                         T.C. Memo. 2000-374



                       UNITED STATES TAX COURT



   NESTLE HOLDINGS, INC., ON BEHALF OF ITSELF AND CONSOLIDATED
    SUBSIDIARIES, AND AS THE SUCCESSOR IN INTEREST TO NESTLE
 ENTERPRISES, INC. AND CONSOLIDATED SUBSIDIARIES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 21562-90.                 Filed December 12, 2000.



     Joseph R. Goeke, Thomas Kittle-Kamp, and John T. Hildy, for

petitioner.

     Theodore J. Kletnick, Paulette Segal, and Oleida Mendiburt,

for respondent.


                  SUPPLEMENTAL MEMORANDUM OPINION

     VASQUEZ, Judge:    This matter is before the Court on the


     *
        This Opinion supplements the Court’s Memorandum Opinion
in Nestle Holdings, Inc. v. Commissioner, T.C. Memo. 1995-441,
affd. in part, revd. and remanded in part 152 F.3d 83 (2d Cir.
1998).
                                 - 2 -

parties’ disputed computations under Rule 155 of the decision to

be entered for Nestle Holding Inc.’s (petitioner) 1983, 1984, and

1985 tax years.1    The ruling in this opinion relates solely to

petitioner’s 1985 tax year.2    The issue presented to us is

whether the parties agreed in two settlement agreements on the

method of computing the deficiency and/or overpayment for the

1985 tax year.     In the event that respondent’s interpretation of

the settlement agreements is rejected by the Court, respondent

concedes that petitioner is entitled to a refund of $36,441,904.

See Respondent’s Additional Memorandum of Law.

                              Background

1995 Tax Court Opinion

     Respondent determined deficiencies in petitioner’s Federal

income taxes as follows:

          Taxable Year Ending               Amount

             Dec. 31, 1983               $38,934,552
             Dec. 29, 1984                21,764,946
             Dec. 28, 1985               285,591,539

     On September 14, 1995, after the settlement of numerous

issues by the parties, the Court rendered an opinion (1995


     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
years in issue (or the Internal Revenue Code in effect for years
in which carrybacks were generated).
     2
        Although we discuss petitioner’s 1983 and 1984 tax years
herein, we dispose of those tax years separately in an
accompanying order.
                                - 3 -

opinion) with regard to remaining issues in the case.      See Nestle

Holdings, Inc. v. Commissioner, T.C. Memo. 1995-441, affd. in

part, revd. and remanded in part 152 F.3d 83 (2d Cir. 1998).     In

the 1995 opinion, the Court (1) held that petitioner and

Carnation Co. (Carnation) were entitled to interest deductions of

$131,739,791,3 (2) established the fair market value of various

Carnation assets, and (3) concluded that Carnation (i.e.,

petitioner) had to recognize capital gains on the sale of those

assets to Nestle S.A., a foreign entity.   The Court ordered the

parties to submit computations under Rule 155.

1995 Advance Tax Payments

     On December 15, 1995, after the release of the 1995 opinion,

but before the Court entered a decision, petitioner paid

respondent the following amounts (advance tax payments) on the

deficiencies as anticipated by petitioner for the tax years in

issue:

          Taxable Year Ending       Advance Tax Payments

             Dec. 31, 1983                $6,774,252
             Dec. 29, 1984                31,222,100
             Dec. 28, 1985               114,964,176

Initial Tentative Refunds and 1996 Motion To Strike

     On August 7, 1996, a stipulation by the parties with regard


     3
        During 1985, Carnation was acquired by and became a
subsidiary of Nestle Enterprises, Inc., petitioner’s predecessor.
For 1985, Nestle Enterprises, Inc., and Carnation filed a
consolidated return. Petitioner has filed its petition as a
successor in interest to Nestle Enterprises, Inc.
                               - 4 -

to the Rule 155 computations (1996 stipulation) was filed.      In

order to understand the reason for this stipulation, we describe

various actions previously undertaken by petitioner.      During the

litigation, petitioner filed with respondent Form 1139,

Corporation Application for Tentative Refund, requesting

tentative refunds attributable to carrying back a variety of net

operating losses (NOL's), business credits, and net capital

losses generated in post-1985 tax years to the 1983 and 1984 tax

years (initial tentative refunds).     See sec. 6411.   Respondent

allowed those refunds.

     On July 26, 1996, before the parties filed their Rule 155

computations and proposed decision documents, petitioner filed a

motion to strike paragraphs 4(cw) and 5(bt)(i) of its petition.

Through the motion, petitioner sought to clarify that the amounts

carried back to the 1983 and 1984 tax years (and any resulting

adjustments) were not in issue before the Court.     See infra 1996

stipulation.

       Respondent did not object to the motion.     The Court

granted petitioner’s motion.   For the purposes of this opinion,

we interpret the “not in issue” terminology to mean that

petitioner did not seek to have this Court establish whether the

carrybacks which led to the initial tentative refunds were
                              - 5 -

properly allowed by respondent.4

1996 Stipulation and Tax Court Decision

     The relevant portions of the 1996 stipulation follow:

          1. Respondent may assess the deficiencies
     determined to be due pursuant to the foregoing decision
     for the taxable [years] ended December 31, 1983,
     December 29, 1984, and December 28, 1985. The
     deficiencies shown in the foregoing decision for the
     1983 and 1984 taxable years and the overpayment shown
     in the foregoing decision for the 1985 taxable year
     were determined without giving Petitioner credit for
     carrybacks, including carrybacks that were tentatively
     allowed under the provisions of I.R.C. sec. 6411, from
     taxable years after December 28, 1985, which carrybacks
     are not in issue in this case. Further, the amounts of
     the net tax assessed and paid and the deficiencies
     shown in the foregoing decision for the 1983 and 1984
     taxable years were determined after reducing the tax
     assessed and paid for those years by all amounts that
     were refunded or credited in connection with the
     aforementioned carrybacks. The reflection in the
     decision of these refunds is not a substantive
     determination of whether the carrybacks are allowable
     and does not put the carrybacks in issue.

               *    *    *    *       *   *   *

          9. It is further stipulated that business credit
     carrybacks, net operating loss and capital loss
     carrybacks and the effect of such carrybacks, and other
     similar tax attributes defined in I.R.C. secs.
     6511(d)(2) and (d)(4) arising with respect to the
     Petitioner’s taxable years beginning after December 28,
     1985, were not at issue in T.C. Docket No. 21562-90 and
     may be the subject of a claim for refund attributable
     to such carrybacks and the effect of such carrybacks
     into Petitioner’s taxable years ended December 31,
     1983, December 29, 1984, and December 28, 1985, * * *.
     [Emphasis added.]



     4
        As explained infra in the 1996 stipulation, the parties
agreed that the decision of the Court would not serve as res
judicata with regard to this issue.
                                - 6 -

     Pursuant to the record and the 1996 stipulation, on

August 7, 1996, the Court also entered a decision (1996 decision)

redetermining the deficiency determinations as follows:

          Taxable Year Ending           Deficiency

             Dec. 31, 1983              $6,780,478
             Dec. 29, 1984              33,217,385
             Dec. 28, 1985              86,323,660

Pursuant to the Court’s refund jurisdiction under section

6512(b)(1), the Court also concluded in the 1996 decision that as

to the 1985 tax year, petitioner had an overpayment of

$28,640,5165 in addition to the deficiency of $86,323,660.6

Subsequent Tentative Refunds

     On September 9, 1996, petitioner submitted to respondent

another Form 1139 seeking tentative refunds (subsequent tentative

refunds) of $556,698, $14,045,138, and $49,907,010 for the 1983,

1984, and 1985 tax years, respectively.    The subsequent tentative

refund for 1985 resulted from carrying back NOL's generated in




     5
        The overpayment of $28,640,516 resulted from the
difference between petitioner’s $86,651,835 tax liability
(consisting of a $328,175 tax shown on petitioner’s tax return
plus the $86,323,660 deficiency established by the Court) and the
combination of a $328,175 payment made with petitioner’s 1985 tax
return and the $114,964,176 advance tax payment for the 1985 tax
year.
     6
        Because respondent did not assess the advance tax
payments as a deficiency until Dec. 30, 1996, they were not part
of the deficiency computations. See sec. 6211(a).
                               - 7 -

the 1995 tax year to 1985.7   Furthermore, when the NOL's were

carried back to 1985, business credits that initially offset the

1985 tax liability became eligible to be applied to the 1983 and

1984 tax years, creating refunds in those years.8    Specifically,

the NOL's were derived from additional interest and State taxes

resulting from the litigation of the instant case.    Respondent

allowed the subsequent tentative refunds for 1983, 1984, and

1985.

Appeal of 1995 Opinion

     In late 1996, petitioner appealed the Court’s valuation of

the Carnation assets and the corresponding capital gains issue to

the U.S. Court of Appeals for the Second Circuit.    On December

30, 1996, respondent assessed the deficiencies redetermined by

the Court in the 1996 decision.9   On July 31, 1998, the Court of


     7
        Sec. 172(b)(1)(C) provides that if a taxpayer has a
“specified liability loss”, the specified liability loss can
serve as a carryback to the preceding 10 taxable years. The
definition of a specified liability loss, however, has materially
changed between 1995 (the year in which the NOL carrybacks were
generated) and today. See sec. 172(f) before and after amendment
by the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, 1999, Pub. L. 105-277, sec. 3004(a), 112
Stat. 2681-905 (which applies to NOL's arising in taxable years
ending after Oct. 21, 1998).
     8
        A part of the refunds for 1983 and 1984 resulted from
carrying back business credits generated in 1986 and 1987.
     9
        The advance tax payments for 1983 and 1984 did not cover
the entire deficiency assessed for 1983 and 1984 by respondent
pursuant to the Court’s decision. In order to cover the
shortfall, respondent credited $6,226 and $1,995,285 to
                                                   (continued...)
                               - 8 -

Appeals affirmed this Court’s holding that petitioner had to

recognize capital gains on the sale of the Carnation assets but

reversed and remanded the Court’s 1995 opinion with regard to the

valuation of the Carnation assets.

Remand to the Tax Court and 1999 Stipulation

     After the Court scheduled the case for a new trial, the

parties reached a basis of settlement in 1999 as to the value of

the Carnation assets (1999 stipulation).   The valuation dispute

affected only the deficiency and overpayment determinations for

the 1985 tax year.10   As part of the 1999 stipulation, the

parties described the deficiency and/or overpayment computation

for the 1985 tax year in their Rule 155 computations.   The

parties agreed to the following:

          1. * * * The parties hereby stipulate that
     Carnation Company’s basis in the trademarks was
     $239,500,000 and that the capital gain upon the sale of
     these trademarks to NSA shall be computed by reference
     to the foregoing basis * * *.

          2. The parties’ stipulation in paragraph 1 of
     Petitioner’s basis in the trademarks is for the sole
     purpose of resolving the remaining disputed issue in
     this case and has no precedential value beyond
     determining Carnation Company’s basis in the trademarks
     and goodwill/going concern value.


          9
           (...continued)
petitioner’s 1983 and 1984 tax accounts, respectively. Those
funds came from interest overpaid by petitioner for the years in
issue.
     10
        The valuation of the Carnation assets affected the
amount of capital gains petitioner had to recognize for the 1985
tax year.
                              - 9 -

          3. Pursuant to T.C. Rule 155, this Court entered
     a decision in this case on August 7, 1996, determining
     a deficiency of income tax due from Petitioner for the
     taxable year ended December 28, 1985, in the amount of
     $86,323,660. As a result of this Stipulation of
     Settled Issue, the foregoing deficiency must be
     recomputed pursuant to the parties’ stipulation of
     basis in paragraph 1. The Court’s August 7, 1996
     decision was accompanied by a stipulation signed by
     Petitioner’s counsel and Respondent’s counsel on July
     26, 1996, and August 2, 1996, respectively.   The
     stipulation accompanying the August 7, 1996 decision
     [(1996 stipulation)] controls the manner in which the
     income tax at issue for the 1985 taxable year will be
     recomputed. The parties will expeditiously submit the
     recomputed deficiency for the Court to enter pursuant
     to Rule 155. [Emphasis added.]

For ease of reference, the Court provides a flowchart in the

appendix which lists the various steps in this litigation.

The Parties’ Positions

     In the present Rule 155 computational dispute, respondent

arrives at a deficiency of $8,815,210 for the 1985 tax year,

while petitioner arrives at a $41,091,800 overpayment.11


     11
        Sec. 6211(a) defines a deficiency as the amount by which
the taxpayer’s tax liability exceeds the excess of:

          (1) the sum of

               (A) the amount shown as the tax by the
          taxpayer upon his return, * * * plus

               (B) the amounts previously assessed (or
          collected without assessment) as a deficiency,
          over–-

          (2) the amount of rebates, as defined in
     subsection (b)(2), made.

In describing their respective positions, the parties
                                                   (continued...)
                                      - 10 -

Their deficiency and overpayment computations follow below:
                            Respondent’s 1985
                          Deficiency Computation1

          Tax liability                              $45,560,035

          Tax on return               $328,175
          Amounts assessed
            as a deficiency       86,323,660
          Tax assessed
                                  2
            and paid             86,651,835
          -Reductions           (49,907,010)

          -Net tax assessed and paid                 (36,744,825)
          Deficiency                                   8,815,210



                             Petitioner’s 1985
                          Overpayment Computation1
                                                 2
          Tax assessed and paid                   $86,651,835
          -Tax liability                          (45,560,035)
          Overpayment                              41,091,800
                1
                   We have slightly altered respondent’s and
          petitioner’s presentations for comparison
          purposes.
                2
                   Petitioner made a $328,175 payment with its
          1985 tax return and a $114,964,176 payment in
          anticipation of our 1996 decision. Petitioner’s
          tax assessed and paid of $86,323,660 is net of
          $28,640,516 returned to petitioner by respondent
          (i.e., $328,175 + $114,964,176 - $28,640,516).

     The parties agree that petitioner’s tax liability for 1985

equals $45,560,035, but they interpret the 1996 and 1999

stipulations differently in determining the deficiency and/or

overpayment for 1985.     Although the NOL carrybacks, which

     11
      (...continued)
characterize the sum of the amount shown as a tax on the return
and the amounts previously assessed as a deficiency as the “tax
assessed and paid” by petitioner. We use the same terminology in
this opinion as a shorthand reference to the sec. 6211(a)(1)
figure. Using a computational format, a deficiency may therefore
be expressed as follows:

     Tax liability - (tax assessed and paid - rebates).
                              - 11 -

resulted in the subsequent tentative refund for 1985, are not to

be taken into account by the Court in redetermining the 1985 tax

liability,12 respondent argues that the 1996 and 1999

stipulations provide for the tax assessed and paid for the 1985

tax year to be reduced by the subsequent tentative refund.13

     Respondent first contends that the 1999 stipulation provides

that the 1996 stipulation “‘controls the manner in which the

income tax at issue for the 1985 taxable year will be computed.’”

Respondent then argues that because the parties agreed in the

1996 stipulation that the initial tentative refunds for the 1983

and 1984 tax years would be treated as a reduction to the tax

assessed and paid, the subsequent tentative refund for the 1985

tax year should be treated in the same fashion.

     Petitioner agrees that the 1999 stipulation directs the

Court to consider the language of the 1996 stipulation.

Petitioner, however, argues in a memorandum that the 1996

stipulation says “nothing at all” about whether the subsequent

tentative refund is to be treated as a reduction to the tax

assessed and paid for 1985.   Petitioner further argues that the

“absence of any such language for 1985 is not only conspicuous,



     12
        Both parties agree that the NOL carrybacks, which
resulted in the subsequent tentative refunds, are also not in
issue before the Court.
     13
        Our use of the singular form of the term “subsequent
tentative refunds” refers to the subsequent tentative refund for
the 1985 tax year.
                              - 12 -



but dispositive:   it shows that the parties meant to treat 1985

differently from 1983 and 1984.”14

                            Discussion

I.   Settlement Agreement Issue

     A.   Contract Law

     This Court applies general principles of contract law to

compromises and settlements of Federal tax cases.   We stated in

Robbins Tire & Rubber Co. v. Commissioner, 52 T.C. 420, 435-436

(1969), that “a compromise is a contract and thus is a proper

subject of judicial interpretation as to its meaning, in light of

the language used and the circumstances surrounding its

execution.”   See also Brink v. Commissioner, 39 T.C. 602, 606

(1962), affd. 328 F.2d 622 (6th Cir. 1964); Saigh v.

Commissioner, 26 T.C. 171, 177 (1956); Davis v. Commissioner, 46

B.T.A. 663, 671 (1942); Himmelwright v. Commissioner, T.C. Memo.

1988-114.   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.


     14
        In addition, petitioner also argues that respondent’s
own Internal Revenue Manual instructs its employees not to take
into account tentative refunds (resulting from NOL carrybacks not
in issue) in the computation of a deficiency. See Internal
Revenue Manual, Part XXXV-Chief Counsel Directives Manual Exhibit
(35)(10)00-28 (July 11, 1991). In response, respondent only
argues that “regardless of the interpretation” of the Internal
Revenue Manual, statements “issued to guide the [Internal
Revenue] Service’s employees in performing their duties have a
directory nature and do not bind Respondent.”
                                - 13 -

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).    However, we will not force a settlement on the parties

where no settlement was intended.    See Autera v. Robinson, 419

F.2d 1197 (D.C. Cir. 1969).

     B.    Analysis of Settlement Agreements

     The issue before us is whether the subsequent tentative

refund should be subtracted from the tax assessed and paid for

1985, the result of which is a deficiency.     When we examine the

language used in the 1999 stipulation, we find that it does not

specifically provide for the tax assessed and paid for the 1985

year to be reduced by the subsequent tentative refund.    The

relevant portion of the 1999 stipulation does state that the

“income tax at issue” for the 1985 year should be computed

according to the 1996 stipulation.15

     The 1996 stipulation provides that as to the 1983, 1984, and

1985 tax years, petitioner should not be given credit for

carrybacks which are not in issue (i.e., the carrybacks should

not be considered in determining taxable income and the

corresponding tax liability).    The 1996 stipulation also states

that the 1983 and 1984 tax assessed and paid should be reduced by



     15
        We believe that the reference in par. 3 of the 1999
stipulation indicating that the deficiency be computed according
to par. 1 refers to par. 1 of the 1999 stipulation and not the
1996 stipulation.
                              - 14 -

tentative refunds.   In computing the deficiency and overpayment

for 1985, however, the parties did not address in the 1996

stipulation whether a tentative refund for 1985 was to be treated

as a reduction to the tax assessed and paid for 1985.

     Although it is evident from both stipulations that the 1985

tax liability should be computed without considering the

carrybacks not in issue, it is unclear from the stipulations

whether the parties also meant for a tentative refund for 1985 to

reduce the tax assessed and paid.   Because the parties have not

clearly set forth the substance of their agreement and since we

cannot discern the intent of the parties from the ambiguous

language of the stipulations, we will not construe an agreement

to exist with regard to the disputed issue.

     Having concluded that the 1996 and 1999 stipulations do not

address the issue of whether to treat the subsequent tentative

refund as a reduction to the tax assessed and paid, we would

normally look to relevant statutory and case law to determine how

to treat the subsequent tentative refund in the deficiency

computation.   However, because respondent has conceded an

overpayment of $36,441,904 in the event that the Court does not

sustain his interpretation of the settlement agreements, we hold

that petitioner is entitled to a refund of $36,441,904.16



     16
        Petitioner agrees that the cash or credit refund should
be $36,441,904.
                              - 15 -

II.   Decision Document

      Additionally, respondent requests that if the Court

concludes that petitioner is entitled to a refund, the Court

include language in the decision document protecting respondent’s

right to challenge the validity of the carrybacks that resulted

in the subsequent tentative refund for 1985.   Respondent’s

request arises from an unpublished opinion of the U.S. Court of

Appeals for the Eighth Circuit that upheld a U.S. District

Court’s decision that the United States was barred under res

judicata principles from subsequently recovering a tentative

refund pursuant to section 6213(b)(3).   See Bradley v. United

States, 106 F.3d 405 (8th Cir. 1997), affg. Civil No. 3-94-1514

(D. Minn., Jan. 30, 1996).   Because petitioner does not object to

the language itself,17 the parties are directed to include the

language in a stipulation drafted by the parties to accompany the

decision document.

      To the extent not herein discussed, we have considered the

parties’ other arguments and found them to be irrelevant or

without merit.




      17
        Petitioner objects only to the language being placed in
the decision document itself instead of in a stipulation to the
decision document.
                        - 16 -

To reflect the foregoing,

                                      An appropriate order

                            directing the parties to file

                            revised computations will be

                            issued.
                              - 17 -

Appendix:   Flowchart Summarizing Litigation



                      Notice of Deficiency



                            Petition



                    Initial Tentative Refunds



                          1995 Opinion



                  1996 Stipulation/1996 Decision



                   Subsequent Tentative Refunds



                          Appeal/Remand



                         1999 Stipulation



                     Current Rule 155 Dispute
