                     T.C. Summary Opinion 2011-50



                       UNITED STATES TAX COURT



               TUWANA JYNNE ANTHONY, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8263-10S.               Filed April 18, 2011.



     TuWana Jynne Anthony, pro se.

     Mark J. Miller, for respondent.



     SWIFT, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1    Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and




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

this opinion shall not be treated as precedent for any other

case.

     Respondent determined a deficiency of $5,516 in petitioner’s

2005 Federal income tax.   This $5,516 deficiency was based on an

adjustment adjudicated in Anthony v. Commissioner, docket No.

5791-07S, a prior case before this Court relating to petitioner’s

2003 and 2004 Federal income taxes.    Respondent moves for summary

judgment under Rule 121.

     The issues for decision are:   (1) Whether the mitigation

provisions under sections 1311 through 1314 permit respondent to

make a deficiency determination against petitioner for 2005, a

year that is otherwise closed under the section 6501 3-year

period of limitations; and (2) if so, whether petitioner may

raise unrelated issues to offset the increase in tax therefrom.

     At the time of filing the petition, petitioner resided in

Michigan.

                            Background

     At all relevant times petitioner was the sole proprietor and

operator of a beauty consulting business.   In connection with her

business petitioner bought, sold, and maintained inventories of

cosmetic products.

     On Schedules C, Profit or Loss From Business, of her 2004

and 2005 Federal income tax returns, petitioner reported opening

and ending inventory, income, and deductions arising from
                               - 3 -

operation of her business.   On her 2004 return petitioner

reported ending inventory of $41,097.

     On April 15, 2006, petitioner filed her 2005 Federal income

tax return.   Consistent with her reported 2004 ending inventory,

petitioner reported a $41,097 opening inventory for 2005.

     In 2006 respondent audited petitioner’s 2004 Federal income

tax return, resulting in the issuance to petitioner of a notice

of deficiency that included adjustments to Schedule C purchases

and gross receipts (i.e., adjustments unrelated to the reporting

of inventory).   Petitioner timely filed the petition at docket

No. 5791-07S challenging respondent’s determination.2

     During settlement negotiations in docket No. 5791-07S,

petitioner affirmatively raised, inter alia, the issue of whether

the $41,097 reported ending inventory on petitioner’s 2004

Federal income tax return should have been reported as $20,548.

Specifically, petitioner took the position that she erroneously

reported her 2004 ending inventory using her retail selling

price--rather than her cost--for the inventory.3

     Respondent ultimately agreed with petitioner as to the

amount of petitioner’s 2004 ending inventory, and as part of a

settlement stipulation dated September 23, 2009, in docket No.


     2
      The proceedings in docket No. 5791-07S were conducted under
the small tax case procedures authorized by sec. 7463.
     3
      Petitioner’s markup of her inventory of cosmetic products
was 100 percent over cost.
                               - 4 -

5791-07S, petitioner and respondent agreed that petitioner’s 2004

ending inventory for cosmetic products was reduced from $41,097

to $20,548.   This adjustment increased petitioner’s 2004 cost of

goods sold, decreased her 2004 income by $20,549, and decreased

her 2004 Federal income tax liability.   The parties’ written

settlement stipulation in docket No. 5791-07S expressly provided,

in relevant part:

     On her 2004 income tax return, petitioner reported
     ending inventory for her Schedule C activity as
     $41,097. In connection with this case, petitioner
     affirmatively raised the issue of whether the ending
     inventory of her 2004 federal income tax return should
     have been reported as $20,548, instead of $41,097.
     Petitioner alleged that the ending 2004 inventory had
     been reported at retail price rather than at cost.
     Petitioner further alleged that there were no errors
     with respect to the beginning and ending 2003 or
     beginning 2004 inventory values. Based on the evidence
     provided by petitioner, respondent agrees with
     petitioner’s assertions with respect to the inventory.
     Under the terms of settlement, the value of
     petitioner’s ending 2004 inventory reported on Schedule
     C is reduced from $41,097 to $20,548, resulting in an
     increase to petitioner’s 2004 cost of good sold
     deduction of $20,549.

     On September 23, 2009, the parties simultaneously filed with

the Court the above settlement stipulation and a stipulated

decision in docket No. 5791-07S, and on October 2, 2009, this

Court entered a decision therein.   The decision became final on

December 31, 2009.4



     4
      A Tax Court decision in a proceeding conducted under sec.
7463 becomes final 90 days after the decision is entered. Sec.
7481(b).
                                - 5 -

     On January 7, 2010, respondent mailed petitioner a notice of

deficiency for 2005--the focus of the instant case.   The only

substantive adjustment made in this notice was a $20,549

reduction of petitioner’s Schedule C opening inventory for

cosmetic products--from $41,097 (as reported on petitioner’s 2005

return) to $20,548.   Respondent explained this adjustment as

follows:

     In Tuwana J. Anthony v. Commissioner, Docket No. 5791-
     “07S”, based on representations made by you, the Tax
     Court made a determination that your ending inventory
     for 2004 was $20,548, instead of $41,097 as reported by
     you. Under section 1311, the same adjustment is
     required to be made to your beginning inventory for
     2005. * * * This results in an increase to your [2005]
     income of [$20,549].

     On the basis of the above inventory adjustment and other

adjustments that petitioner and respondent agreed to, respondent

determined a $5,516 deficiency in petitioner’s 2005 Federal

income tax.   Although the section 6501 3-year period of

limitations for 2005 had expired at the time respondent issued

the notice of deficiency on January 7, 2010, respondent relied on

the mitigation provisions of sections 1311 through 1314 to issue

the notice of deficiency to petitioner.

                             Discussion

     The parties agree that there are no issues of material fact

requiring a trial.    When no material fact remains at issue, we

may grant summary judgment as a matter of law.   Rule 121(b);

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Fla. Country
                               - 6 -

Clubs, Inc. v. Commissioner, 122 T.C. 73, 75-76 (2004), affd. on

other grounds 404 F.3d 1291 (11th Cir. 2005).

     While respondent’s notice of deficiency for 2005 was issued

after the section 6501 3-year period of limitations had expired,

respondent argues that the notice was timely by operation of the

mitigation provisions under sections 1311 through 1314.

     If applicable, the mitigation provisions, among other

things, permit the correction of an item that is shown to be

erroneous by a determination in an administrative or judicial

proceeding relating to another year or to a related taxpayer.

Fruit of the Loom, Inc. v. Commissioner, T.C. Memo. 1994-492,

affd. 72 F.3d 1338 (7th Cir. 1996).    The limited conditions under

which the mitigation provisions will be applied may be described

generally as follows:   (1) There has been a determination (as

defined in section 1313(a)); (2) the determination must fall

within one of the specified “circumstances of adjustment” or

“doubling-up” situations described in section 1312; (3) with

respect to the treatment of the item in question for the

determination year, the party against whom the mitigation

provisions are invoked must have maintained 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 limitations or by some other rule

of law, see sec. 1311(b); and (4) the party who seeks to employ
                               - 7 -

the mitigation provisions must act timely thereunder and in the

proper manner to make a corrective adjustment, see sec. 1314.

Fong v. Commissioner, T.C. Memo. 1998-181.     We discuss these

conditions below as they apply to this case.

     Section 1313(a) provides that a “determination” is one of

the following:   An action by this Court or another court of

competent jurisdiction that has become final; a closing agreement

made under section 7121; a final disposition of a claim for

refund; or an agreement under section 1313(a)(4).    See also Fruit

of the Loom, Inc. v. Commissioner, supra.

     As discussed above, this Court entered a decision in docket

No. 5791-07S which became final on December 31, 2009.    Generally,

for a court decision to constitute a determination under section

1313(a) it must involve a substantive opinion by the court on the

merits of an issue.   Compare Commissioner v. Estate of Weinreich,

316 F.2d 97, 103-104 (9th Cir. 1963) (a prior court opinion on

the issue in question or directly related issues is to be treated

as a final determination under the mitigation provisions), affg.

in part and revg. in part 37 T.C. 365 (1961), with Fruit of the

Loom, Inc. v. Commissioner, supra at 1343-1345 (general

administrative settlement agreements will not constitute

determinations under the mitigation provisions).    In Fong v.

Commissioner, supra, however, we explained:     “Where the written

stipulation of settled issues reflects more than general language
                               - 8 -

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.”   (Emphasis deleted.)

     Herein, the settlement stipulation agreed to by the parties

in docket No. 5791-07S expressly described the terms of the

agreement between the parties--namely that petitioner had

overstated her ending inventory for 2004 and that it was reduced

to $20,548.   Because the Court’s decision entered in docket No.

5791-07S was based on a stipulation that included the specific

terms of the parties’ settlement agreement (including exclusion

of the $20,549 erroneous inventory amount), that decision is to

be treated as a final determination for purposes of the

mitigation provisions.

     The determination must also fall within one of the

“circumstances of adjustment” described in section 1312.

Respondent relies on section 1312(3)(A), which provides:    “The

determination requires the exclusion from gross income of an item

included in a return filed by the taxpayer * * * and which was

erroneously excluded or omitted from the gross income of the

taxpayer for another taxable year”.

     For mitigation purposes, changes to inventory may be treated

as a change in an item of gross income and may result in a double

exclusion or inclusion of gross income.   Estate of SoRelle v.
                              - 9 -

Commissioner, 31 T.C. 272, 274 n.2 (1958).     The determination in

docket No. 5791-07S that there was an overstatement of ending

inventory in 2004 resulted in a double exclusion of $20,549 in

income--in 2004 and in 2005--that originally had been reported by

petitioner on her 2004 Federal income tax return.    Sec.

1312(3)(A); see also United States v. Rachal, 312 F.2d 376, 381-

382 (5th Cir. 1962).

     Section 1311(b)(1) requires that the party against whom the

mitigation provisions are invoked (petitioner herein) must have

maintained a position inconsistent with the treatment of the item

in question in another year of the taxpayer.    As discussed,

petitioner filed her 2004 and 2005 Federal income tax returns

reporting ending 2004 and opening 2005 inventory of $41,097.    In

docket No. 5791-07S petitioner affirmatively maintained (as an

offset to other adjustments respondent was making) that her

ending inventory for 2004 actually was $20,548 (not $41,097 as

she had reported), a position that was agreed to by respondent

and formally adopted by this Court.5   It is clear from these

facts that the exclusion of $20,549 from petitioner’s 2004

reported income occurred as a result of her affirmative position



     5
      With respect to the adjustment of ending inventories, one
court has stated: “Where a closing inventory for any taxable
year is reduced, the opening inventory for the following taxable
year is automatically reduced in the same amount”. Gooch Milling
& Elevator Co. v. United States, 111 Ct. Cl. 576, 584, 78 F.
Supp. 94, 99 (1948).
                                - 10 -

with regard thereto and that such exclusion was inconsistent with

the exclusion of that same amount from her 2005 income.

Petitioner took inconsistent positions with respect to the

inventory adjustment.

       Additionally, on the date of a determination, correction of

the error in question must be barred by the operation of the

section 6501 3-year period of limitations or some other rule of

law.    The decision in docket No. 5791-07S became final on

December 31, 2009.    The section 6501 3-year period of limitations

for including the $20,549 in petitioner’s income for 2005 (by way

of adjustment to opening inventory) and for assessing a

deficiency in petitioner’s 2005 Federal income tax return expired

on April 15, 2009.    Accordingly, at the time the determination

was made, the assessment of a deficiency attributable to the

$20,549 decrease in petitioner’s 2005 opening inventory was

barred by the section 6501 3-year period of limitations.

       Respondent, as the party seeking to use the mitigation

provisions, must also act timely thereunder and in the proper

manner in making a corrective adjustment.    See sec. 1314.     Here,

section 1314(b) required respondent to issue a notice of

deficiency to petitioner within 1 year of the determination

described in section 1311(a).    Again, the decision became final

on December 31, 2009, and respondent timely issued the notice of

deficiency for 2005 on January 7, 2010.    Respondent’s notice was
                              - 11 -

timely and otherwise in accordance with the requirements of

section 1314.

     On the basis of the foregoing, we find that all requirements

of the applicable mitigation provisions have been met and that

respondent properly relied thereon in issuing petitioner the

notice of deficiency for 2005.   Petitioner’s opening inventory

for 2005 is reduced from $41,097 to $20,548 consistent with the

adjustment made to her 2004 ending inventory.

     Lastly, petitioner argues that if respondent is permitted to

use the mitigation provisions to decrease her 2005 opening

inventory, thereby increasing her 2005 Federal income tax

liability, petitioner should be permitted to raise unrelated

issues relating to her 2005 tax liability and the adjustment made

under mitigation.   Specifically, petitioner argues that her 2005

gross receipts should be reduced from the reported $24,963 to

$13,563--a reduction of $11,400.

     Section 1314(c), however, provides:    “The amount to be

assessed and collected in the same manner as a deficiency * * *

under * * * [the mitigation provisions], shall not be diminished

by any credit or set-off based upon any item other than the one

which was the subject of the adjustment.”    (Emphasis added.)   The

application of the mitigation provisions does not allow a

reopening of the tax liability for the closed year except to the

extent that it is affected by the item in question under
                               - 12 -

mitigation.   Estate of SoRelle v. Commissioner, 31 T.C. at 276.

The only adjustment under mitigation involves petitioner’s 2005

opening inventory.    Petitioner’s attempt to offset the effect of

this adjustment with a reduction in her gross receipts is barred

by section 1314(c).

     We sustain respondent’s determination of a $5,516 deficiency

in petitioner’s 2005 Federal income tax.

     To reflect the foregoing,


                                           An appropriate order and

                                     decision will be entered for

                                     respondent.
