                        T.C. Memo. 1997-273



                      UNITED STATES TAX COURT



                 GRANT K. HAGESTAD, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14920-95.                       Filed June 17, 1997.



     Jon T. Flask, for petitioner.

     Warren P. Simonsen, for respondent.


                          MEMORANDUM OPINION

     TANNENWALD, Judge:     Respondent determined a deficiency of

$123,586.00 in petitioner's Federal income tax for the 1987

taxable year, and increased interest under section 6621(c)1 of

$31,027.   After concessions by the parties, the issue for


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


decision is whether respondent may adjust petitioner's 1987

income under the mitigation provisions found in sections 1311 to

1315.



Background

     This case was submitted fully stipulated under Rule 122.

The stipulation of facts and exhibits are incorporated herein by

this reference and found accordingly.

     At the time the petition was filed in this case, petitioner

resided in Carson City, Nevada.    Petitioner timely filed a

Federal income tax return for 1987, subsequent to a valid

extension, on July 18, 1988.    Respondent mailed a statutory

notice of deficiency to petitioner on May 12, 1995, for the 1987

taxable year (the 1995 notice of deficiency).

     During all relevant periods, petitioner was a cash-basis

taxpayer.    During 1986, petitioner purchased an interest in

certain computer equipment for $135,000 cash and a note for the

balance of his $1,000,000 purchase price.    The equipment was then

leased to a third party.    Petitioner claimed deductible losses

from the leasing of the computer equipment (the computer leasing

deductions (CLDs)) in the following amounts:

            Year                  Amount

            1986                $200,250
            1987                 321,002
            1988                  51,972
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On March 3, 1991, respondent issued a statutory notice of

deficiency for the taxable years 1986 and 1988 (the 1991 notice

of deficiency), based on the disallowance of the CLD's for 1986,

1987, and 1988 and the exclusion of a separate item of $360,000

of income from the 1987 taxable year and its inclusion in 1986.

Because the $360,000 exclusion exceeded the disallowed $321,002

CLD, the 1991 notice of deficiency did not result in a deficiency

for 1987, but rather in an overassessment, no part of which,

however, was ever paid by respondent.    Petitioner filed a

protective refund claim with respect to this overassessment, as

to which no further action was taken by petitioner, and which was

rejected by respondent as part of the 1995 notice of deficiency.

     The issue of the CLD's was resolved by settlement.    The

parties agreed on September 18, 1992, by a Stipulation of Agreed

Adjustments (the 1992 stipulation) that, in 1986, only $135,000

of the $200,250 CLD would be allowed, and the remaining $65,250

would be disallowed and suspended in accordance with the "at

risk" rules under section 465.    The $51,972 CLD for 1988 was

disallowed in full, and the loss was also suspended in accordance

with the "at risk" rules.   Since the taxable year 1987 was not

before the Court, the stipulation was silent as to the treatment

of the 1987 CLD of $321,002.   The issue of the correct year of

inclusion of the $360,000 of income was resolved in Hagestad v.

Commissioner, T.C. Memo. 1993-300, issued on July 13, 1993,
                               - 4 -


wherein we decided that such income was properly reported by

petitioner in 1987.   The amount of tax petitioner paid for 1987

was never different from the amount he reported on his 1987

return.

     During June 1993, petitioner filed claims for refund for the

1989, 1990, and 1991 taxable years, in which petitioner claimed

carryovers of the 1986, 1987, and 1988 suspended CLD's, pursuant

to section 465(a)(2).   The amount of the deduction which was

carried forward from 1987 to 1991 was $171,318.   The claims for

1990 and 1991 were handled by Revenue Agent Phillip Valenzuela,

who was thoroughly familiar with the 1991 notice of deficiency

and the 1992 stipulation.   The claim for 1989 was allowed by

respondent on or about May 31, 1993.   The claims for 1990 and

1991 were allowed by respondent on April 17, 1995 (the 1995

refund).

     For the purposes of applying section 6501(e)(1), the amount

of gross income reported by petitioner for taxable year 1987 was

$2,092,344.   Neither petitioner nor respondent executed any

waivers or extensions pursuant to section 6501(c)(4) for

extending the period of time for assessing the tax liability for

any year at issue.
                                 - 5 -


Discussion

       Section 6501(a) provides that the Commissioner generally has

3 years from the date of the filing of a return to assess the

tax.    There are several exceptions listed in section 6501 (for

cases in which, for example, fraud or substantial omission of

items are involved) which the parties agree do not apply here.

Respondent did not issue the 1995 notice of deficiency within the

time required by section 6501.    Thus, this failure would act as a

bar to the assessment of tax for 1987 unless respondent can

obtain the benefit of the mitigation provisions of sections 1311

through 1314.

       The mitigation provisions were first enacted in 1938 to

prevent the Government or the taxpayer from obtaining "an unfair

benefit * * * by assuming an inconsistent position and then

taking shelter behind the protective barrier of the statute of

limitations."    S. Rept. 1567, 75th Cong., 3d Sess. 49 (1938),

1939-1 C.B. (Part 2) 779, 815.    These are very technical

provisions, written to cover only specific instances of

inconsistent treatment, and are not intended to grant the Court

sweeping equitable powers.    Bolten v. Commissioner, 95 T.C. 397,

403 (1990), and cases cited thereat.     On the other hand, one must

not construe the provisions so strictly or so narrowly as to

undermine the purpose for which they were enacted.     Id.
                              - 6 -


     The factual frame of reference herein is:   (1) petitioner

took a CLD of $321,002 on his 1987 return; (2) upon the audit of

that return, respondent disallowed the deduction but did not

determine a deficiency for that year because respondent removed

$360,000 of income included in that return on the ground that it

was properly includable in income for 1986; (3) by virtue of our

decision in Hagestad v. Commissioner, supra, respondent's

position as to the includability of the $360,000 in income was

rejected, and petitioner's position that it was properly reported

in 1987 was sustained; (4) as a result of the expiration of the

3-year period of limitations in respect of 1987, the effect of

the foregoing events was to leave petitioner's 1987 return

accepted as filed, thereby giving petitioner the full benefit of

the CLD which respondent had disallowed on audit; (5) petitioner,

based upon respondent's disallowance of the CLD for 1987 and the

suspension provisions of section 465(a)(2), applied a portion of

that deduction in an amended return for 1991 and received a

refund in 1995.

     The question before us is whether, under the foregoing

circumstances, respondent can obtain the benefit of the

mitigation provisions.

     Respondent contends that petitioner received the benefit of

a CLD of $321,002 in 1987, and then again (to the extent of

$171,318) in 1991 (by virtue of the 1995 refund), and that this
                               - 7 -


scenario is a textbook example of the kind of abuse the

mitigation provisions were designed to prevent.    Petitioner, on

the other hand, contends that the 1987 CLD was disallowed, and

that the fact that respondent failed timely to assess a

deficiency does not alter this fact.   Thus, petitioner argues, he

did not maintain an inconsistent position by carrying forward the

disallowed deduction as permitted by section 465(a)(2).

Petitioner asserts that whatever unpaid tax liability which might

exist is due not to any action on the part of petitioner, but is

a consequence of respondent's litigation gamble.

     In Fruit of the Loom, Inc. v. Commissioner, 72 F.3d 1338,

1341-1342 (7th Cir. 1996), affg. T.C. Memo. 1994-492, the Court

of Appeals for the Seventh Circuit approved our articulation of

the following elements involved in determining whether the

mitigation provisions apply:

          (1) An error occurred in a taxable year which cannot

     otherwise be corrected by operation of law, sec. 1311(a);

          (2) there was a determination, within the meaning of

     section 1313(a), for another year with respect to the item

     giving rise to the error, sec. 1311(a);

          (3) the determination was within one of the categories

     enumerated in section 1312 as a circumstance of adjustment

     (e.g., a double allowance of a deduction, sec. 1312(2)),

     sec. 1311(a); and
                               - 8 -


           (4) the party who prevailed in the determination

     maintained a position that was adopted there and that was

     inconsistent with the erroneous treatment.   Sec. 1311(b).

If the mitigation provisions apply, the taxable income for the

year of the error may be adjusted under section 1314.   Sec.

1311(a).   Having invoked the mitigation provisions, respondent

bears the burden of proving that each of the four requirements

has been met.   Fruit of the Loom, Inc. v. Commissioner, 72 F.3d

at 1341.

     Initially, we think it clear that there was an error in

that, as a result of our decision in Hagestad v. Commissioner,

T.C. Memo. 1993-300, petitioner in fact received the benefit of a

CLD for 1987.   It is equally clear under section 465(a)(1) that

petitioner was not entitled to the CLD for 1987, and indeed

petitioner so concedes.   It is also clear that the correction of

that error is barred by the normal 3-year period of limitations.

Thus, the first of the above-stated elements is present.

     Turning to the second element, a "determination" within the

meaning of section 1313(a) includes "a final disposition by the

Secretary of a claim for refund".   Sec. 1313(a)(3).   Petitioner

concedes that the 1995 refund is such a determination for the

purposes of the mitigation provisions.   The determination must

also be with respect to the item giving rise to the error.     Sec.

1311(a); sec. 1.1311(b)-1, Income Tax Regs.; cf. B.C. Cook &
                               - 9 -


Sons, Inc. v. Commissioner, 65 T.C. 422 (1975) (Tannenwald, J.,

concurring at 432 (mitigation provisions did not apply because

the same items not involved)), affd. 584 F.2d 53 (5th Cir. 1978).

Petitioner argues that any deficiency with respect to his 1987

taxable year was not due to the CLD, which petitioner concedes he

was not entitled to, but due to the inclusion of the $360,000 of

income, which respondent initially excluded from the 1987 taxable

year, and was forced to re-include as a result of our decision in

Hagestad v. Commissioner, supra.     By this argument, petitioner

appears to be maintaining that it was the omitted income that was

the item giving rise to the error.

     Petitioner's analysis fails to recognize that, while the

omission of income provided the foundation for the resulting

error, it was the CLD that became the error which gave rise to

the application of mitigation provisions.    In this respect,

Bolten v. Commissioner, 95 T.C. 397 (1990), provides helpful

guidance.   In that case, the disallowance of certain deductions

resulted in increased amounts of taxable income and became the

foundation for a reallocation of net operating loss deductions.

In holding that the mitigation provisions applied, we concluded

that the same item was involved, namely the net operating loss.

As we see it, the only difference between the situation in that

case and that involved herein is that, in Bolten, unrelated

deductions were involved whereas in the instant case we are
                               - 10 -


dealing with an item of income.    However, both deductions and

omissions affect the determination of taxable income.

Consequently, we think that any distinction based on a "same

item" argument is a distinction without a difference.    In short,

we are satisfied that the second element enunciated in Fruit of

the Loom, Inc. v. Commissioner, supra, has been satisfied.

     Finally, we turn to the third and fourth elements enunciated

in Fruit of the Loom test.    These elements require that there be

a double deduction, section 1312(2), and that petitioner have

maintained inconsistent positions with respect to the deduction,

section 1311(b).   That is, the carryforward of a portion of the

CLD to 1991 must be inconsistent with the "treatment accorded"

that portion in 1987.    Sec. 1.1311(b)-1(a), Income Tax Regs.

Since it is clear that a portion of the CLD was allowed in 1991

by the 1995 refund, we would have to find that that portion of

the deduction had also been allowed in 1987 for the mitigation

provisions to apply.    Thus, the decision in this case turns on

what exactly was the "treatment accorded" the deduction in 1987--

was it allowed or not?

     If it was allowed, this would be the "erroneous treatment"

needed to invoke the mitigation provisions, the determination

would reflect a case of double deduction, one of the enumerated

circumstances of adjustment, section 1312(2), and the facts of

this case would fit squarely under the prohibition against double
                               - 11 -


deductions set forth in the statute, the regulations, and the

legislative history.   Sec. 1312(2); S. Rept. 1567, supra, 1939-1

C.B. (Part 2) at 814-817; sec. 1.1312-2(b), Example (1), Income

Tax Regs.   If it was not allowed, there would be no error and no

inconsistent position, the carryforward would not have resulted

in a double deduction, and the mitigation provisions would not

apply to lift the bar of section 6501.

     Petitioner contends that the CLD's were not "allowed" for

purposes of the statute, but were suspended and properly carried

forward under the "at risk" rules of section 465.   In the 1991

notice, respondent disallowed the deductions.   Petitioner did not

contest this disallowance, and agreed to the 1992 stipulation,

which disallowed the CLD's for 19862 and 1988, but was silent as

to 1987.    Petitioner contends that, with the 1992 stipulation, he

was agreeing in both principle and practice that all CLDs were

subject to the "at risk" rules of section 465, including the one

claimed in 1987.   Petitioner notes that neither he nor respondent

has ever changed position as to the allowability of the CLD's.

     Petitioner does, however, recognize that the tax he paid for

1987, which was computed after taking the CLD for that year was

never altered by the 1992 stipulation.   Petitioner argues:


     2
        A deduction in the amount of $135,000, the amount
petitioner had "at risk" in the transaction for purposes of sec.
465, was allowed; all other amounts were disallowed and
suspended.
                              - 12 -


     The fact the disallowance did not result in the
     imposition or collection of any additional tax is not
     relevant.

Respondent contends to the contrary, and we agree, that it is

very relevant.

     Petitioner confuses the legal question of whether or not the

CLD's were allowable or should have been allowed with the factual

question of whether or not they were actually allowed.3   For this

reason, we see no need to decide whether the 1992 stipulation

would apply to the CLD originally allocated to the 1987 taxable

year, as this would only help determine whether the deduction at

issue was allowable, not whether it was actually allowed.

     With respect to petitioner's 1987 taxable year, petitioner

filed a return reporting a certain amount of income, which he

reduced by a certain amount of CLD.    He then paid tax on this

lower amount of net income.   Regardless of respondent's various

positions during the dispute and litigation, the amount of tax

petitioner paid for 1987 never changed, and was never different

from the amount he reported on his 1987 return.

     3
        For example, petitioner argues that respondent's
decision, through Revenue Agent Valenzuela, to grant petitioner's
1995 refund, was necessarily based on the conclusion that the
CLD's were not allowed in 1987. We, however, think respondent's
actions could just as well have been based on a conclusion that
the deductions should not have been allowed, and that the proper
action at the later date was to allow the refunds based on the
carryforwards, and then to press for correction of the original
mistake using the mitigation provisions. See Kenosha Auto
Transport Corp. v. Commissioner, 28 T.C. 421, 425 (1957).
                               - 13 -


     In Chertkof v. Commissioner, 66 T.C. 496 (1976), affd. 649

F.2d 264 (4th Cir. 1981), the Commissioner asserted a deficiency

based on shifting income from a later year to an earlier year.

The Commissioner issued a refund on his own initiative for the

later year.   The taxpayer paid the deficiency, sued in District

Court, and won a refund for the earlier year.    The Commissioner

then sought relief under the mitigation provisions to assert a

deficiency with respect to the later year.    This Court rejected

the taxpayers' argument that there was no error as to the later

year because the refund had been forced upon them.

     In Priest Trust v. Commissioner, 6 T.C. 221 (1946), the

taxpayer trust was prepared to pay tax on a distribution on

behalf of a beneficiary, but the Commissioner gave it a

deduction.    This Court later determined that the beneficiary

should not be taxed.    In a later action by the Commissioner under

the mitigation provisions to re-open the year the trust received

the deduction, this Court rejected the trust's argument that it

"privately" maintained a consistent position because it did not

originally claim the deduction:

     It does not seem important to us who proposed the
     allowance of the deduction, or upon what theory. The
     important fact is that it was allowed, that a tax was
     paid pursuant to the allowance of the deduction, and
     that the action was erroneous. * * * [Id. at 226.]

     In the same way, in spite of the fact that petitioner agreed

in principle that he was not entitled to the 1987 CLD, he
                                - 14 -


nevertheless "took" it, that is, used it to reduce his gross

income, and paid less tax as a result, and it was thus certainly

"allowed", in the plain meaning of those words.    "To argue

otherwise is merely to play games with words."     Bolten v.

Commissioner, 95 T.C. at 407.

     The fallacy of petitioner's position herein becomes apparent

in the following context.   Assume a scenario in which: (1) Only

petitioner's 1986 and 1988 returns had been audited and the CLD's

for those years had been disallowed and, after litigation, the

disallowances were sustained; (2) petitioner's 1987 return had

never been audited; and (3) petitioner had applied the decisions

in respect of 1986 and 1988 to the 1987 CLD in determining its

carryforward of suspended amounts under section 465(a)(2) and

obtained a refund for 1991 based on those carryforwards.       There

can be no doubt that, in this scenario, the CLD was allowed for

1987, for purposes of the mitigation provisions.    We think that

the situation in this case is no different.   The inescapable fact

is that the determination that the $360,000 was properly reported

by petitioner in 1987 produced the result that the disallowance

of the CLD was negated because of the expiration of the period of

limitations and petitioner was left in the same position as he

would have been in if his 1987 return had never been audited.

     In our analysis, we have kept in mind that the legislative

history contemplated the type of facts involved here: "disputes
                               - 15 -


as to the year in which * * * deductions belong    * * * should

never result in    * * * a double reduction of tax".   S. Rept.

1567, supra, 1939-1 C.B. (Part 2) at 815.    Because we hold that

the CLD was "allowed" in 1987 for the purposes of sections 1311

and 1312, we find that there was a double deduction and that

petitioner did maintain an inconsistent position with respect to

the CLD.   Thus, the third and fourth elements enunciated in Fruit

of the Loom, Inc. v. Commissioner, supra, have been met.

Accordingly, we conclude that the mitigation provisions are

applicable and operate to lift the time bar of section 6501.

     The mitigation provisions, once applicable, do not allow

respondent to re-examine the barred year de novo, but rather,

merely allow an adjustment to the extent of the inconsistency.

Secs. 1311(a), 1314; sec. 1.1314(a)-1(c), Income Tax Regs.; see

4 Bittker & Lokken, Federal Taxation of Income, Estates and Gifts

par. 113.9.5 at 113-34 (2d ed. 1992).    In this case, respondent

may adjust petitioner's 1987 income by the amount of the CLD

taken in 1987 and carried forward to 1991, agreed to by the

parties to be $171,318.

Additions to Tax

     Petitioner concedes that, were we to find the mitigation

provisions applicable, any resulting underpayment in tax was due

to a tax-motivated transaction as described in section 6621(c).
                             - 16 -


Thus, we sustain respondent on this issue.   The addition will be

based on the figure agreed to by the parties of $171,318.

     Due to concessions by respondent,

                                         Decision will be entered

                                   under Rule 155.
