               - 12 -


     (1) Under section 1312(7)(A) the relevant determination must
     determine the basis of the property;

     (2) Under section 1312(7)(A) there must be a transaction on
     which such basis depends or a transaction which was
     erroneously treated as affecting such basis;

     (3) In respect of a transaction mentioned in (2) above,
     there must have occurred one of the errors listed in section
     1312(7)(C) (namely, the erroneous inclusion in or exclusion
     from gross income, an erroneous recognition or
     nonrecognition of gain or loss, or an erroneous deduction of
     an item properly chargeable to a taxpayer’s capital account
     or an erroneous charge to a taxpayer’s capital account of an
     item properly deductible).

     (4) The error described in (3) above must have occurred with
     respect to one of the taxpayers described in section
     1312(7)(B).


     As indicated, the narrow issue raised in petitioner’s motion

for summary judgment focuses on the first of the above

requirements (namely, whether the settlement agreement and/or the

Court's decision entered on March 30, 1995, "determined the

basis" of the properties as required by section 1312(7)(A)).

     Generally, to constitute a determination under section

1313(a), a court decision must involve a substantive decision on

the merits of a case.    See, for example, Commissioner v. Estate

of Weinreich, 316 F.2d 97, 103-104 (9th Cir. 1963), affg. in part

and revg. in part 37 T.C. 365 (1961), and Cotter v. Commissioner,

40 T.C. 506, 507-509 (1963), in which the courts rendered prior

affirmative opinions on the issue or on directly related issues,

which opinions were treated as final determinations under the

mitigation provisions.
                             - 13 -


     Fruit of the Loom, Inc. v. Commissioner, 72 F.3d 1338 (7th

Cir. 1996), affg. T.C. Memo. 1994-492, and Rasmussen v. United

States, 811 F.2d 949 (5th Cir. 1987), illustrate, among other

things, that general administrative settlement agreements are not

regarded as constituting determinations under section 1313(a).

     Where the written stipulation of settled issues reflects

more than general language and expressly includes the underlying

terms of the settlement agreement between the parties, the Tax

Court decision that is entered based thereon may be treated as a

final determination for purposes of the mitigation provisions.

For example, in Shields v. United States, 265 F. Supp. 770 (N.D.

Ohio 1965), affd. 375 F.2d 457 (6th Cir. 1967), a stipulation of

settlement that was filed with the Court included the specific

underlying treatment of the particular adjustments on which

mitigation was sought, and such stipulation served as the grounds

for the decision entered by the Court.   In that situation, the

decision entered by the Tax Court was held by the District Court

to constitute a determination for purposes of mitigation.

     Where, however, a Tax Court case is settled and a decision

is entered based thereon, and where the specific underlying terms

of the settlement agreement between the parties are not reflected

in the stipulation of settlement that is filed with the Court and

that serves as grounds for the decision that is entered, such a

Tax Court decision does not satisfy either the determination
                              - 14 -


requirement of section 1313(a) or the more specific requirement

of section 1312(7)(A) that the court decision itself "determine

the basis" of the property.   For example, in Knowles Elecs. Inc.

v. United States, 365 F.2d 43, 45 (7th Cir. 1966), a summary

dismissal of a mitigation claim was affirmed where, much like the

instant case, the alleged determination was based not on an

affirmative court opinion but rather on a general stipulation of

settlement between the parties (that did not specify the specific

underlying terms of the settlement) and on the court’s decision

reflecting only the general settlement agreement.

     Petitioner acknowledges that there exists some support for

the proposition that a determination of basis under section

1312(7) need not expressly relate to basis to qualify as a

determination of basis where there is a determination of a matter

that necessarily must have included a determination of basis.   In

Gooding v. United States, 164 Ct. Cl. 197, 326 F.2d 988, 993

(1964), in a prior decision, the Tax Court determined the

specific amount of gain to be realized on a transaction, and it

was concluded by the Court of Claims that such an affirmative

determination of gain by the Tax Court necessarily involved a

determination of the basis of property under section 1312(7).   In

Gooding v. United States, 326 F.2d at 993, it was noted, however,

that where a court’s decision deals only incidentally or
                              - 15 -


tangentially with basis, the decision will not be treated as a

determination of basis.

      In Rosenberger v. United States, 138 F. Supp. 117, 119

(E.D. Mo. 1955), affd. 235 F.2d 69 (8th Cir. 1956), it was held

that where a prior court decision affirmatively considered and

decided an issue as to the amount of gain or loss on disposition

of certain debentures, a determination of basis had occurred.     In

both Gooding and Rosenberger, the trial courts rendered

substantive decisions on the merits of the issues tried that

implicitly included consideration of and a computation of the

taxpayers' tax bases.

     In our view, Gooding and Rosenberger have no application

where, as in the 1989 Fong case, this Court rendered no

affirmative decision, where the case was settled, and where both

the settlement stipulation and the decision simply reflect a

summary calculation of the adjustments agreed to under the

settlement and where no explanation of the underlying grounds for

the settlement is provided either in the stipulation of

settlement or in the decision.

     We agree with petitioner that the Tax Court in the 1989 Fong

case did not have occasion to consider, pass upon, or take into

account, explicitly or implicitly, the taxable bases of the

properties.   The decision entered by the Tax Court in the 1989
                                - 16 -


Fong case is not to be regarded as a determination of the bases

of the properties.

     Petitioner appropriately notes that if respondent, as a

condition to settlement of the 1989 Fong case, wanted to ensure

that the mitigation provisions under section 1312(7) would apply

to open petitioner’s 1986 year, respondent could have requested

that petitioner enter into a closing agreement under section 7121

(see sec. 1.1313(a)-2, Income Tax Regs.) or into a specific

agreement under section 1313(a)(4) to that effect.   See also sec.

1.1313(a)-4, Income Tax Regs.

     Respondent speculates that if, in the context of negotiating

settlement of the depreciation adjustment in the 1989 Fong case,

respondent had requested and petitioner had refused to enter into

a settlement agreement under the above mitigation regulations for

purposes of opening petitioner’s 1986 year, the settlement likely

would have broken down, and respondent then would have been

forced to litigate the depreciation adjustment for 1989 in order

to obtain an adverse Tax Court decision that would qualify as a

determination of basis under section 1312(7).   Respondent asserts

that such a scenario would be counter to the public policy in

favor of settling litigation and further that respondent in the

1989 Fong case might have been subject to an award of litigation

costs under section 7430 for pursuing an adjustment (namely,

disallowance of the claimed 1989 depreciation expense of the Lily
                               - 17 -


Partnership) that was not substantially justified.   See sec.

7430(c)(4)(B).

     We reject respondent’s argument.   The fact that parties to

litigation, in the manner and method by which they settle issues

and disputed tax adjustments, should take into account and should

anticipate the specific requirements of the mitigation provisions

is not new.   We find no merit in respondent’s argument.   See Hill

v. Commissioner, T.C. Memo. 1957-2, in which a particular

adjustment was litigated solely in order to obtain an adverse

determination under the mitigation provisions necessary to open

an otherwise closed year.

     No relevant material facts are in dispute in the instant

case regarding the content of the settlement stipulation filed

and the decision entered in the 1989 Fong case that would

preclude a ruling on the narrow issue presented to us in

petitioner’s motion.   Under the terms of the settlement

stipulation that was filed with the Court and the decision that

was entered, no tax bases in the properties were determined by

the Court.    The tax adjustments reflected therein clearly cannot

be said to encompass a determination by the Tax Court of

petitioner’s tax bases in the properties.

     The possibility that petitioner and respondent, in settling

the 1989 Fong case, may have entered into further or additional

agreements not reflected in the stipulation of settlement or in
                               - 18 -


the decision (for example, as to the tax bases of the properties)

would not elevate any such further or additional agreement to the

level of a Tax Court determination under section 1312(7), in

light of the absence of any reference thereto in the written

stipulation of settled issues or in the decision.

     We conclude, as a matter of law, that under section 1312(7)

a determination of basis by the Tax Court regarding the

properties did not occur when the 1989 Fong case was settled and

the decision in that case was entered.   The settlement

stipulation and the decision in the 1989 Fong case do not give

rise to a determination that opens the period of limitations for

petitioner’s 1986 Federal income tax liability.

     For the reasons stated, the Court will grant petitioner’s

motion for summary judgment.


                                    An appropriate order and

                               decision will be entered.
