                         T.C. Memo. 2004-65




                       UNITED STATES TAX COURT



            PHILLIP AND GLADIES AARON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9879-01L.               Filed March 12, 2004.


     Phillip and Gladies Aaron, pro sese.

     Catherine L. Campbell, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     VASQUEZ, Judge:    This case was commenced in response to a

Notice of Determination Concerning Collection Action(s) Under

Sections 63201 and 6330.    The issue is whether respondent may



     1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure. All amounts are rounded
to the nearest dollar.
                               - 2 -

proceed with collection of petitioners’ 1997 and 1998 income tax

liabilities.

                         FINDINGS OF FACT

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

The stipulation of facts, stipulation of settled issues, and

attached exhibits are incorporated herein by this reference.    At

the time they filed the petition, petitioners resided in

Bellevue, Washington.

     At the time of trial, Phillip Aaron (petitioner) and Gladies

Aaron had been married for 35 years.    Mrs. Aaron works for the

State of Washington as a social worker.     Petitioner is an

attorney in private practice and also owns interests in various

closely held corporations.

     In the latter part of 1996, petitioner’s health declined. In

the beginning of 1997, petitioner was diagnosed with colon cancer

and underwent surgery immediately.     After the surgery, petitioner

underwent chemotherapy treatment until approximately December

1997.

     On April 30, 1998, petitioner returned to the practice of

law part time.

BP Concessions, Inc.

     Petitioner and Bernie Foster formed BP Concessions, Inc. (BP

Concessions), to sell goods and duty-free items at the Portland,

Oregon, airport.   Mr. Foster and petitioner each held 50 percent
                                - 3 -

of the shares of BP Concessions.    On or about October 1, 1988, BP

Concessions elected to become an S corporation pursuant to

section 1362(a).

     In December 1996, petitioner and Mr. Foster agreed in a

board meeting to terminate BP Concessions’ S corporation status

by revoking the S corporation election.   They decided to revoke

the S corporation election on account of an anticipated and

substantial distributive share of income based on “a lowering of

the cost of goods which was going to result in an increase from

prior years” to the shareholders.

     Petitioner was responsible for revoking the election.     For

the revocation to be effective for 1997, petitioner had to revoke

the S corporation election by March 17, 1997.   Petitioner failed

to revoke the S corporation election by March 17, 1997, because

he was ill with cancer.   Indeed, the parties stipulated that BP

Concessions was an S corporation during the years 1997 and 1998.

As of March 13, 2003, the date of the trial in this case,

petitioner had not properly revoked the S corporation election

for BP Concessions.

     Keith Meyers, the accountant who prepared BP Concessions’

tax return for 1997, was unaware of the shareholders’ desire to

terminate the S corporation election.   On October 20, 1998,

petitioner signed the Form 1120S, U.S. Income Tax Return for an S

Corporation, for 1997.    The Schedule K-1, Shareholder’s Share of
                               - 4 -

Income, Credits, Deductions, etc., reported $447,653 as

petitioner’s share of the income from BP Concessions for 1997.

Petitioners’ Tax Returns

     On their Form 1040, U.S. Individual Income Tax Return, for

1997, petitioners reported a Schedule K-1 distributive share of

$447,653 of nonpassive income from BP Concessions and a total tax

of $103,708.2   On their Form 1040 for 1998, petitioners reported

a distributive share of $21,336 of nonpassive income from

Schedule K-1 from BP Concessions and a total tax of $35,909.

They sought a refund of $5,825.   On March 29, 2000, petitioners

signed both returns.

     Petitioner decided to report the distributive share of

income from BP Concessions on his Form 1040 for 1997 so that he

would not be viewed as underreporting his income.   Petitioner

intended to amend his return and “correct the situation at a




     2
        On their 1997 return, petitioners reported that they had
overpaid their taxes by $217,952 and sought a refund of $192,952
and application of $25,000 to their 1998 estimated taxes. This
alleged overpayment was based on petitioners’ belief that the
Internal Revenue Service (IRS) owed them a refund of $300,000
plus interest. The alleged refund arises from a prior dispute
with the IRS concerning petitioner’s personal liability on unpaid
employment taxes for his corporation, National Waste Co., Inc.
Petitioners claimed a refund on their 1997 return of $300,000
plus interest on the basis of their allegation that the IRS sold
their personal residence at below market value when it foreclosed
on their house to collect the unpaid employment taxes.
Petitioners never filed a claim for refund with a U.S. District
Court.
                               - 5 -

later date”.   Petitioner did not believe that this course of

action would result in any problems.

     The Internal Revenue Service (IRS) did not issue petitioners

a statutory notice of deficiency for 1997 or 1998.

IRS Collection Efforts

     The IRS concluded that petitioners’ individual tax return

for 1997 contained multiple mathematical errors.   On June 10,

2000, after correcting the mathematical errors, the IRS assessed

a tax liability of $111,636.

     The IRS concluded that petitioners’ individual tax return

for 1998 contained multiple mathematical errors.   On July 17,

2000, after correcting the mathematical errors, the IRS assessed

a tax liability of $34,890.

     Before collection proceedings, petitioner and Revenue

Officer Steve Lerner corresponded regarding petitioners’ unpaid

taxes and refund claims for 1997 and 1998.

     On November 16, 2000, Revenue Officer Lerner issued a Final

Notice--Notice of Intent to Levy and Notice of Your Right to a

Hearing.   On December 6, 2000, Revenue Officer Lerner advised

petitioners that he would delay filing the notice of Federal tax

lien until December 28, 2000, so that petitioners could file

amended income tax returns for 1997 and 1998.   On December 27,

2000, Revenue Officer Lerner issued a Notice of Federal Tax Lien

Filing and Your Right to a Hearing Under IRC 6320.
                               - 6 -

     On January 29, 2001, petitioners, through their attorney

Deborah Jaffe,3 filed a Form 12153, Request for a Collection Due

Process Hearing.   In their “Statement in Support of Form 12153”

petitioners identified three issues to be discussed at the

hearing.   First, petitioners disputed the amount of the tax

liability set forth in the notice of Federal tax lien.   The

statement in support of Form 12153 stated:

     The taxpayers are in the process of determining the
     correct amount of their income tax liabilities for
     these years, and they anticipate that their actual
     liability will be substantially less than as set forth
     in the notice of Federal tax lien. While the taxpayers
     acknowledge that the liability set forth in the notice
     was assessed based on a 1997 return filed by the
     taxpayers, that return as filed was incorrect, and the
     taxpayers had so advised the Internal Revenue Service
     prior to the filing of the notice of Federal tax lien.

Second, petitioners claimed that the “notice of Federal tax lien

was filed despite the taxpayers’ cooperation with the IRS”.

Third, petitioners claimed that the filing of the notice of

Federal tax lien would hinder the ability of the IRS to collect

the tax liabilities because potential investors would not invest

in BP Concessions if a Federal tax lien was filed.

     On March 20, 2001, Appeals Settlement Officer J.A. Vander

Linden wrote to Ms. Jaffe regarding the Appeals process.     On May

14, 2001, Ms. Jaffe proposed a settlement to Appeals Settlement

Officer Vander Linden.   The settlement proposed filing of


     3
        On Sept. 18, 2002, the Court granted Ms. Jaffe’s motion
to withdraw as counsel of record.
                                - 7 -

individual and corporate amended returns for 1997 and 1998 and

filing of an appropriate revocation of BP Concessions’ S

corporation election in exchange for withdrawal of the notice of

Federal tax lien.    In May 2001, petitioner gave Ms. Jaffe amended

individual income tax returns but stated they were never filed.

On May 22, 2001, petitioner and Mr. Foster executed an “Agreement

to Change BP Concessions to a C Corporation”.   The agreement

stated:

          The undersigned hereby agree that at the year-end
     meeting in December of 1996, Phillip Aaron was charged
     by the Corporation with converting BP CONCESSIONS, INC.
     from a Sub-Chapter S Corporation to a C Corporation for
     the specific purpose, and in anticipation of, BP
     CONCESSIONS, INC., receiving income and loaning part of
     that income to Bernie Foster and Phillip Aaron during
     the year of 1997. Phillip Aaron was responsible for
     changing the Corporation from a Sub-Chapter S to a C
     Corporation. Phillip Aaron developed cancer and
     underwent chemotherapy during 1997 and, as a result,
     the C Corporation election was not made. It is still
     the desire of BP CONCESSIONS, INC., Phillip Aaron, and
     Bernie Foster that BP CONCESSIONS, INC., be changed
     from a Sub-Chapter S Corporation to a C Corporation and
     that the disbursement of proceeds for 1997 be
     classified as a loan as they were intended to be at the
     time of disbursement.

     Appeals Settlement Officer Vander Linden prepared a detailed

Appeals case memo evaluating petitioners’ appeal and recommending

that it be denied.   On July 6, 2001, the IRS issued a Notice of

Determination Concerning Collection Action(s) Under Sections 6320

and 6330.
                                - 8 -

Litigation

     On August 8, 2001, petitioners timely filed a petition with

the Court.

     On the morning of the trial in this case, petitioners mailed

to the IRS Ogden Service Center Forms 1040X, Amended U.S.

Individual Income Tax Return, for 1997 and 1998.    The amended

returns eliminated the $447,653 distributive share of income from

BP Concessions for 1997 and indicated that the amount of tax owed

for each year was zero.    At trial, petitioners presented no

evidence regarding any spousal defenses, any challenges to the

appropriateness of the collection actions, or any offers of

collection alternatives.

     On September 22, 2003, the parties filed a stipulation of

settled issues.   This stipulation stated:

           1. In their petition, petitioners requested that
     the Court determine, inter alia, that the amounts of
     the assessments for petitioners’ 1997 and 1998 income
     taxes are incorrect and are overstated because the
     petitioners were entitled to revoke the subchapter S
     election for BP Concessions, Inc. for years 1997 and
     1998.

          2. Petitioners concede that there is no
     reasonable cause exception for their failure to timely
     revoke the subchapter S status of BP Concessions, Inc.
     for years 1997 and 1998.

                               OPINION

1.   Applicable Law

     Section 6321 provides that, if any person liable to pay any

tax neglects or refuses to do so after demand, the amount shall
                                     - 9 -

be a lien in favor of the United States upon all property and

rights to property, whether real or personal, belonging to such

person.   Pursuant to section 6323, the Commissioner generally is

required to file a notice of Federal tax lien with the

appropriate State office for the lien to be valid against certain

third parties.

     After the Commissioner files a notice of lien, section

6320(a)(1) requires the Commissioner to provide notice to the

taxpayer of such filing.     Additionally, under section

6320(a)(3)(B) and (b), the Commissioner must provide the taxpayer

with notice of and an opportunity for an administrative review of

the lien filing; i.e., a hearing.         Section 6320(b)(1) requires

that the Appeals Office conduct the hearing.         Section 6320(c)

incorporates section 6330(c) and certain parts of section

6330(d), which describe the procedural rules that apply to the

hearing and the judicial review thereof.

     At the hearing, the taxpayer may raise certain matters set

forth in section 6330(c)(2), which provides, in pertinent part:

          SEC. 6330(c). Matters Considered at Hearing.--In
     the case of any hearing conducted under this section--

                  *    *         *    *      *   *    *

          (2) Issues at hearing.--

               (A) In general.--The person may raise at the
          hearing any relevant issue relating to the unpaid
          tax or proposed levy, including--

                           (i)    appropriate spousal defenses;
                              - 10 -

                        (ii) challenges to the
                    appropriateness of collection actions;
                    and

                       (iii) offers of collection
                    alternatives, which may include the
                    posting of a bond, the substitution of
                    other assets, an installment agreement,
                    or an offer-in-compromise.

               (B) Underlying liability.--The person may
          also raise at the hearing challenges to the
          existence or amount of the underlying tax
          liability for any tax period if the person did not
          receive any statutory notice of deficiency for
          such tax liability or did not otherwise have an
          opportunity to dispute such tax liability.

     Pursuant to section 6330(d)(1), within 30 days of the

issuance of the notice of determination, the taxpayer may appeal

that determination to this Court if we have jurisdiction over the

underlying tax liability.   Van Es v. Commissioner, 115 T.C. 324,

328 (2000).

     Although section 6330 does not prescribe the standard of

review that the Court is to apply in reviewing the Commissioner’s

administrative determinations, we have stated that, where the

validity of the underlying tax liability is properly at issue,

the Court will review the matter de novo.   Where the validity of

the underlying tax liability is not properly at issue, however,

the Court will review the Commissioner’s administrative

determination for abuse of discretion.   Sego v. Commissioner, 114

T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176, 181

(2000).
                              - 11 -

     In Montgomery v. Commissioner, 122 T.C. __, __ (2004) (slip

op. at 2), we recently held that section 6330(c)(2)(B) permits a

taxpayer to challenge the existence or amount of the tax

liability reported on an original tax return when the taxpayer

has not received a notice of deficiency and has not otherwise had

an opportunity to dispute the tax liability in question.

Pursuant to section 6330(c)(2)(A), a taxpayer may raise at the

section 6330 hearing any relevant issue with regard to the

Commissioner’s collection activities, including spousal defenses,

challenges to the appropriateness of the Commissioner’s intended

collection action, and alternative means of collection.     Sego v.

Commissioner, supra at 609; Goza v. Commissioner, supra at 180.

2.   Stipulation of Settled Issues

     After trial but before the submission of petitioner’s

posttrial brief, the parties filed a stipulation of settled

issues that stated:   “there is no reasonable cause exception for

* * * [petitioners’] failure to timely revoke the subchapter S

status of BP Concessions, Inc. for years 1997 and 1998”.    On

brief, petitioner argues that his illness was a reasonable cause

exception for failing to timely terminate BP Concessions’ S

corporation election.

     A settlement stipulation is usually a compromise.    “A

settlement stipulation is in all essential characteristics a

mutual contract by which each party grants to the other a
                               - 12 -

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).    Absent wrongful misleading conduct or mutual mistake, we

will enforce a stipulation of settled issues in accordance with

our interpretation of its written terms.    See Stamm Intl. Corp.

v. Commissioner, 90 T.C. 315, 322 (1988); Korangy v.

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

1990).

     The stipulation was entered into fairly and freely by both

parties.    The stipulation of settled issues was filed after

petitioner wrote a letter to the Clerk of the Court conceding

respondent’s position that there is no reasonable cause exception

for failing to revoke BP Concessions’ S corporation election.    In

that letter, petitioner stated that he wished to discontinue the

case.    The stipulation of settled issues was also filed after the

Court held a telephone conference with the parties discussing

this issue.    Petitioner has not shown mutual mistake or

misleading conduct or that he was unaware of the consequences of

the stipulation.

     In the petition and at trial, petitioners’ only challenge to

the underlying tax liability was that they were entitled to a

reasonable cause exception on account of petitioner’s illness.

On the basis of the stipulation of settled issues, we find that
                              - 13 -

petitioner has conceded his challenge to the underlying tax

liability.   Accordingly, we sustain respondent’s determination.

3.   Additional Points Raised by Petitioner

     Nevertheless, for the sake of completeness, we shall address

additional points raised by petitioner.

     A.   Termination of BP Concessions’ S Corporation Election

     Petitioner argues that “Although there is no reasonable

cause exception that directly excuses the petitioners’ failure to

timely revoke the Subchapter S Election of BP Concessions, there

is no specific provision that directly indicates that a

reasonable cause exception does not apply.”    An election to be an

S corporation continues until terminated.     Mourad v.

Commissioner, 121 T.C. 1, 4 (2003).    An S corporation election

may be terminated:   (1) By revocation of the election to be

treated as an S corporation; (2) by the corporation’s ceasing to

be a small business corporation; or (3) where passive investment

income exceeds 25 percent of gross receipts and the corporation

has subchapter C earnings and profits.    See sec. 1362(d); Mourad

v. Commissioner, supra.   The Code provides no other manner in

which to terminate an S corporation election.     Mourad v.

Commissioner, supra.

     While section 1362(b)(5) authorizes the Secretary to treat

late S corporation elections as timely if the Secretary

determines that there was “reasonable cause for the failure to
                               - 14 -

timely make such election”, this section applies only to the

election to become an S corporation.    See sec. 1362(a) and

(b)(5)(A).    Congress provided no reasonable cause exception for

termination of an S corporation election by revocation.      See sec.

1362(d)(1).    The regulations provide no reasonable cause

exception for termination of an S corporation election by

revocation.

       Petitioner failed to revoke BP Concessions’ S corporation

election by March 17, 1997.    See secs. 1362(d)(1)(C)(i), 7503.

Indeed, as of the date of trial, petitioner conceded that he

still had not revoked BP Concessions’ S corporation election.

While we are sympathetic to petitioner’s medical condition during

1997 and 1998, there is no provision under section 1362(d) for a

reasonable cause exception for revocation of the S corporation

election.    We must apply the law as written; it is up to Congress

to address questions of fairness and to make improvements to the

law.    Metzger Trust v. Commissioner, 76 T.C. 42, 59-60 (1981),

affd. 693 F.2d 459 (5th Cir. 1982).

       Furthermore, the May 22, 2001, agreement between petitioner

and Mr. Foster is insufficient to revoke the S corporation

election for 1997 or 1998.    There is no indication that the

agreement was filed with the proper IRS service center.      It does

not include the number of shares of stock issued and outstanding.

See sec. 1.1362-6(a)(3), Income Tax Regs.    Additionally, it does
                                - 15 -

not comply with the requirements for obtaining shareholders’

consents.    See sec. 1.1362-6(b), Income Tax Regs.

     Because the S corporation election was in effect for 1997

and 1998, petitioners were required to report their distributive

share of income from BP Concessions.     Petitioners reported this

distributive share of income.    The IRS assessment was proper.

     B.   Allegations of Loan to Petitioner From BP Concessions

     At trial, petitioner testified that even if the S

corporation election remained in effect, the distribution of

$447,653 from BP Concessions was actually a loan to him from the

corporation.    Generally, proceeds of a loan do not constitute

income to a borrower because the benefit is offset by an

obligation to repay.     United States v. Rochelle, 384 F.2d 748,

751 (5th Cir. 1967); Arlen v. Commissioner, 48 T.C. 640, 648

(1967).     Whether a particular transaction actually constitutes a

loan, however, is to be determined upon consideration of all the

facts.    Fisher v. Commissioner, 54 T.C. 905, 909 (1970).

     For a payment to constitute a loan, at the time the payments

are received the recipient must intend to repay the amounts and

the transferor must intend to enforce payment.     Haag v.

Commissioner, 88 T.C. 604, 615 (1987), affd. without published

opinion 855 F.2d 855 (8th Cir. 1988); Beaver v. Commissioner, 55

T.C. 85, 91 (1970).    Further, the obligation to repay must be

unconditional and not contingent on a future event.     United
                              - 16 -

States v. Henderson, 375 F.2d 36, 39 (5th Cir. 1967); Bouchard v.

Commissioner, 229 F.2d 703 (7th Cir. 1956), affg. T.C. Memo.

1954-243; Haag v. Commissioner, supra at 615.

     Petitioner offered no convincing proof that the funds were

actually lent to him.   The “Agreement to Change BP Concessions to

a C Corporation” signed by petitioner and Mr. Foster mentions the

shareholders’ intentions to treat the distribution as a loan.

However, this document was prepared more than 4-1/2 years after

the board meeting occurred and was drafted in support of an

attempt to settle the issues of this case.   No other documents

were submitted regarding the alleged loan.   The Court is not

required to, and in this case we do not, accept petitioner’s

unsubstantiated testimony regarding this issue.   See Wood v.

Commissioner, 338 F.2d 602, 605 (9th Cir. 1965), affg. 41 T.C.

593 (1964).

     C.   Issues Raised Initially in Petitioners’
          Posttrial Briefs

     In their posttrial briefs, petitioners raised for the first

time the issues of abatement of interest and penalties, an

entitlement to spousal defenses, a request for an installment

agreement, and a request for other reasonable alternatives to

collection.   These issues were not raised in the petition to the

Court or at trial.   Nor were they raised at the collection due

process hearing.   Generally, in a section 6330 proceeding the

Court is not obligated to consider requests for abatement of
                              - 17 -

penalties or proposals of collection alternatives if they were

not raised by the taxpayer at the section 6330 hearing or

otherwise brought to the attention of the Appeals Office.      Magana

v. Commissioner, 118 T.C. 488, 493 (2002); Miller v.

Commissioner, 115 T.C. 582, 589 n.2 (2000); Sego v. Commissioner,

114 T.C. at 612.   Generally, we do not consider issues that are

raised for the first time at trial or on brief, and we decline to

do so in this case.   Foil v. Commissioner, 92 T.C. 376, 418

(1989), affd. 920 F.2d 1196 (5th Cir. 1990); Markwardt v.

Commissioner, 64 T.C. 989, 997 (1975).   Petitioner has failed to

raise a spousal defense, make a valid challenge to the

appropriateness of respondent’s intended collection action, or

offer alternative means of collection.   These issues are now

deemed conceded.   See Rule 331(b)(4).

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect the foregoing,

                                         Decision will be entered

                                    for respondent.
