                        T.C. Memo. 2009-60



                      UNITED STATES TAX COURT



      ROGER A. BURTON AND COLLEEN C. BURTON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7001-07.                Filed March 18, 2009.



     Claudia M. Revermann and John R. Koch, for petitioners.

     David L. Zoss, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   Respondent determined a $239,309 deficiency

in petitioners’ 2000 joint Federal income tax and a $47,862

accuracy-related penalty under section 6662(a).

     At this time the only issue for decision is whether

petitioners entered into a binding settlement agreement with

respondent’s Appeals Office relating to petitioners’ joint
                                -2-

Federal income tax liability for 2000.1     Petitioners assert that

a final binding settlement was entered into under which they were

to pay a single lump sum of $60,000 without any further liability

to pay statutory interest.   Respondent asserts, among other

things, that no final binding agreement was ever reached--

particularly with regard to petitioners’ liability for statutory

interest.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code applicable to the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.


                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     When they filed the petition, petitioners resided in

Minnesota.

     Over the course of 17 years, petitioners owned the stock in

an S corporation that operated a truck stop, a convenience store,

storage units, and rental units located in a building complex on

Interstate 10.   In 2000 petitioners transferred their stock in




     1
        By order dated Apr. 8, 2008, the issue as to whether
petitioners entered into a binding settlement agreement with
respondent’s Appeals Office was severed for trial and decision.
Trial of other issues will await resolution of this issue.
                                 -3-

the S corporation to an affiliated employee stock ownership plan

(ESOP), and the ESOP in turn sold the assets of the S corporation

to a third party for $627,344.

     The $627,344 was to be paid in installments over a number of

years.   Robert Olson, acting under a power of attorney for

petitioners (Attorney Olson), assisted in the transfer of the S

corporation stock and in the sale of the S corporation’s assets.

     On their 2000 joint Federal income tax return petitioners

did not report any of the $627,344 as income.

     During an audit by respondent of petitioners’ 2000 joint

Federal income tax return, Attorney Olson represented

petitioners.   As a result of the audit, respondent’s revenue

agent proposed to ignore petitioners’ ESOP, to treat the above

asset sale as a sale by petitioners directly, and to charge

petitioners under sections 1231 and 1366 with the $627,344 in

proceeds from the asset sale.    Respondent’s revenue agent also

proposed the $239,309 tax deficiency, the $47,862 section 6662(a)

accuracy-related penalty, and statutory interest.    Respondent’s

revenue agent also proposed two alternative adjustments (first

alternative--recognize the ESOP but treat the sale by the ESOP of

the S corporation’s assets as a sale that did not qualify under

section 453 for installment sale reporting; second alternative--

recognize the ESOP but, if the sale of the S corporation assets

was treated as qualifying under section 453 for installment sale
                                -4-

reporting, treat the sale of the assets under section 453(e) as a

second disposition by a related party and charge petitioners with

income each year for the payments received by the ESOP).

     Petitioners protested the revenue agent’s proposed

deficiency to respondent’s Appeals Office.   During the protest

Attorney Olson represented petitioners.   In petitioners’ written

protest no mention was made of statutory interest.

     In a February 17, 2005, letter respondent’s Appeals officer

notified petitioners and Attorney Olson that he had been assigned

the case.   Respondent’s Appeals officer further stated that

statutory interest would accrue on the proposed tax deficiency as

required by law.

     Soon thereafter, Attorney Olson and the parties initiated

settlement discussions.

     In a faxed letter dated July 31, 2006, respondent’s Appeals

officer stated that for purposes of settlement negotiations the

maximum tax that would be due from petitioners on the sale of

their S corporation assets was estimated to be $107,000.

Respondent’s Appeals officer also stated that under his estimate

the minimum tax that would be due from petitioners was $90,000.

Respondent’s Appeals officer further stated that the amount of

any settlement would have to at least equal the estimated minimum

of $90,000.
                                  -5-

     During a conference on August 3, 2006, Attorney Olson argued

that each side had hazards of litigation of at least 50 percent,

and he proposed that petitioners’ 2000 Federal income taxes be

settled for $40,000.

     In a letter dated August 7, 2006, to respondent’s Appeals

officer, Attorney Olson summarized his calculation of his $40,000

settlement proposal as follows:


                        Description                        Amount

    Net sale proceeds                                  $600,000
    Capital gain tax rate                                    15%
                                                       $ 90,000
     Hazards of litigation                                   50%
                                                       $ 45,000
     Addition for future capital gain taxes that
       would have been paid under current
       structure                                       $ 15,000

     Subtraction for taxes already paid on
       $275,000                                        $(20,000)
       Total                                           $ 40,000


     In the above July 31, August 3, and August 7, 2006,

communications apparently no reference was made to statutory

interest.

     In a faxed letter dated August 21, 2006, respondent’s

Appeals officer sent to Attorney Olson revised calculations in

which he used $106,881 for the total estimated tax due and in

which he restated that from respondent’s viewpoint and for

settlement negotiations $90,000 was being treated as the minimum
                                 -6-

tax due under any settlement.    In this letter no mention was made

of statutory interest.

     At the next conference, on September 1, 2006, Attorney Olson

and respondent’s Appeals officer discussed a possible settlement

at $60,000.   The record does not reflect what was said, if

anything, about statutory interest.

     In a faxed letter dated September 1, 2006, respondent’s

Appeals officer sent Attorney Olson a computerized calculation of

interest on a hypothetical tax liability of $25,000.   On the copy

of this letter which is in evidence there appears a handwritten

calculation reflecting a $60,000 liability that appears to

include some statutory interest.   This handwritten calculation

reflecting $60,000, however, is not explained and is ambiguous.

     On September 7, 2006, respondent’s Appeals officer sent a

cover letter to Attorney Olson with regard to a proposed

settlement with an enclosed Form 870-AD, Offer to Waive

Restrictions on Assessment and Collection of Tax Deficiency and

to Accept Overassessment.   In the September 7, 2006, cover letter

respondent’s Appeals officer referred expressly to the accrual of

statutory interest as follows:


     The computations do not include interest. By law,
     interest accrues from the due date of the return. In
     order to stop additional interest from accruing, you
     may enclose full payment payable to the United States
     Treasury.
                                -7-

     The proposed Form 870-AD shows $60,000 as the tax due and

refers expressly to the accrual of statutory interest as follows:

“with interest as provided by law.”

     In an October 20, 2006, faxed letter Attorney Olson proposed

that a closing agreement be entered into regarding the settlement

of petitioners’ 2000 joint Federal income tax liability, and on

or before October 23, 2006, Attorney Olson mailed to respondent’s

Appeals officer a proposed closing agreement.   The proposed

closing agreement stated in part--


     The total sanction amount due to the United States Treasury
     under this Agreement is Fifty-Five Thousand Dollars
     ($55,000). The taxpayers shall pay this sum * * *
     contemporaneously with the execution of this Agreement, or
     by five (5) payments of Eleven Thousand Dollars ($11,000)
     per year plus statutory interest paid annually * * *.


     After discussing the above language for a closing agreement

with one of respondent’s closing agreement coordinators, on

November 15, 2006, respondent’s Appeals officer mailed to

Attorney Olson a cover letter with a revised closing agreement

for petitioners’ signature.   In the letter respondent’s Appeals

officer explained that the tax due under the proposed revised

settlement would be $60,000 and that interest would “continue to

accrue” thereon until paid.

     Attorney Olson notified respondent’s Appeals officer that he

agreed on behalf of petitioners to the revised closing agreement,

and on November 20, 2006, respondent’s Appeals officer sent to
                                 -8-

Attorney Olson the original revised closing agreement along with

the Form 870-AD for signature.

     On or about November 27, 2006, petitioners and Attorney

Olson signed the closing agreement and the Form 870-AD and mailed

them, along with a check for $60,000, back to respondent’s

Appeals officer.   On petitioners’ $60,000 check the words “paid

in full” were written in the lower left corner.

     On November 28, 2006, respondent’s Appeals officer mailed a

letter to Attorney Olson acknowledging receipt of the closing

agreement signed by petitioners, the Form 870-AD signed by

petitioners, and petitioners’ $60,000 check.   In his letter,

however, respondent’s Appeals officer explained that he could not

process petitioners’ $60,000 check because that check and

petitioners’ payment did not include an additional $23,684 in

statutory interest respondent’s Appeals officer calculated had

accrued and was due on the $60,000 through November 30, 2006.

Respondent’s Appeals officer also included a computation of the

$23,684 in accrued interest.

     On December 5, 2006, respondent’s Appeals officer mailed

another letter to Attorney Olson reiterating that the payment due

under the settlement that had been discussed was $60,000 in taxes

and $23,684 in statutory interest.

     Not having received a response from petitioners, on

December 11, 2006, respondent’s Appeals officer by mail returned
                                  -9-

to Attorney Olson with a cover letter petitioners’ $60,000 check,

and on December 21, 2006, respondent issued the notice of

deficiency.

     Neither respondent’s Appeals officer nor any other

representative of respondent or of the United States ever signed

the closing agreement that petitioners had signed regarding

petitioners’ 2000 Federal income tax liability.


                                OPINION

     As explained recently in Dormer v. Commissioner, T.C. Memo.

2004-167, the law applicable to administrative settlement offers

involving Federal income taxes is well established.    Regulations

establish the procedures for closing agreements and compromises

under sections 7121 and 7122.    Secs. 301.7121-1, 301.7122-1,

Proced. & Admin. Regs.   These procedures are exclusive and must

be satisfied in order to effect an administrative compromise or

settlement which will be binding on both a taxpayer and

respondent.   Rohn v. Commissioner, T.C. Memo. 1994-244, see also

Urbano v. Commissioner, 122 T.C. 384, 393 (2004) (“it is firmly

established that section 7121 sets forth the exclusive means by

which an agreement between the Commissioner and a taxpayer

concerning the latter’s tax liability may be accorded

finality.”); Estate of Meyer v. Commissioner, 58 T.C. 69, 70

(1972) (“Section 7121 of the Internal Revenue Code of 1954 sets

forth the exclusive procedure under which a final closing
                               -10-

agreement as to the tax liability of any person can be

executed”); Harbaugh v. Commissioner, T.C. Memo. 2003-316 (“It is

well settled that section 7122 and the regulations thereunder

provide the exclusive method of effectuating a valid compromise

of assessed tax liabilities.”); Ringgold v. Commissioner, T.C.

Memo. 2003-199 (“The law regarding compromises is well

established.   The regulations and procedures under section 7122

provide the exclusive method of effectuating a compromise.”).

Regulations under sections 7121 and 7122 require that any closing

agreement or offer-in-compromise be submitted and/or executed on

or in the specific form prescribed by the IRS.   Secs. 301.7121-

1(d), 301.7122-1(d), Proced. & Admin. Regs.

     Respondent has prescribed that one of two forms be used to

finalize closing agreements--Form 866, Agreement as to Final

Determination of Tax Liability, or Form 906, Closing Agreement on

Final Determination Covering Specific Matters.   Form 866 is used

to determine conclusively a taxpayer’s total tax liability for a

taxable period.   Form 906 is used if an agreement relates to one

or more separate items affecting a taxpayer’s tax liability.

Sec. 601.202(b), Statement of Procedural Rules; see Manko v.

Commissioner, 126 T.C. 195, 201-202 (2006).

     Further, final authority over administrative settlements

involving Federal tax matters has been delegated to Regional

Counsel, Regional Director of Appeals, Chiefs, Assistant Chiefs
                                 -11-

and Associate Chiefs of the Appeals Offices, Appeals Team Chiefs,

Team Managers, Directors of an Appeals Operating Unit, Appeals

Area Directors, Deputy Appeals Area Directors, and Appeals Team

Case Leaders.   Sec. 601.106(a)(1)(i) and (ii), Statement of

Procedural Rules; Delegation Order No. 66 (Rev. 15 Jan. 23,

1992).   The purported closing agreement in this case was never

executed by an authorized representative of respondent.   Neither

the Appeals officer nor the Closing Agreement Coordinator ever

signed the document.

     Once a case is docketed in this Court a different framework

of rules is typically applied.    In Dormer v. Commissioner, supra,

we explained that after a case is docketed in this Court a

settlement agreement may be reached and may become final and

binding on the parties through contract principles of offer and

acceptance.   See also Dorchester Indus. Inc. v. Commissioner, 108

T.C. 320, 330 (1997), affd. without published opinion 208 F.3d

205 (3d Cir. 2000).

     As has been stated, it “‘is not necessary that the parties

[in litigation] execute a closing agreement under section 7121 in

order to settle a case pending before this Court, but, rather, a

settlement agreement may be reached through offer and acceptance

made by letter, or even in the absence of a writing.’”    Id.

(quoting Manko v. Commissioner, T.C. Memo. 1995-10).
                                  -12-

     In this connection, a settlement is a contract, and general

principles of contract law govern whether a settlement has been

reached.   Id.    A prerequisite to the formation of a contract is

mutual assent to its essential terms, arrived at through offer

and acceptance.     Id.

     Whichever framework and set of rules we apply here, on the

record before us we conclude that no settlement was entered into

between the parties.      Clearly, no final closing agreement was

signed by an individual authorized to bind respondent, and no

mutual agreement was reached by the parties that either excluded

petitioners’ liability for statutory interest on the lump sum

$60,000 petitioners tendered to respondent or that affirmatively

included statutory interest as part of the $60,000 that was

tendered by petitioners.      The bulk of the relevant documentation

in evidence supports the conclusion that statutory interest was

to accrue and was to be paid in addition to the $60,000.

     We agree with respondent that no mutual agreement was

reached on key aspects of the proposed settlement that were being

negotiated (particularly as to petitioners’ liability for

statutory interest) and that no final and binding settlement was

entered into between the parties.        We also conclude that no

person authorized to bind respondent ever executed an agreement
                               -13-

under section 7121.   This case is returned to the general

jurisdiction of the Court for trial.2


                                      An appropriate order will be

                               issued.




     2
        In their posttrial memorandum, petitioners for the first
time raise equitable estoppel. This issue is not properly before
the Court. See Rule 39. In any event, the facts do not support
a finding that respondent’s Appeals officer made any false
representations to or in any way misled petitioners or Attorney
Olson about the terms of the proposed settlement. FPL Group,
Inc., & Subs. v. Commissioner, T.C. Memo. 2008-144.
