                        T.C. Memo. 2006-187



                      UNITED STATES TAX COURT



     RHETT RANCE SMITH AND ALICE AVILA SMITH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11902-05.             Filed August 31, 2006.



     Robert J. Stientjes, for petitioners.

     Anne W. Durning and Henry N. Carriger, for respondent.



                        MEMORANDUM OPINION


     GERBER, Judge:   Petitioners, in a motion filed March 13,

2006, sought the entry of a decision in accord with a purported

settlement of this case.1   Respondent, by means of a notice filed



     1
       This case is related to several other cases, two of which
involve these same petitioners at docket Nos. 13227-05 and
13228-05.
                               - 2 -

April 5, 2006, objected, and the parties presented their views in

documents, the last of which was filed July 3, 2006.   The

question presented by the parties’ controversy is whether

petitioners and respondent entered into an enforceable agreement

to settle any part of this case.

Background

     Respondent’s examination in this case focused upon whether

petitioners were entitled to certain contribution deductions that

they claimed on their Federal tax return.   In the notice of

deficiency, respondent determined that petitioners were not

entitled to deductions for cash contributions claimed on their

2002 joint Federal income tax return.   This case was being

handled in Omaha, Nebraska (Omaha case).    The examination in the

Omaha case involved only the substantiation of cash contribution

deductions.   Respondent had examined earlier taxable years of

petitioners, and in those cases the deductibility of noncash

contributions was in controversy.   Respondent’s counsel in the

Omaha case was Henry N. Carriger.   At the time of the events we

consider here, petitioners’ earlier tax years that had already

been petitioned to this Court were scheduled for trial in

Phoenix, Arizona, and were being handled by a different counsel

for respondent, Anne W. Durning (Phoenix cases).

     On June 28, 2005, petitioners’ petition in the Omaha case

was filed, and their representatives thereafter began working
                              - 3 -

with respondent’s Appeals Officer Laura M. Gonzalez in Omaha to

administratively resolve the cash contribution issues determined

in the notice of deficiency and raised by the pleadings.   Ms.

Gonzalez requested substantiation of the cash contribution

deductions claimed on petitioners’ return.   In particular, she

requested receipts or evidence of payment and information showing

that any entity to which a contribution was made was one that

qualified under section 501(c)(3).2

     Following the exchange of multiple letters between the

parties, on January 6, 2006, one of petitioners’ representatives,

Attorney Eric Johnson, sent Ms. Gonzalez a letter which, in

pertinent part, contained the following:

     I propose that we settle this case. I think it would
     be fair for the government to agree that the taxpayers
     may deduct as a charitable contribution the $74,200
     paid to Open Heaven Ministries for tax year 2002. As
     stated in my letter of August 23, 2005, the itemized
     list of contributions made by the taxpayers after the
     Service Center contact totals $223,906, which is
     somewhat less than the $226,774 reported on the income
     tax return, and of that $223,906, the taxpayers are
     unable now to produce substantiation for $1,825, which
     leaves $222,081 in substantiated contributions. The
     taxpayers hereby offer to settle this case on the basis
     that they are entitled to $222,081 of the charitable
     contribution of $226,774 reported on the return.

     If you are not satisfied with various aspects of the
     Open Heaven Ministries issue, we would invite a
     counter-offer from the government containing a
     percentage disallowance of the Open Heaven Ministries
     contribution deduction for 2002 reflecting what the


     2
       Section references are to the Internal Revenue Code as
amended and in effect for the period under consideration.
                              - 4 -

     government views as its hazards. Although we feel that
     the right answer given the facts is that the taxpayers
     are entitled to the deduction in full, we recognize
     that as a practical matter proving that entitlement at
     this point through litigation would likely be cost-
     prohibitive.

     Please contact me with any questions or to discuss. I
     would appreciate a response by the end of the month.

Shortly thereafter, on January 26, 2006, Ms. Durning moved to

continue the trial of the Phoenix cases, and the Court gave

petitioners until February 21, 2006, to respond to respondent’s

continuance motion.3

     Between January 6 and February 21, 2006, petitioners’

attorney, on several occasions, unsuccessfully attempted to

contact Ms. Gonzalez by telephone.    On February 21, 2006,

Attorney Robert Stientjes, a counsel for petitioners, contacted

Mr. Carriger, counsel for respondent in the Omaha case, to

solicit a response to the January 6, 2006, offer made to Ms.

Gonzalez.

     At this point, the parties’ allegations as to what

transpired are diametrically opposed.    Petitioners contend that,

during the February 21, 2006, telephone conversation, Mr.



     3
       Although petitioners attempt to link respondent’s
continuance motion in the Phoenix cases to the Omaha case and the
purported acceptance of their offer to settle, the circumstances
we consider do not support such a connection. Even if
petitioners could show or believe such a connection existed, we
do not find that fact decisive one way or the other with respect
to whether there was a meeting of the minds and a settlement of
the cash contribution issue or the Omaha case.
                                 - 5 -

Carriger stated to Mr. Stientjes that “[w]e have a settlement.”

Petitioners also allege that during a March 2, 2006, telephone

conversation, Mr. Carriger admitted that he had accepted

petitioners’ settlement offer.    Petitioners also admit that

before the March 2 conversation, Mr. Carriger advised Mr.

Stientjes, in a telephone message, that respondent intended to

raise a new issue.   Petitioners also contend that Mr. Carriger

attempted, during the March 2, conversation, “to retract his

admissions and claimed that he did not unequivocally accept the

settlement offer during the February 21, 2006 teleconference.”

     Respondent, on the other hand, contends that, at the time of

the February 21 conversation, Mr. Carriger was “aware that

Appeals Officer Gonzalez had nearly completed her review of the

documentation submitted for the cash contributions and that a

settlement seemed likely.”   Respondent also alleges that Mr.

Carriger was “unaware of the January 6, 2006 offer letter and of

the details of what a settlement might be.”     With those

premises, respondent contends that Mr. Carriger, during the

February 21 conversations, “reported to * * * [Attorney]

Stientjes that ‘settlement was looking good.’” In essence,

respondent’s position is that Attorney Carriger “had no basis to

reach a meeting of the minds on the matter as he had not reviewed

the documentation submitted.”
                               - 6 -

     Respondent, through affidavits from the employees involved,

has stated that at the time of the February 21, 2006, telephone

conference:   (1) Ms. Gonzalez and her supervisor had not

recommended or approved a settlement of part or all of the Omaha

case; (2) Mr. Carriger was unfamiliar with the specifics of the

settlement offer and the exchanges between Appeals and

petitioners’ representatives; (3) the provisions of Rev. Proc.

87-24, 1987-1 C.B. 720, direct that Appeals attempt to settle

cases and that Government counsel normally does not settle cases

until the administrative files are returned to Government

counsel; (4) petitioners’ counsel contacted Ms. Gonzales 6 days

after the February 21 telephone conference and asked whether she

had made a determination about the January 6 offer; (5)

petitioners did not confirm the alleged oral settlement by means

of a followup letter or memorandum reflecting the terms thereof;

(6) petitioners’ counsel agreed to a continuance of petitioners’

Phoenix cases on February 15, 2006 (6 days before the February 21

teleconference).

     Between the February 21 and the March 2, 2006,

conversations, Mr. Carriger left a message for Mr. Stientjes

advising that, in addition to the cash contribution issue raised

in the notice of deficiency, respondent intended to affirmatively

raise a non-cash-contribution issue in the Omaha case that was

the same as or similar to the issues pending in petitioners’
                               - 7 -

Phoenix cases.   Petitioners had the same representatives in all

pending cases, whereas respondent was represented by Ms. Durning

in the Phoenix cases and Mr. Carriger in the Omaha case.

     Mr. Stientjes (without respondent’s counsels’ knowledge)

made a recording of the March 2, 2006, telephone conversation.     A

transcript of the conversation was attached to one of

petitioners’ documents filed in connection with the motion to

enforce settlement and entry of decision.   The March 2

conversation began with Mr. Stientjes accusing Mr. Carriger of

being “dishonest” for advising on February 21 “that we have a

settlement” and subsequently advising that respondent is “going

to raise a new issue.”   Mr. Carriger, in response to the

accusation, stated that he did not think his actions were

dishonest “because the issue that we thought we had a settlement

on, we do.   Which is the cash contribution.   At the time

[February 21, 2006] I was not aware that the noncash

contributions were even at issue.”

     The next matter of substance was Mr. Stientjes’s observation

to Mr. Carriger that he “can’t tell * * * [Mr. Stientjes that] we

are settling the only issue in the case and then, a week later,

tell * * * [Mr. Stientjes that respondent is] raising a new issue

and we haven’t settled the whole case a week before.”     Mr.

Carriger responded that there was no prohibition upon the raising

of an issue after settlement of the sole issue in the case.
                              - 8 -

     Later in the same conversation, after Mr. Stientjes advised

that he would file a motion to enforce settlement, Mr. Carriger

checked his notes of the February 21 telephone conversation and

contended that he had not told Mr. Stientjes that the case was

settled, but only that “settlement is looking good.”     After that

point in the conversation, Mr. Carriger’s supervisor, Attorney

Albert Kerkhove, became active in the conversation.    The matter

devolved into a verbal standoff where nothing further was said

that is worthy of consideration.    Following these exchanges,

petitioners filed a motion to enforce the purported settlement.

Discussion

     Petitioners have moved for entry of decision based on a

purported settlement agreement in this case.    The question we

consider is whether petitioners and respondent have an

enforceable agreement that settled either the cash contribution

issue or the entire case, so as to prohibit respondent from

raising the non-cash-contribution issue.    Petitioners’ returns

had been audited for earlier tax years, and petitioners had

pending Tax Court cases scheduled for trial in Phoenix involving

non-cash-contribution deductions.    The subsequent audit of the

2002 year was being handled in a different office of respondent,

and the examination resulted in a determination that petitioners

were not entitled to cash contribution deductions.    The non-cash-

contribution issue was the subject of the cases for earlier
                                 - 9 -

years.   However, while petitioners apparently also claimed non-

cash-contribution deductions on their 2002 return, the issue was

not raised in the examination, nor were the deductions disallowed

in the 2002 deficiency notice.

     The 2002 year (Omaha case) moved though the normal

administrative procedures and became docketed in this Court at a

time when the earlier years’ cases (Phoenix cases) were at a more

advanced stage of development.    The Omaha and Phoenix cases were

being handled by different Government counsel, and different

cities had been requested for trial.     In a routine manner, the

Omaha case was assigned to Appeals for settlement, and, after

exchanges with Appeals, petitioners sent a letter proposing

settlement.    Coincidentally, a few weeks later, Government

counsel in the Phoenix cases moved to continue the cases from the

scheduled Phoenix trial session.    After not being able to obtain

a response from Appeals to their 2002 year offer, petitioners

contacted Government counsel in Omaha, who was not aware of the

non-cash-contribution issues in the Phoenix cases and was not

familiar with the details of the negotiations or settlement offer

during the Appeals process.    When petitioners’ counsel asked

respondent’s Omaha counsel about the status of the settlement

offer, Government counsel made some affirmation that the matter

was settled (per petitioners) or that settlement was likely (per

respondent).    Considering that scenario with those two possible
                             - 10 -

endings, we must decide whether there was a settlement, and if

so, what was settled; i.e., the cash contribution issue or the

entire case.

      The general principles involving settlements have been

effectively set out in the case of Dorchester Indus., Inc. v.

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

Commissioner, T.C. Memo. 1995-10), affd. 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, 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
                               - 11 -


    to that bargain is invited and will conclude it.’
    1 Restatement, Contracts 2d, sec. 24 (1981).
         “In a tax case, it ‘is not necessary that the
    parties execute a closing agreement under section 7121
    in order to settle a case pending before this Court,
    but, rather, a settlement agreement may be reached
    through offer and acceptance made by letter, or even in
    the absence of a writing.’ Lamborn v. Commissioner,
    T.C. Memo. 1994-515. Settlement offers made and
    accepted by letters are enforced as binding agreements.
    Haiduk v. Commissioner, T.C. Memo. 1990-506; see also
    Himmelwright v. Commissioner, T.C. Memo. 1988-114.”

     In the circumstances we consider here, the authority to

settle is not the decisive element of whether a binding contract

was formed.   Clearly, there was an offer of settlement in the

form of the January 6, 2006, letter from petitioners’ counsel to

Ms. Gonzalez.   That offer sought to resolve the only issue then

pending in this case--the cash contributions disallowed in the

notice of deficiency.   It is less clear whether that offer was

accepted and/or whether there was a meeting of the minds.   It is

certain that Ms. Gonzalez did not make a written or oral

response, and hence did not accept the offer irrespective of

whether she had authority to do so.

     To the extent there was an acceptance of the offer,

petitioners contend that it was made by Mr. Carriger.   In the

circumstances of this case, we cannot conclude that Mr. Carriger

accepted petitioners’ offer.   First, the offer was not made to

Mr. Carriger.   Significantly, the negotiations were conducted by

Ms. Gonzalez and not by Mr. Carriger, and he was not aware of the

specifics of the offer.   Mr. Carriger’s response to Mr. Stientjes
                              - 12 -

during the February 21 conversation was, at best, his

understanding of the intent or actions of another person–-Ms.

Gonzalez or her office.   The subsequent discussion between

Messrs. Carriger and Stientjes was essentially an argument about

whether petitioners’ offer of settlement had been accepted.

     The essence and focus of the February 21 and March 2, 2006,

telephone conversations indicate that petitioners were more

concerned about avoiding the new issue (noncash contribution)

than merely enforcing the settlement of the cash contribution

issue.   We are not compelled to consider this subtlety, because

we hold that there was no acceptance of the offer, and, hence the

entire case could not have been settled.   Even though

respondent’s counsel indicated in the March 2, 2006, telephone

conversation that the cash contribution issue was or would be

settled, that was after a new issue (the non-cash-contribution

issue) had been raised.   In any event, it is not sufficiently

clear that the cash contribution issue had been settled before

the March 2, 2006, conversation.

     Although there is precedent that would permit this Court to

enforce an oral settlement or acceptance of a settlement offer,

it must appear reasonably certain that the parties had agreed or
                              - 13 -

intended to agree.4   In this case, we are not able to find that

respondent’s agents or representatives either accepted and/or

intended to accept petitioners’ offer.    Accordingly, we hold that

there was no meeting of the minds and no settlement reached by

the parties.

     To reflect the foregoing,

                                      An order will be issued

                                 denying petitioners’ motion for

                                 entry of decision.




     4
       Needless to say, this matter would likely not be before
the Court if both the settlement offer and the acceptance had
been in some way memorialized; i.e., committed to writing.
