                               T.C. Memo. 2015-219



                         UNITED STATES TAX COURT



               CHRISTOPHER MCMULLEN, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 9304-14.                            Filed November 16, 2015.


      Pamela K. Tahim, for petitioner.

      Paulmikell A. Fabian and Catherine G. Chang, for respondent.



                            MEMORANDUM OPINION


      LAUBER, Judge: This case involves petitioner’s Federal income tax liabili-

ty for 2010. Before the case was called for trial, the parties reached a settlement

and filed with the Court a stipulation of settled issues. The stipulation stated that

the settlement resolved all issues in the case, and we gave the parties 60 days to

file decision documents. Counsel for the Internal Revenue Service (IRS or re-
                                        -2-

[*2] spondent) obtained tax computations consistent with the settlement and sent

petitioner a proposed decision document based on those computations. Petitioner

disagreed with respondent’s computations and declined to sign the decision docu-

ment. Respondent then filed a motion for entry of decision. We will grant respon-

dent’s motion and enter a decision consistent with his tax computations, which we

have determined to be correct in all respects.

                                    Background

      Petitioner is the sole shareholder of HBC Protocols, Inc. (HBC), an S cor-

poration. He filed a late individual income tax return for 2010 on which he did not

report on Schedule E, Supplemental Income and Loss, any flow-through income or

loss from HBC. His return included a Schedule C, Profit or Loss From Business

(Sole Proprietorship), on which he reported gross receipts of $59,491 and total

expenses of $102,925. He thus reported on Schedule C a loss of $43,434.1

      The IRS examined HBC’s return and petitioner’s individual return and pro-

posed a number of adjustments. It determined that petitioner received unreported

wages of $5,571 during 2010 and that he did not have a distinct Schedule C busi-


      1
        Unless otherwise noted, all statutory references are to the Internal Revenue
Code as in effect for the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure. We round all dollar amounts to the nearest
dollar.
                                          -3-

[*3] ness. Rather, the IRS determined that the gross receipts and expenses re-

ported on petitioner’s Schedule C were in fact attributable to his activities on

behalf of HBC. The IRS accordingly zeroed out his Schedule C activity,

eliminating Schedule C gross receipts of $59,491 and disallowing Schedule C

deductions of $102,925, and folded these items into his Schedule E business.

After making the latter adjustments, the IRS determined that petitioner had unre-

ported Schedule E flow-through income of $290,703 from HBC.

         On May 5, 2014, the IRS sent petitioner a timely notice of deficiency for

2010. This notice determined an income tax deficiency of $98,761, an addition to

tax of $9,440 under section 6651(a)(1) for failure to file timely his 2010 return,

and an accuracy-related penalty of $18,224 under section 6662(a). While residing

in California, petitioner timely sought redetermination of the deficiency in this

Court.

         The case was calendared for trial in Los Angeles, California, on April 20,

2015. Prior to the trial date, the parties reached a basis of settlement. On April

10, 2015, the parties filed with the Court a stipulation of settled issues that was

signed by petitioner and by counsel for respondent. This stipulation stated that it

“resolves all the issues before the Court” and expressed the parties’ understanding
                                          -4-

[*4] that “this stipulation of settled issues will be given full effect by the Court

when it enters its Decision in this case.”

      The stipulation of settled issues involved mutual concessions. Petitioner

agreed that he had unreported wage income of $5,571; that he had no distinct

Schedule C business; that the income and expense items reported on his Schedule

C should be transferred to his Schedule E business, thus eliminating the reported

Schedule C loss of $43,434; and that he was liable for an accuracy-related penalty.

Respondent conceded that petitioner had Schedule E flow-through income from

HBC of only $84,626 (as opposed to $290,703 as determined in the notice of de-

ficiency) and conceded that petitioner was not liable for any addition to tax under

section 6651(a)(1).

      At the calendar call there was no appearance by or on behalf of petitioner.

Counsel for respondent appeared, explained that it would take some time to obtain

tax computations, and requested 60 days to file signed decision documents. The

Court ordered that executed decision documents be submitted by June 19, 2015.

      On June 16, 2015, respondent filed a motion for entry of decision. Respon-

dent’s counsel represented that he had obtained tax computations consistent with

the parties’ agreement as set forth in the stipulation of settled issues; that he had

prepared a decision document reflecting these tax computations; and that he had
                                       -5-

[*5] sent the computations and draft decision document to petitioner for review.

Petitioner, who was being assisted by an accountant not admitted to practice

before this Court, disagreed with the computations and declined to sign the

decision document.

      On June 17, 2015, we ordered petitioner to file a response to respondent’s

motion for entry of decision. We informed petitioner that if he “disagrees with the

tax computations attached to respondent’s Motion then he shall specify, in detail,

each item that he believes to be incorrect and shall provide the Court with what he

believes to be the correct tax computations.” Petitioner responded on July 21,

contending that respondent’s computations were erroneous because $50,141 of

income was being counted twice.

      In a subsequent filing, which was accompanied by a declaration from his

accountant, petitioner explained that the $50,141 of alleged “duplicate income”

represents the sum of $43,434 and $6,707. The first number represents the net

“Schedule C Adjustments” shown on line 7 of respondent’s Form 5278, Statement

of Income Tax Changes: gross receipts of $59,491 minus claimed deductions of

$102,925 = ($43,434). This number adds back to petitioner’s income the loss ori-

ginally reported on his Schedule C, consistently with the parties’ agreement that

all Schedule C items of income and expense should have been reported instead on
                                        -6-

[*6] Schedule E. The second number, $6,707, appears on line 9 of respondent’s

Form 5278 as the taxable income shown on petitioner’s 2010 return as filed.

                                     Discussion

      Petitioner first contends that there was no “meeting of the minds” regarding

the settlement. According to petitioner, the tax computation that would result

from the stipulation of settled issues was “one of the most essential aspects of the

settlement.” Because there allegedly was “no agreement as to the essential terms

of the settlement,” petitioner asserts that “there was no objective manifestation of

mutual assent or ‘meeting of the minds’” and hence that “no settlement was

reached.”

       We disagree. The stipulation of settled issues was a binding contract in-

volving mutual concessions, and it finally resolved all substantive tax issues in

this case. Disagreement about the tax computations resulting from the settlement

does not relieve either party of the concessions he made in exchange for the other

party’s concessions.

      “A controversy before this Court may be settled by agreement of the par-

ties.” Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320, 329 (1997), aff’d,

208 F.3d 205 (3d Cir. 2000). “A settlement is a contract and, consequently,

general principles of contract law determine whether a settlement has been
                                          -7-

[*7] reached.” Id. at 330 (quoting Manko v. Commissioner, T.C. Memo. 1995-10,

69 T.C.M. (CCH) 1636, 1638); Robbins Tire & Rubber Co. v. Commissioner, 52

T.C. 420, 435-436 (1969), 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,” which generally requires an offer and an acceptance. Dorchester

Indus. Inc., 108 T.C. at 330 (quoting Manko, 69 T.C.M. (CCH) at 1638-1639);

FPL Group, Inc. v. Commissioner, T.C. Memo. 2008-144, 95 T.C.M. (CCH) 1562,

1566-1567 (citing Dorchester Indus. Inc., 108 T.C. at 330).

      In the Tax Court, concessions, compromises, and settlements can be memor-

ialized in various ways, including (as here) by the parties’ execution of a stipula-

tion of settled issues. “[A] settlement stipulation is in all essential characteristics a

mutual contract by which each party grants to the other a concession of some

rights as a consideration for those secured and the settlement stipulation is entitled

to all of the sanctity of any other contract.” Saigh v. Commissioner, 26 T.C. 171,

177 (1956); Applestein v. Commissioner, T.C. Memo. 1989-42, 56 T.C.M. (CCH)

1169, 1170 (quoting Saigh, 26 T.C. at 177). The agreement manifested by a

stipulation of settled issues will not be set aside except as necessary to prevent

“manifest injustice,” e.g., in the case of fraud or material misrepresentation of fact.

See Rakosi v. Commissioner, T.C. Memo. 1991-630, 62 T.C.M. (CCH) 1563,
                                         -8-

[*8] 1565; Applestein, 56 T.C.M. (CCH) at 1170. “The mere fact that one party

unilaterally miscalculated the amount of taxes that would be owed under the

agreement is no basis for relieving the party of the terms of the agreement.”

Applestein, 56 T.C.M. (CCH) at 1170; accord Stamm Int’l Corp. v. Commissioner,

90 T.C. 315, 320 (1988).

      Where a stipulation of settlement resolves all issues in the case, as the par-

ties’ stipulation did here, the parties are expected to agree on the tax computation

resulting from the settlement and embody that computation in a decision document

for entry by the Court. When one party objects to a decision document tendered

by the other, “[o]ur role * * * is to determine whether the proposed decision docu-

ment is in accord with the settlement stipulation executed by the parties.” Rakosi,

62 T.C.M. (CCH) at 1565. “[I]f the terms of the settlement agreement are clear, it

should be enforced even if one of the parties miscalculated the amount of taxes

resulting therefrom.” Ibid.; accord Stamm Int’l Corp., 90 T.C. at 320-321, 325;

Applestein, 56 T.C.M. (CCH) at 1170.

      Parties to Tax Court litigation routinely settle or concede issues at a time

when they do not (or cannot) know the exact tax computation that will result from

their concessions. Parties may execute a partial stipulation covering some of the

issues in a case, reserving the remaining issues for trial. Or a party may unilateral-
                                          -9-

[*9] ly concede an issue at trial or in post-trial briefs. The fact that the parties

have not yet agreed upon the ultimate tax consequences does not render such con-

cessions or stipulations any less binding.

      Rule 155, captioned “Computation by Parties for Entry of Decision,”

furnishes a useful analogy. This Rule typically comes into play where each party

has prevailed on one or more issues in the case, yielding what might be called a

“split decision.” Under these circumstances, the Court, after issuing its opinion,

“withhold[s] entry of its decision for the purpose of permitting the parties to

submit computations pursuant to the Court’s determination of the issues, showing

the correct amount to be included in the decision.” Rule 155(a).

      When the parties submit a computation for entry of decision under Rule

155, some of the issues may have been tried and resolved by the Court’s opinion,

and other issues may have been resolved by concession, by dispositive order, or by

stipulation of partial settlement. If the parties disagree about the proper tax com-

putation resulting from resolution of all these issues, the Court affords them an op-

portunity to express their views; in the Court’s discretion, this may include oral

argument. See Rule 155(b). But such argument is limited to “the correct compu-

tation”; this Rule “is not to be regarded as affording an opportunity for retrial” or

for retraction of concessions or stipulations previously made. See id. para. (c).
                                        - 10 -

[*10] Whenever parties make concessions, by stipulation or otherwise, in a case

that ultimately requires a Rule 155 computation, they will necessarily have made

those concessions at a time when the ultimate tax liability generated by their con-

cessions may not be known. If the parties in their respective Rule 155 computa-

tions disagree about the amount of tax ultimately due, the Court, after considering

the parties’ arguments, “will determine the correct amount and will enter its deci-

sion accordingly.” Rule 155(b). In short, there is no requirement in a Rule 155

case, or in any other case, that the parties have reached agreement on the ultimate

tax computation as a precondition to making concessions or executing partial or

complete settlements that are binding as to the resolution of the issues thus

resolved.2

      2
         In Shah v. Commissioner, 790 F.3d 767 (7th Cir. 2015), the parties had
executed a stipulation of settled issues and subsequently failed to reach agreement
on the proper tax computation. The U.S. Court of Appeals for the Seventh Circuit
reversed an order of this Court granting the Commissioner’s motion for entry of
decision and remanded for trial to determine the correct tax liability. We find that
case to be factually distinguishable from this one. In concluding that “the Tax
Court should not have entered a judgment adopting the disputed deficiency calcu-
lations,” the Court of Appeals relied on the facts that the taxpayer husband had
been diagnosed with serious illness; that he was “sick and mentally distressed”
and could no longer “understand mathematical calculations”; that the taxpayer
wife “did not understand the case because she was never involved in tax return
preparation”; and that the Commissioner’s counsel had acknowledged errors in the
initial tax computations and, in a letter to the taxpayers, had made ambiguous
statements about the finality of the settlement. Id. at 769. In the instant case, by
                                                                         (continued...)
                                        - 11 -

[*11] Here, we find that the parties did have a meeting of the minds concerning

resolution of all substantive tax issues presented by this case. The stipulation of

settled issues included significant concessions by each party. By executing the

stipulation, the parties explicitly “agree[d] to the following [adjustments]” and

stated that these adjustments “resolve[d] all the issues before the Court.” They

unambiguously stated in their agreement “that this stipulation of settled issues will

be given full effect by the Court when it enters its Decision in this case.”

      Because the parties have executed a binding agreement as to how all sub-

stantive issues in this case are to be resolved, our task is to determine whether the


      2
         (...continued)
contrast, petitioner is acting under no incapacity; he has been assisted at all times
by an experienced accountant; and he has clearly identified the computational
errors he believed to exist, thus enabling this Court to determine the correct tax
liability without the need for trial or oral argument. We note, however, that the
Shah opinion may have misapprehended the import of our Rules and case law in
surmising that, “when the Stipulation of Settled Issues was submitted to the Tax
Court, the parties were still negotiating with the expectation of soon arriving at a
settlement.” Id. at 771. Under well-established case law, a stipulation of settled
issues executed by both parties is itself a settlement; it constitutes a binding
contract that finally resolves the substantive tax issues covered by the agreement,
and the Court will enforce that settlement in the absence of fraud, misrepresenta-
tion of material facts, or similar circumstances. See supra pp. 7-9. Since the par-
ties in this case have reached a binding settlement resolving all tax issues present-
ed, our role in addressing respondent’s motion for entry of decision, like our role
in addressing unagreed tax computations in a Rule 155 context, is to determine the
correct tax computation that flows from the manner in which the parties have
resolved those issues, whether they have agreed on the tax computation or not.
                                        - 12 -

[*12] decision document proposed by respondent in his motion for entry of

decision “is in accord with the settlement stipulation executed by the parties.”

Rakosi, 62 T.C.M. (CCH) at 1565. We conclude that it is.

       The sole challenge petitioner makes to the proposed decision document

concerns the $50,141 of alleged “duplicate income.” Petitioner expresses his

belief that “the extra $50,141 [shown] as taxable income on the [IRS] report was

duplicate income as this income was already being accounted for through the

Corporation,” viz., through the Schedule E adjustments relating to HBC. As noted

earlier, the $50,141 to which petitioner refers represents the sum of $43,434 and

$6,707.

      The first number represents the net “Schedule C Adjustments” shown on

line 7 of respondent’s Form 5278: gross receipts of $59,491 minus claimed de-

ductions of $102,925 = ($43,434). This component of respondent’s computations

faithfully implements the parties’ agreement and involves no double counting. In

paragraph 6 of the stipulation of settled issues, the parties agreed that “petitioner

did not receive taxable income reported as Schedule C gross receipts in the

amount of $59,491 for taxable year 2010.” And in paragraphs 2 through 5 of that

stipulation, the parties agreed that petitioner is not entitled to Schedule C deduc-

tions in the aggregate amount of $102,925 for taxable year 2010.
                                        - 13 -

[*13] The Schedule C Adjustments shown on respondent’s Form 5278 precisely

track the stipulation of settled issues and correctly add back to petitioner’s 2010

gross income the net Schedule C loss that the parties agreed should be disallowed,

viz., $43,434. In effect, that loss was allowed instead on Schedule E when the

gross receipts and allowable expenses erroneously reported on Schedule C were

folded into HBC’s income. If the loss were not disallowed on Schedule C, it

would in effect be allowed twice.

      The adjustment to Schedule E income shown on respondent’s Form 5278, or

$84,626, is also correct. This precisely tracks paragraph 1 of the stipulation of

settled issues, in which the parties agreed that petitioner “failed to report Schedule

E flow-through income in the amount of $84,626 from HBC * * * for the 2010 tax

year.” This number represents a significant concession by respondent; in the

notice of deficiency, respondent had determined that petitioner for 2010 failed to

report Schedule E income of $290,703 from HBC.

      The other component of the $50,141 to which petitioner objects is the

$6,707 number appearing on line 9 of respondent’s Form 5278 as the “taxable in-

come shown on return.”3 In order to determine the tax liability flowing from the

      3
       On September 14, 2015, respondent filed with the Court copies of peti-
tioner’s certified Form 4340, Certificate of Assessments, Payments, and Other
                                                                     (continued...)
                                        - 14 -

[*14] parties’ agreement, it is necessary to add, to the taxable income petitioner

originally reported, or $6,707, the agreed-upon adjustments to his taxable income.

Those agreed-upon adjustments total $133,632, comprising unreported wages of

$5,572, unreported Schedule E income of $84,626, and the disallowed Schedule C

loss of $43,434. Under the parties’ settlement, therefore, petitioner’s corrected

taxable income for 2010 is $140,339.

      Petitioner does not challenge respondent’s determination that the tax lia-

bility arising for the taxable year 2010 on taxable income of $140,339 is $33,004.

Because the tax shown on petitioner’s return was only $673, respondent has cor-

rectly determined a deficiency of $32,331. This figure represents significant con-

cessions by respondent since the deficiency determined in the notice of deficiency

was $98,761.

       In an order dated September 1, 2015, we informed petitioner that any

further objections to respondent’s computations should be submitted on or before

October 2, 2015. Petitioner has filed no further objection or response. Because

we are satisfied with respondent’s tax computations and because petitioner has


      3
        (...continued)
Specified Matters, a three-year CDE transcript, and a certified account transcript
for the 2010 tax year, all of which confirm that petitioner reported taxable income
of $6,707 on his 2010 return as originally filed.
                                         - 15 -

[*15] raised no valid objections to them, we conclude that further argument is

unnecessary. Cf. Rule 155(b) (where parties submit computations that “differ as

to the amount to be entered as the decision of the Court, then the parties may, at

the Court’s discretion, be afforded the opportunity to be heard in argument

thereon”).

      In sum, we conclude that the parties had a meeting of the minds concerning

resolution of the substantive issues and that their stipulation of settled issues

constituted a valid and binding contract. That is so even though the parties, when

executing the settlement stipulation, may not yet have calculated, or may have

misapprehended, the tax liability that ultimately would flow from their settlement.

We further conclude that the tax computations set forth in respondent’s motion for

entry of decision accurately implement the agreement embodied in the parties’

stipulation of settled issues and that these computations are in all respects correct.

      To effect the foregoing,

                                                  An appropriate order and decision

                                        will be entered.
