                              T.C. Memo. 2017-84



                        UNITED STATES TAX COURT



      NEIL L. WHITESELL AND TRACY L. WHITESELL, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 26230-15.                        Filed May 18, 2017.



      Neil L. Whitesell and Tracy L. Whitesell, pro se.

      Joel D. McMahan, for respondent.



                          MEMORANDUM OPINION


      PARIS, Judge: In a notice of deficiency respondent determined deficiencies

in petitioners’ Federal income tax of $2,862,054 and $81,893 for 2011 and 2012,
                                         -2-

[*2] respectively. Respondent also determined an addition to tax for failure to

timely file under section 6651(a)(1)1 of $696,206.50 for 2011.

      On October 20, 2016, respondent filed a motion for partial summary

judgment under Rule 121. The issues are: (1) whether the expiration of the

periods of limitation for assessment of deficiencies attributable to the S

corporations’ income barred respondent from determining flowthrough income for

Mr. Whitesell from his wholly owned S corporations and (2) whether petitioners

and respondent entered into a contract settling petitioners’ income tax liabilities

for 2011 and 2012. The Court holds for respondent on both issues and will grant

respondent’s motion for partial summary judgment.

                                    Background

      The Court derives the following facts from the parties’ pleadings and

motion papers, including exhibits and affidavits. They are stated solely for the

purpose of deciding respondent’s motion for partial summary judgment and not as

findings of fact in this case. See Rule 1(b); Fed. R. Civ. P. 52(a); Cook v.




      1
      Unless otherwise indicated, 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.
                                         -3-

[*3] Commissioner, 115 T.C. 15, 16 (2000), aff’d, 269 F.3d 854 (7th Cir. 2001).

Petitioners resided in Florida when they timely filed their petition.2

I.    Petitioners’ 2011 and 2012 Federal Tax Returns

      On October 12, 2012, petitioners filed their Form 1040, U.S. Individual

Income Tax Return, for 2011. On October 15, 2013, petitioners filed their Form

1040 for 2012.

      Respondent issued to petitioners a notice of deficiency for their 2011 and

2012 tax years on July 27, 2015. The adjustments in the notice of deficiency

included amounts that flowed through from Mr. Whitesell’s wholly owned S

corporations--Whitesell International Corp. (WIC), NLW Holdings, LLC (NLW),3

and Whitesell Corp.

      WIC and NLW filed their Forms 1120S, U.S. Income Tax Return for an S

Corporation, for 2011 on September 17, 2012. NLW filed its Form 1120S for

2012 on September 16, 2013. Respondent did not issue a notice of deficiency to

any of Mr. Whitesell’s S corporations.


      2
        Absent a stipulation to the contrary, this case is appealable to the U.S.
Court of Appeals for the Eleventh Circuit, and the Court follows precedent of that
court that is squarely on point. See sec. 7482(b); Golsen v. Commissioner, 54
T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).
      3
       The parties have stipulated that during all relevant times NLW Holdings,
LLC, is a S corporation for Federal income tax purposes.
                                          -4-

[*4] II.        Petitioners’ Offer-in-Compromise

       On December 28, 2015, after their petition was filed with the Court,4

petitioners mailed to the Internal Revenue Service (IRS) a modified Form 656-L,

Offer in Compromise (Doubt as to Liability) (OIC), for their Federal income tax

liabilities for 2006 through 2012, including liabilities resulting from the related

flowthrough entities. Petitioners substantially modified the terms and conditions

of the Form 656-L by crossing out sentences in subsections (b) and (d) and

crossing out entirely subsections (k), (l), and (m). Along with their OIC,

petitioners tendered a $3 million check as satisfaction of their 2006 through 2012

tax liabilities.5




       4
           The petition was filed on October 21, 2015.
       5
        In their response to respondent’s motion for partial summary judgment,
petitioners stated that the $3 million was a calculation of the tax with interest to a
specific date. Petitioners did not request from the IRS an amount to pay off their
outstanding tax liabilities.
                                         -5-

[*5] The IRS received their OIC and deposited the $3 million check.6 A few

weeks later, on January 21, 2016, the IRS sent petitioners a letter informing them

that it was returning their OIC. On February 9, 2016, the IRS sent petitioners

another letter confirming that it had closed its file on their OIC and was in the

process of refunding their $3 million deposit because of the modified terms and

conditions. Petitioners have not provided this Court with a copy of the returned

check, but they did provide a bank account statement reflecting a deposit of $3

million on April 8, 2016.

                                     Discussion

      Summary judgment is intended to expedite litigation by avoiding

unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678,

681 (1988). Summary judgment is appropriate if the pleadings, answers to

interrogatories, depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no genuine issue as to any


      6
        These facts are inferred in favor of petitioners because this case is before
the Court on respondent’s motion for partial summary judgment. See Naftel v.
Commissioner, 85 T.C. 527, 529 (1985). They are derived from a legal
memorandum submitted with petitioners’ response. The memorandum was not
addressed to petitioners and was prepared by a law firm that is not representing
petitioners before this Court. In addition, the IRS correspondence dated January
21 and February 9, 2016, referenced in the memorandum have not been provided
to this Court.
                                        -6-

[*6] material fact and that a decision may be rendered as a matter of law. Rule

121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17

F.3d 965 (7th Cir. 1994); Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

Partial summary adjudication may be made which does not dispose of all issues in

the case. Naftel v. Commissioner, 85 T.C. at 529; see also Rule 121(b). The

moving party bears the burden of proving that no genuine issue of material fact

exists and that a decision may be rendered as a matter of law. Naftel v.

Commissioner, 85 T.C. at 529.

      In deciding whether to grant summary judgment, the Court views the factual

material and inferences drawn from that material in the light most favorable to the

opposing party. Id. However, the party opposing summary judgment may not

simply rest upon the mere allegations or denials of his pleadings. The adverse

party must set forth specific facts, in affidavits or otherwise, showing the existence

of a genuine issue for trial. Rule 121(d); Celotex Corp. v. Catrett, 477 U.S. 317,

322 (1986).

      Petitioners have not identified disputes as to any genuine issue of material

fact related to the issues in respondent’s motion for partial summary judgment.

Accordingly, partial summary judgment is appropriate in this case.
                                          -7-

[*7] I.         Whether the Periods for Assessment Have Expired

          Respondent determined that Mr. Whitesell had flowthrough income

attributable to income originating in transactions of separate taxable S

corporations. Petitioners argue that the S corporations’ periods for assessment

should govern whether respondent may make a timely adjustment to any of their

Forms 1040 for any item related to the corporate entities. Respondent contends

that the period for assessment is determined by the taxpayers’ return and not by

the returns of related entities whose attributes flow through to the taxpayers’

return.

          Generally, the Commissioner’s authority to assess income tax deficiencies is

limited to a period ending three years after the filing of the taxpayers’ return. See

sec. 6501(a). “The statute of limitations is an affirmative defense, and the party

interposing it must specifically plead it and carry the burden of showing its

applicability.” Robinson v. Commissioner, 117 T.C. 308, 312 (2001); see Rule

142; Alder v. Commissioner, 85 T.C. 535, 540 (1985). Generally, statutes limiting

the assessment and collection of tax are strictly construed in the Government’s

favor. Badaracco v. Commissioner, 464 U.S. 386, 391 (1984).

          The parties focus on the term “return” in section 6501(a): “[T]he amount of

* * * tax imposed by this title shall be assessed within 3 years after the return was
                                         -8-

[*8] filed”. (Emphasis added.) Here, the question is whether the “return” referred

to is that of the shareholder or the S corporations.

      This Court has consistently held that the relevant “return” for determining

whether the period for assessment has expired under section 6501(a) is that of the

taxpayer with respect to whom the Commissioner seeks to determine a deficiency.

See Robinson v. Commissioner, 117 T.C. at 313; Lardas v. Commissioner, 99 T.C.

490, 493 (1992) (and cases cited thereat). The Court has reached that conclusion

irrespective of whether the adjustment concerned the transactions of another entity

or whether that entity was taxable. See Lardas v. Commissioner, 99 T.C. at 493.

      Petitioners’ argument appears to focus on a previous conflict amongst U.S.

Courts of Appeals that arose around 1992 over whether the period for assessment

of a passthrough corporate entity or a shareholder controlled the Commissioner’s

authority to determine a deficiency for an item flowing from the corporation to the

shareholder.7 In Bufferd v. Commissioner, 506 U.S. 523 (1993), the Supreme

      7
       The U.S. Courts of Appeals for the Second, Fifth, and Eleventh Circuits
held that the filing of the shareholder’s return controlled the period for assessment.
See Green v. Commissioner, 963 F.2d 783 (5th Cir. 1992), aff’g Brody v.
Commissioner, T.C. Memo. 1991-78; Fehlhaber v. Commissioner, 954 F.2d 653
(11th Cir. 1992), aff’g 94 T.C. 863 (1990); Bufferd v. Commissioner, 952 F.2d
675 (2d Cir. 1992), aff’g T.C. Memo. 1991-70. The U.S. Court of Appeals for the
Ninth Circuit held that the filing of the passthrough corporate entity’s return
controlled the period for assessment. See Kelley v. Commissioner, 877 F.2d 756
                                                                         (continued...)
                                         -9-

[*9] Court resolved that conflict in the context of a S corporation and its

shareholder by holding that adjustments to a shareholder’s income are governed by

the shareholder’s period for assessment. The Supreme Court also interpreted the

term “return” in section 6501(a) to be the return of the taxpayer against whom the

deficiency is determined or to be assessed. Id. at 527.

      After Bufferd was released, Congress enacted the Taxpayer Relief Act of

1997, Pub. L. 105-34, sec. 1284, 111 Stat. at 1038, which in part amended section

6501(a). One of its specifically intended purposes was to clarify this issue with

respect to S corporations. See Robinson v. Commissioner, 117 T.C. at 317 (and

legislative history cited thereat). The legislative history explains that the new

provision is intended to clarify that the return that starts the running of the period

of limitations on assessment for a taxpayer is the return of the taxpayer and not the

return of another “person”8 from whom the taxpayer has received an item of

income, gain, loss, deduction, or credit. See H.R. Rept. No. 105-148, at 609-610

(1997), 1997-4 C.B. (Vol. 1) 323, 931-932; S. Rept. No. 105-33, at 277-278

(1997), 1997-4 C.B. (Vol. 2) 1067, 1357-1358; H.R. Conf. Rept. No. 105-220, at


      7
       (...continued)
(9th Cir. 1989), rev’g T.C. Memo. 1986-405.
      8
        Sec. 7701(a)(1) defines “person” to mean and include “an individual, a
trust, estate, partnership, association, company or corporation.”
                                        - 10 -

[*10] 702-703 (1997), 1997-4 C.B. (Vol. 2) 1457, 2172-2173; see also Robinson

v. Commissioner, 117 T.C. at 317. Therefore, the controlling return for each

period of limitation for assessment in this case is petitioners’ respective Form

1040--not the corresponding Forms 1120S of the related S corporations.

      Petitioners filed their 2011 Form 1040 on October 12, 2012, and their 2012

Form 1040 on October 15, 2013. The notice of deficiency for petitioners’ 2011

and 2012 tax years was issued on July 27, 2015, which was within the 3-year

period of limitations on assessment for each year in issue. Accordingly,

respondent is not time barred from assessing income tax attributable to the

flowthrough income for Mr. Whitesell for petitioners’ tax years 2011 and 2012.

See sec. 6501(a); Bufferd v. Commissioner, 506 U.S. 523; Robinson v.

Commissioner, 117 T.C. at 319; see also sec. 6503(a) (providing that the period of

limitations shall be suspended for the period during which the Secretary is

prohibited from making the assessment or a proceeding in Tax Court becomes

final and for 60 days thereafter).

II.   Whether Petitioners Settled Their 2011 and 2012 Income Tax Liabilities

      In December 2015, after the petition was filed, petitioners tendered to the

IRS a $3 million check with their OIC for their tax years 2006 through 2012.

Petitioners argue that under the Uniform Commercial Code (UCC), their OIC was
                                        - 11 -

[*11] accepted when the IRS negotiated the check and did not reject their OIC

within 90 days of receipt. Respondent argues that negotiation of a check does not

constitute accord and satisfaction and that the UCC does not govern the power of

the IRS to administer the Federal income taxation system.

      Once a case is docketed in this Court, a well-settled legal framework

applies. That framework comprises general principles regarding the enforcement

of settlements in the Tax Court that were set out in Dorchester Indus., Inc. v.

Commissioner, 108 T.C. 320, 330 (1997) (quoting Manko v. Commissioner, T.C.

Memo. 1995-10), aff’d without published opinion, 208 F.3d 205 (3d Cir. 2000), as

follows:

      “For almost a century, it has been settled that voluntary settlement of
      civil controversies is in high judicial favor. Williams v. First Natl.
      Bank, 216 U.S. 582, 595 (1910); St. Louis Mining & Milling Co. v.
      Montana Mining Co., 171 U.S. 650, 656 (1898). A valid settlement,
      once reached, cannot be repudiated by either party, and after the
      parties have entered into a binding settlement agreement, the actual
      merits of the settled controversy are without consequence. This Court
      has declined to set aside a settlement duly executed by the parties and
      filed with the Court in the absence of fraud or mutual mistake.
      Stamm Intl. Corp. v. Commissioner, 90 T.C. 315 (1988); Spector v.
      Commissioner, 42 T.C. 110 (1964). However, a court will not force a
      settlement on parties where no settlement was intended. Autera v.
      Robinson, 419 F.2d 1197 (D.C. Cir. 1969).”

      “A settlement is a contract and, consequently, general principles of
      contract law determine whether a settlement has been reached.
      Robbins Tire & Rubber Co. v. Commissioner, 52 T.C. 420, 435-436,
                                         - 12 -

[*12] supplemented by 53 T.C. 275 (1969). A prerequisite to the formation
      of a contract is an objective manifestation of mutual assent to its
      essential terms. Heil v. Commissioner, T.C. Memo. 1994-417; 17A
      Am. Jur. 2d, Contracts, secs. 27 and 28 (1991); 1 Williston on
      Contracts, sec. 3:5 (4th ed.1990). Mutual assent generally requires an
      offer and an acceptance. 17A Am. Jur. 2d, Contracts, sec. 41 (1991).
      ‘An offer is the manifestation of willingness to enter into a bargain,
      so made as to justify another person in understanding that his assent
      to that bargain is invited and will conclude it.’ 1 Restatement,
      Contracts 2d, sec. 24 (1981).”

See also McMullen v. Commissioner, T.C. Memo. 2015-219; FPL Group, Inc. v.

Commissioner, T.C. Memo. 2008-144.

      In order for the Court to determine that the parties entered into a valid

settlement, the Court must determine as a prerequisite whether the parties

objectively manifested mutual assent to settle petitioners’ income tax liabilities for

2011 and 2012. In this Court, depending on the facts and circumstances of a case,

mutual assent can be objectively manifested by concessions, compromises, and

settlements and memorialized in various ways, including the parties’ execution of

a stipulation of settled issues or a stipulation of settlement. “[A] settlement

stipulation is in all essential characteristics a mutual contract by which each party

grants to the other a concession of some rights as a consideration for those secured

and the settlement stipulation is entitled to all of the sanctity of any other

contract.” Saigh v. Commissioner, 26 T.C. 171, 177 (1956); McMullen v.
                                        - 13 -

[*13] Commissioner, at *3. However, a settlement agreement may be reached

through offer and acceptance made by letter, or even in the absence of writing.

See Dorchester Indus., Inc. v. Commissioner, 108 T.C. at 330; Haiduk v.

Commissioner, T.C. Memo. 1990-506 (holding that formal stipulations of

settlement are not absolute prerequisites to an agreement to settle if the parties’

intent and the settlement terms are otherwise ascertainable).

      The parties have not filed with the Court any document memorializing

settlement of the issues for petitioners’ tax years 2011 and 2012, nor have the

parties manifested mutual assent through an offer and acceptance. Petitioners

argue that their submission of the OIC with the $3 million check, together with the

IRS’ negotiation of the check, constituted an accord and satisfaction under the

UCC and thus meets the mutual assent requirement for a contract. However, the

U.S. Government, as the sovereign, is not bound by such State statutes as the

UCC. See Burnet v. Harmel, 287 U.S. 103, 110 (1932); Tex. Learning Tech. Grp.

v. Commissioner, 96 T.C. 686, 693 (1991), aff’d, 958 F.2d 122 (5th Cir. 1992);

Bear v. Commissioner, T.C. Memo. 1992-690, 1992 WL 354004, at *2, aff’d

without published opinion, 19 F.3d 26 (9th Cir. 1994).

      In any event, petitioners’ submission of the OIC on December 28, 2015,

does not illustrate the IRS’ assent. By letter dated January 21, 2016, the IRS
                                        - 14 -

[*14] notified petitioners that their OIC would be returned along with their $3

million deposit. The IRS also notified petitioners in a second letter dated February

9, 2016, that the reason for rejecting the OIC was petitioners’ modifying its terms

and conditions. Under a contract law analysis, respondent rejected petitioners’

offer; thus, there was no settlement. See, e.g., Angle v. Commissioner, T.C.

Memo. 2016-27.

      Petitioners further argue that by cashing their check, the IRS accepted their

OIC. This argument is incorrect. The IRS cashing a check does not necessarily

mean that the IRS has accepted the offer. See Currier v. Commissioner, T.C.

Memo. 2011-113 (holding that the taxpayer’s check did not constitute full

payment of his tax liabilities and the taxpayer did not enter into a binding

agreement with the Commissioner to compromise his tax liabilities); Kehew v.

Commissioner, T.C. Memo. 1983-354 (holding that the simple acceptance and

cashing of a check tendered by a taxpayer does not represent a final determination

binding upon the Government as the recipient of the funds).

      Additionally, petitioners understood at the time they submitted their OIC

that their payment could be returned. On their modified Form 656-L, petitioners

offered to pay $3 million and hand wrote “pursuant to section 4 Terms - 4b”.

Section 4(b) of the Terms states: “If the IRS rejects or returns the offer * * *, the
                                        - 15 -

[*15] IRS will return any amount paid with the offer.” Under IRS guidelines for

OICs, payments or deposits received with the OIC are either placed in a non-

interest-bearing account, stamped nonnegotiable and returned, or posted to a

taxpayer’s account and processed through “paper check conversion”. See Internal

Revenue Manual (IRM) pt. 5.8.2.8 (July 28, 2015) (sorts and payment processing).

Once a determination has been made with respect to an OIC, deposits on accepted

OICs will be applied against the taxpayer’s liability and deposits on withdrawn,

rejected, or returned offers will be refunded to the taxpayer. See id. pt.

5.19.7.2.12.3 (Jan. 8, 2014) (disposition of OIC deposits). Respondent rejected

petitioners’ OIC and subsequently returned their $3 million deposit in accordance

with those guidelines.

      Alternatively, petitioners argue that their OIC was deemed accepted under

the UCC because their offer was not rejected within 90 days. The facts

surrounding this OIC and the IRS’ response--set forth in petitioners’ response to

respondent’s motion for partial summary judgment, see supra note 5--clearly show

the IRS’ timely rejection of their OIC and return of their $3 million deposit. See

sec. 7122(f); Hornbacker v. Commissioner, T.C. Memo. 2016-65, at *22 (holding

that the IRS has up to 24 months to process an OIC). More importantly, the U.S.

Government, as the sovereign, is not bound by State statutes such as the UCC.
                                         - 16 -

[*16] See Burnet v. Harmel, 287 U.S. at 110; Bear v. Commissioner, 1992 WL

354004, at *2. Accordingly, there is no objective manifestation of mutual assent

by the parties to settle petitioners’ tax liabilities for 2011 and 2012 and no

settlement for the Court to enforce.

III.   Conclusion

       Before the Court is a petition for redetermination of petitioners’ 2011 and

2012 Federal income tax deficiencies resulting from flowthrough income from Mr.

Whitesell’s wholly owned S corporations. The notice of deficiency for

petitioners’ 2011 and 2012 tax years was issued within both periods of limitation

for assessment.

       The parties have not filed a settlement stipulation with the Court as to

petitioners’ 2011 and 2012 tax years; and there is no settlement or contract to

settle their income tax liabilities for 2011 and 2012 for the Court to enforce

because their OIC was rejected timely.

       Accordingly, the Court will grant respondent’s motion for partial summary

judgment. The Court has considered all of the arguments made by the parties, and

to the extent they are not addressed herein, they are considered unnecessary, moot,

irrelevant, or without merit.
                                  - 17 -

[*17] To reflect the foregoing,


                                           An appropriate order will be issued.
