FINDINGS OF FACT

1. Antone Construction Company was incorporated in the State of South Carolina in March, 1977. The attorney who prepared the articles of incorporation was Thomas B. Pollard, Jr., a South Carolina attorney, who listed himself as the initial registered agent and his professional office address, 1200 First National Bank Building, Columbia, South Carolina, as the initial registered office of the corporation. South Carolina law required that every corporation have an in-state registered agent and registered office. Mr. Pollard was also named in the articles of incorporation as the director and incorporator of Antone.

2. Antone was incorporated at the behest of Anthony J. Frank upon the recommendation of his brother Frederick Frank.

3. At the time of incorporation of Antone and at all times thereafter Anthony J. Frank was a resident of Hermitage, Pennsylvania . Frederick Frank was a resident of Columbia , South Carolina .

4. Anthony J. Frank was also the President and sole stockholder of Brimar Construction Company at the time of Antone's incorporation. Brimar Construction Company (hereinafter "Brimar") had its principal executive office, at all times pertinent to this action, at 155 Snyder Road , Sharon , Pennsylvania .

5. Soon after the incorporation of Antone, Thomas B. Pollard resigned as the director of Antone. He was replaced by Anthony J. Frank, Frederick Frank, and Bernard Rosen as the directors and officers of Antone. At that time Bernard Rosen was also an employee of Brimar. Mr. Pollard continued as the registered agent of and his professional office continued to be the registered office of Antone in South Carolina until he resigned that position in September, 1980.

6. Antone was involved, as a subcontractor, in construction projects in the states of Georgia , Florida , Ohio , South Carolina , Virginia and West Virginia . The first project it undertook was in Columbia , South Carolina , at the time of its incorporation or immediately thereafter. Antone maintained an office at each construction site while engaged in the particular project. Each project office was responsible for keeping records related to its project. Antone also maintained checking accounts at a bank located in the vicinity of each project, during its involvement thereon, from which suppliers and employees were paid.

7. Antone also maintained checking accounts at the McDowell National Bank, Sharon , Pennsylvania . The business or mailing address for Antone for these accounts was P.O. Box 1278 , Sharon , Pennsylvania .

8. All payments by the general contractor for work done by Antone on the construction project at Columbia , South Carolina , were received at the local office but were forwarded to Anthony J. Frank in Pennsylvania .

9. Frederick Frank was in charge of supervising the day-to-day field activities of all the construction projects for Antone. He maintained an office at the construction site in Columbia , South Carolina , and in the basement of his home in that same city while he was an employee of Antone.

10. Anthony J. Frank was responsible for deciding what projects Antone would submit bids on and for negotiating the final contracts when it was the successful bidder.

11. Frederick Frank left the employ of Antone in October, 1978, at which time he discontinued maintaining an office for Antone in his home.

12. Antone never conducted any business from nor maintained any records of employees at 1200 First National Bank Building, Columbia , South Carolina .

13. A meeting of the Board of Directors of Antone was held on October 9, 1978 , at 155 Snyder Road , Sharon , Pennsylvania . (That address is also the address of the offices of Brimar.) At that meeting, Frederick Frank and Bernard Rosen were replaced as directors and officers of Antone. Mary Frank and Christine Bell, the wife and mother-in-law respectively of Anthony J. Frank, became directors of, and Mary Frank became an officer of, Antone.

14. The tax return for Antone for the tax year ending January 31, 1978 , was prepared by the certified public accounting firm of Black, Bashor and Porsch of Sharon, Pennsylvania. That return was filed as a consolidated return with Brimar and it listed Antone as a subsidiary of Brimar. Antone's address on the return was shown as Box 1278 , Sharon , Pennsylvania . The information and records upon which the return was based were supplied to the accounting firm by Anthony J. Frank.

15. Employer's Monthly Federal Tax Returns filed by Antone with the Internal Revenue Service in February, March and April, 1979, show Antone's address as P.O. Box 1278, Sharon, Pennsylvania.

16. Antone in December, 1978, filed an application for a certificate of authority to operate as a foreign corporation with the Commonwealth of Pennsylvania . The address of its proposed registered office in the state was given as 155 Snyder Road , Sharon (Hermitage), Pennsylvania .

17. Between October and November, 1978, the plaintiff made three loans totalling $92,000.00 to Anthony J. Frank for the use by the latter in his construction business. These loans were eventually secured by a promissory note from Brimar and by the personal guarantees of Anthony J. and Mary Frank.

18. The plaintiff made a fourth loan of $23,000.00 on April 5, 1979 . This loan was made to Antone and was secured by a promissory note from Antone and by the personal guarantees of Anthony J. and Mary Frank.

19. On April 5, 1979 , Antone also executed a document guaranteeing the repayment of all monies loaned by the plaintiff to Brimar (Anthony J. Frank) and Antone. Antone also assigned to the plaintiff an interest in a mechanic's lien action it had pending in the Cabell County Circuit Court. Plaintiff's interest, or share, in the lawsuit amounted to $115,000.00 plus interest at twelve per cent per annum. That assignment was recorded with the Cabell County Clerk on April 30, 1979 . The plaintiff has never received any repayment of the principal or interest on any of these loans.

20. The Internal Revenue Service has made the following tax delinquency assessments against Antone for employment (F.I.C.A.) taxes:

Quarter  Date of   Amount of    Lien

Ending  Assessment Assessment   Filed

                              
11/22/78

                                &

 09/78    
11/8/78
  $64,576.89   
3/1/79

 12/78     
2/5/79
  $67,269.70 
3/1/79

 03/79    
3/16/79
  $ 2,679.43 
9/18/79

 

21. The Internal Revenue Service has made a tax delinquency assessment against Antone for unemployment taxes for the year 1978 as follows:

 Date of   Amount of   Lien

Assessment Assessment Filed

  
2/5/79
   $3,999.06  
3/1/79

 

22. All the tax liens against Antone involved herein were filed with the Prothonotary of Mercer County, Pennsylvania. The cities of Sharon and Hermitage are located within that county.

23. In April, 1983, Anthony J. Frank made offers to compromise the tax liabilities owed by himself personally, by Brimar and by Antone for the aggregate sum of $250,000.00. The offers were made on an Internal Revenue Service form, number 656.

24. Robert C. Quigley, an employee of the Internal Revenue Service, was assigned to investigate these offers of compromise made by Anthony J. Frank. Mr. Quigley had numerous meetings with Mr. Frank regarding the offers. After one of these meetings, he became suspicious that Mr. Frank was attempting to bribe him in order to obtain approval and acceptance of the offers.

25. On June 28, 1983 , as part of the investigation of the suspected bribery, Mr. Quigley delivered to Mr. Frank a letter signed by the District Director of the Pittsburgh District of the Internal Revenue Service. The letter stated that the District Director accepted the offers to compromise the tax liabilities of Frank, Brimar, and Antone for the sum of $250,000.00.

26. Anthony J. Frank delivered a check made out to the Internal Revenue Service for $250,000.00 to Mr. Quigley on July 12, 1983 . Mr. Frank was later arrested and indicted for attempting to bribe Mr. Quigley. He was subsequently acquitted of the charge.

27. The Internal Revenue Service sent a letter to Anthony J. Frank, on behalf of Antone, on February 22, 1984 , rejecting the offer to compromise the tax liabilities of Antone and demanding full payment thereof. By letter dated March 9, 1984 , the Internal Revenue Service informed Anthony J. Frank that it would retain the proceeds of the $250,000.00 settlement check because it was made by him for fraudulent and illegal purposes. Furthermore, the proceeds would be applied against the tax liabilities of Mr. Frank personally and Brimar.

28. As of April 30, 1985 , the total tax liabilities of Antone, including penalties and interest, were $303,724.12.

CONCLUSIONS OF LAW

1. This court has jurisdiction to decide the issue of priority of the liens asserted by the United States pursuant to 26 U.S.C.A. §7426 and 28 U.S.C.A. §2410.

2. The tax liabilities of Antone to the United States became liens upon its property, both real and personal, from the time the assessments thereof were made. 26 U.S.C.A. §§6321 and 6322 (1967).

3. The general rule in determining the priority of liens is that the first in time is first in right. Mantovani v. Fast Fuel Corp. [80-2 USTC ¶9468 ], 494 F.Supp. 72, 75 (S.D.N.Y. 1980). Under this rule the tax liens of the United States would have priority because the assessments were all made prior to Antone's assignment to the plaintiff in April, 1979, of an interest in its lawsuit. However, the common law rule is modified by 26 U.S.C.A. §6323(a) (1967)--Mantovani, at 75--which states that "[t]he lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary of his delegate." Subsection (f) reads as follows:

(f) Place for filing notice; form.--

(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

(A) Under State laws.--

(i) Real property.--In the case of real property, in one office within the State (or the county, or other governmental subdivision) as designated by the laws of such State, in which the property subject to the lien is situated; and

(ii) Personal property.--In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; or

(B) With the clerk of district court.--In the office of the clerk of the United States district court for the judicial district in which the property subject to the lien is situated, whenever the State has not by law designated one office which meets the requirements of subparagraph (A); or

* * *

(2) Situs of property subject to lien.--For purposes of paragraphs (1) and (4), property shall be deemed to be situated--

(A) Real property.--In the case of real property, at its physical location; or

(B) Personal property.--In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

For purposes of paragraph (2)(B), the residence of a corporation or partnership shall be deemed to be the place at which the principal executive office of the business is located, and the residence of a taxpayer whose residence is without the United States shall be deemed to be in the District of Columbia.

26 U.S.C.A. §6323(f) (1967 and 1986 Cum. Supp.).

The tax liens of the United States for employment taxes for the quarters ending 09/78 and 12/78 and for unemployment taxes for 1978 would continue to have priority under subsection (f) because they were filed prior to the assignment in April, 1979, to the plainfiff of part of Antone's interest in the mechanic's lien suit. However, the plaintiff maintains that the filing of the liens in Mercer County, Pennsylvania was incorrect, and thus invalid, because either: (a) the mechanic's lien lawsuit, an interest of which was assigned to him, was real property and, therefore, the liens against it had to be filed in Cabell County, West Virginia, §6323(f)(2)(A) (1986 Cum. Supp.); or, (b) if the lawsuit were personal property, the liens had to be filed in Columbia, South Carolina because that was the residence of Antone. §6323(f)(2)(B) (1986 Cum. Supp.).

First of all, this court believes that Antone's mechanic's lien and the suit it brought to enforce the lien were a chose in action. Young v. Garred, 90 W.Va. 767, 112 S.E. 181, 184 (1922); W.Va. Code §38 -2-2 & -34 (1985 Replacement Vol). As such they were intangible personal property of Antone. See, Perrin & Martin, Inc. v. United States [64-2 USTC ¶9694 ], 233 F. Supp. 1016, 1020 (E.D.Va. 1964); Johnston Memorial Hospital v. Hess, 44 Bankr. 598, 600 (W.D.Va. 1984). Consequently, the situs of the property for filing tax liens is the residence of Antone. 26 U.S.C.A. §6323(f)(2)(B) (1986 Cum. Supp.).

Plaintiff argues that Antone's residence was Columbia , South Carolina , because that was where its principal executive office, §6323(f)(2)(B) , was located inasmuch as that was where Antone was incorporated. However, the place of incorporation is not necessarily the principal executive office of a corporation. See, D'Antoni, Inc. v. Great Atlantic & Pacific Tea Co. [74-2 USTC ¶9552 ], 496 F.2d 1378 (5th Cir. 1974). The principal executive office "is the headquarters of the business--the office at which the major executive decisions affecting the business are made." Id. at 1383; accord, Dimmitt & Owens Financial, Inc. v. Unique Industries, Inc. [84-1 USTC ¶9228 ], 589 F. Supp. 14, 16 (N.D.Ill. 1983).

In the case at bar, Antone never conducted any of its activities at the address given on its application for incorporation--1200 First National Bank Building --in South Carolina . It did have an office and bank accounts at the construction project it was engaged in at Columbia ; but it had these at each project in various other states. To hold that the construction site offices were the principal executive office could mean that at any one time Antone might have several, or no, residence for filing tax liens, depending on the health of its business at a particular time. We think that this would run counter to the intent of Congress in enacting §6323 . But see, Corwin Consultants, Inc. v. Interpublic Groups of Companies, Inc. [75-1 USTC ¶9299 ], 512 F.2d 605, 609-11 (2d Cir. 1975). This court does not believe that the office maintained by Frederick Frank in the basement of his home was the residence of Antone; especially after October, 1978, when he left Antone's employ--which was before any of the liens in question arose.

This court holds that the principal executive office of Antone was in Sharon (Hermitage) Pennsylvania . Anthony J. Frank, the driving force behind Antone, had his offices there and conducted substantially all of his business from there. He made all the decisions about what projects Antone would become involved in. The financial records of Antone were kept by Anthony J. Frank in Pennsylvania . Its Federal tax returns showed a Sharon , Pennsylvania address and were filed in Pennsylvania . After its incorporation, all of its directors and officers, except for Frederick Frank, were residents of Pennsylvania . According to its own records, any meetings of the board of directors of Antone were held in Sharon , Pennsylvania . The overwhelming weight of the evidence shows that the major business decisions regarding Antone were made in Sharon , Pennsylvania . Therefore, the tax liens of the United States were filed at the residence of Antone. ³

4. The liens of the United States on the funds in dispute herein for employment taxes for the quarters ending 09/78 and 12/78 and for unemployment taxes for the year 1978 have priority over plaintiff's interest in the mechanic's lien suit brought by Antone because the former were filed before the latter was assigned to plaintiff. However, plaintiff's claim to the money sub judice would have priority over the tax lien for employment taxes for the quarter ending 03/79 because the latter was not filed until after plaintiff had obtained assignment of an interest in the chose in action.

5. Plaintiff has contended that even if the United States had valid priority liens such liens were extinguished by the Internal Revenue Service's acceptance, by the letter of June 28, 1983 , of Antone's offer to compromise its tax liability. Alternatively, the United States should be estopped to deny that it has settled those tax liabilities due to the fact that it has retained the $250,000.00 paid by Anthony J. Frank in settlement of all tax liabilities after it rejected the compromise offers.

Settlement of disputed tax liabilities are governed by 26 U.S.C.A. §7121 & 7122 (1967). These statutes authorize the Secretary of the Treasury or his delegate to compromise claims against taxpayers for unpaid taxes. They are strictly construed in that the procedures set forth therein for settling disputes must be precisely followed in order to form a binding agreement. Botany Worsted Mills v. United States [1 USTC ¶348 ], 278 U.S. 282, 288-89 (1929); Country Gas Service, Inc. v. United States [69-1 USTC ¶9178 ], 405 F.2d 147 (1st Cir. 1969).

The letter of acceptance cited by the plaintiff was purportedly signed by the Pittsburgh District Director of the Internal Revenue Service. However, the authority to accept an offer to compromise a tax liability of the amount Antone owed was delegated only to regional commissioners or regional counsels. Delegation Order 11 (Rev. 13), 1982-1 C.B. 333. Therefore, because the District Director did not have the authority to accept Antone's offer of compromise, that acceptance was not binding on the United States . Bowling v. United States [75-1 USTC ¶9333 ], 510 F.2d 112 (5th Cir. 1975) (per curiam); Dorl v. Commissioner of Internal Revenue [74-2 USTC ¶9826 ], 507 F.2d 406 (2nd Cir. 1974) (per curiam); Country Gas Service, supra; McGee v. United States [83-1 USTC ¶9245 ], 566 F. Supp. 960 (M.D.Fla. 1982). The Internal Revenue Service's later rejection of the offers of compromise were valid since there was no binding settlement agreement.

Plaintiff's theory of estoppel seems to be grounded on the argument that the Internal Revenue Service's stated reason for retaining the $250,000.00--fraud by the payor, Anthony J. Frank--was invalid because Mr. Frank was acquitted of the charge of attempting to bribe Agent Quigley. Consequently, since the United States retained the benefits of the offers to compromise it should be bound by the same.

First of all, there is some question whether the plaintiff has standing to raise the issue of estoppel since he is a stranger to the transaction. See, Phillips v. Commissioner of Internal Revenue [50-1 USTC ¶9102 ], 178 F.2d 270 (3rd Cir. 1949) (per curiam), cert. denied, 339 U.S. 932 (1950); I.R.S. v. Blais [85-2 USTC ¶9684 ], 612 F. Supp. 700, 704 (D.Mass. 1985). But even if he does have standing, his claim of estoppel fails. The acquittal of Anthony J. Frank on the criminal charge of bribery is not res judicata in a civil tax case. Helvering v. Mitchell [38-1 USTC ¶9152 ], 303 U.S. 391, 397 (1938). The Internal Revenue Service, therefore, was not foreclosed from asserting fraud as a ground for retaining the $250,000.00. The controlling reason for denying plaintiff's claim of estoppel, however, is the exclusiveness of the statutory manner of settling tax liability disputes. Bowling, supra; United States v. Saladoff [64-2 USTC ¶9698 ], 233 F. Supp. 255, 258-59 (E.D.Pa. 1964), aff'd sub nom., United States v. Feinberg [67-1 USTC ¶9176 ], 372 F.2d 352 (3rd Cir. 1965), reh'g denied, id. Because the statutory requirements were not followed, there can be no estoppel, Saladoff, supra, even though the Internal Revenue Service retained the money paid in regard to the rejected offer. Bowling, supra.

6. The court holds that the United States' tax liens against Antone for employment (F.I.C.A.) taxes for the quarters ending 09/78 and 12/78 and for unemployment taxes for the year 1978 are valid and give it a priority claim to the funds being held by Fidelity over the plaintiff's interest, by way of assignment from Antone, in such funds. The plaintiff's interest, however, has priority over the United States ' tax lien against Antone for employment taxes for the quarter ending 03/79.

The court is not prepared at this time to order disbursal of the funds being held by the defendant Fidelity because we do not have current accountings of the amounts claimed by the United States and the plaintiff nor the amount of the fund held by Fidelity. We will, therefore, withhold entering judgment pending submissions within thirty days of entry of this opinion of affidavits; (1) by the United States setting forth the current assessment against Antone for each tax period involved in this litigation; (2) by the plaintiff of the amounts of principal and interest outstanding on the loans to Brimar and Antone which are secured by the funds being held by Fidelity; and (3) by Fidelity of the present value of the funds held by it that are the subject of this action.

¹ In his memorandum of law, plaintiff presents his arguments regarding the facts, the applicable law and the standard the court should use in viewing the evidence as though the case were being decided on a motion for summary judgment. However, it is perfectly clear from the order of October 26, 1984, that the case has been submitted to the court for full adjudication on the evidence developed by the parties.

² The court notes that we originally included in our time frame schedule a date for oral argument by counsel. However, that date was passed over due to continuances requested by both parties. Since counsel for neither party has asked the court to reschedule oral argument, we deem that it has been waived.

³ Plaintiff has not challenged the propriety of the filings of the tax liens as to the officer with whom they were filed or the county in which they were filed.

 

79-2 USTC ¶9731] United States of America , Plaintiff v. Gene and Frances Hamm, Defendants

U. S. District Court, West. Dist. Ky. , at Louisville , Civil Action No. C 76-1447 L(A), 10/20/79

[Code Sec. 7122]

Statute of limitations: Compromise of taxes: Rejection of offer by IRS : Failure to deny liability as to amount owed.--A taxpayer's offer of compromise that contained a waiver of limitations was rejected by the IRS , and, therefore, the IRS could not assert that it accepted the portion of the offer containing the waiver. However, the taxpayer's failure to deny liability for the amount claimed by the IRS in the requests for admissions sent to the taxpayers operated as a waiver of any defense based on the statute of limitations.

George J. Long, United States Attorney, Louisville, Ky. 40202, Mikal H. Frey, Department of Justice, Washington, D. C. 20530, for plaintiff. Quinn F. Pearl, Jr., Pearl , Pearl & Pearl , 632 Knox Blvd. , Radcliff , Ky. 40160 , for defendants.

Memorandum Opinion

ALLEN, District Judge:

This matter is before the Court on plaintiff's motion for summary judgment. Defendants have not responded.

In 1973, prior to the filing of the instant suit, defendants submitted to plaintiff an offer of compromise, on a form containing a waiver of the defense of limitations. This offer was rejected by plaintiff, although plaintiff now argues that it accepted that portion of the offer containing the waiver of limitations. We must reject the notion that an offer of settlement can be accepted piecemeal and unilaterally.

However, we also note that requests for admission, submitted to the defendants in January, 1979, were not answered in any form. Included is a request for admission that there is due the entire amount claimed by the plaintiff. The language of Federal Rule of Civil Procedure 36 clearly states that requests submitted pursuant thereto are admitted unless answer or objection is made within 30 days. Thus, we must conclude that failure to deny liability for the total amount claimed due operated as a waiver of any defense based on the statute of limitations. Accordingly, all issues raised herein having been established by failure to deny, plaintiff is entitled to summary judgment as a matter of law.

A judgment in accordance herewith has this day been entered.

 

[79-2 USTC ¶9524]James P. Kehoe, Plaintiff v. United States of America , Defendant

U. S. District Court, So. Dist. N. Y., 75 Civ. 3842 ( CHT ), 7/19/79

[Code Secs. 6402 and 7122]

Compromises: Acceptance of offer: Counteroffer distinguished: Credit of overpayment against tax liability of another year.--The Commissioner effectively accepted an offer to compromise a refund claim when he mailed the taxpayer's attorney a letter accepting the offer and informing the taxpayer that the refund settlement would be credited against the unpaid tax liability of a later tax year. The court rejected the taxpayer's argument that the IRS letter constituted a counteroffer rather than an acceptance because it materially altered the terms of the offer. Nothing in the offer limited the government's right under Code Sec. 6402 to offset the settlement against other outstanding tax liabilities.

Morton L. Ginsberg, 666 Fifth Avenue , New York , N. Y. 10019, for plaintiff. Robert B. Fiske, Jr., United States Attorney, Peter R. Paden, Assistant United States Attorney, New York , N. Y. 10007, for defendant.

Opinion

TENNEY, District Judge:

James P. Kehoe commenced this action in 1975 to seek a refund of $24,700.32 that had allegedly been wrongfully assessed against him as personal income tax owing for the 1970 tax year. The parties subsequently corresponded about settling this action. Contending that the parties did reach such a settlement, the Government now moves for an order enforcing the alleged settlement and dismissing the complaint. For the reasons given below, the Government's motion is granted and the complaint is dismissed.

Background

In his complaint, Kehoe alleged that his gross income for 1970 was $66,730.00 and that the tax properly due was $32,875.00, but that the Internal Revenue Service (" IRS ") had wrongfully determined that his gross income was $100,200.00 and wrongfully seized $57,020.75. In its answer, the Government denied the material allegations of the complaint. One month later Kehoe offered a compromise settlement. His attorney wrote that "I have been authorized by Mr. Kehoe to settle this action for the sum of $18,000 plus interest according to law." Letter from Morton L. Ginsberg to Paul H. Silverman, dated Dec. 31, 1975, Exh. C to Notice of Motion. The Government acknowledged receipt of Kehoe's offer, stating in part: "As we understand the terms of your offer they are as follows: Taxpayer, in full settlement of the above-entitled case, will accept a refund of $18,000, plus interest according to law." Letter from Scott P. Crampton to Ginsberg, dated Jan. 20, 1976, id. Exh. D. The Government subsequently accepted the offer. It wrote that Kehoe would receive a check if he sent the Government the proper stipulation discontinuing the action and "[s]ubject to the final paragraph of this letter." The final paragraph provided: "If the taxpayer has any unpaid liability in respect of an internal revenue tax, the overpayment resulting from this settlement may be credited thereon in accordance with the provisions of Section 6402, Internal Revenue Code of 1954." ¹ Letter from Crampton to Ginsberg, dated Mar. 2, 1976, id. Exh. E. Several months later, the Government informed Kehoe that the settlement amount had been credited by the IRS to his outstanding tax liability for 1971, see id. Exh. K, and sent him a stipulation of discontinuance asking him to execute and return it. Letter from Silverman to Ginsberg, dated Nov. 11, 1976, id. Exh. F. Rather than doing so, Kehoe protested the application of his 1970 overpayment, stating that he did not offer a settlement on the terms expressed in the Government's November 11 letter. He suggested that the parties "inform the Court that no settlement has been reached and that this action should be activated forthwith," and he reiterated the terms of the compromise offer. He also stated: "If the Department wishes to commence an action for the year 1971 we will be prepared to litigate the same independently." Letter from Ginsberg to Silverman, dated Nov. 16, 1976, id. Exh. G. In response, the Government reiterated its belief that the parties had reached a compromise settlement and explained the use of the section 6402 offset of the settlement amount against Kehoe's 1971 tax liability. Letter from Silverman to Ginsberg, dated Nov. 23, 1976, id. Exh. H. Subsequent correspondence indicated that the parties had reached a stalemate.

The Government argues, in summary, that the parties entered a binding agreement to settle the dispute, that the Government has fully performed under that agreement, and that the IRS had statutory authority, to credit the settlement amount to Kehoe's outstanding tax liability for 1971. Kehoe responds that the parties never reached an enforceable agreement because there was no meeting of the minds as to the manner of payment and because the Government's use of the term "overpayment" rather than "refund" or "sum" constituted not an acceptance of the offer, but rather a counteroffer. Allegedly, "sum" or "refund" refers to an actual return of the settlement amount whereas "overpayment" refers to money that may be set off against any existing tax liability. Kehoe also contends that the offer did not contemplate IRS discretion to use the sum as a credit and that, if it intends to so use the money, it must do so pursuant to 31 U. S. C. §227 by immediately commencing a separate action to collect for any 1971 liability and not by an administrative setoff pursuant to 26 U. S. C. §6402.

Discussion

"A district court has the power to enforce summarily, on motion, a settlement agreement reached in a case that [is] pending before it." Meetings & Expositions, Inc. v. Tandy Corp., 490 F. 2d 714, 717 (2d Cir. 1974). Although the facts in some cases may be so complex that summary enforcement is inappropriate, see id., the instant case can be resolved on the documents. To resolve the case, the Court must determine whether the parties reached a binding settlement agreement and, if so, whether the Government performed its part of the agreement, entitling it to relief. These questions are governed by general contract principles. United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1, 4 (5th Cir. 1962); Walker v. Alamo Foods Co. [1 USTC ¶207], 16 F. 2d 694, 697 (5th Cir. 1927).

After reviewing the documents, the Court concludes that the parties did reach a compromise settlement of their dispute over Kehoe's 1971 income tax liability. Kehoe offered "to settle this action for the sum of $18,000 plus interest according to law." Letter from Ginsberg to Silverman, dated Dec. 31, 1975 , Exh. C to Notice of Motion. The Government subsequently accepted the offer. Letter from Crampton to Ginsberg, dated Mar. 2, 1976 , id. Exh. E.

Kehoe argues, however, that the Government's response was not an acceptance, but rather a counteroffer, because it materially altered the manner of payment provided for in the offer, first, by referring to a credit against any unpaid liability rather than to an outright return of the money and, second--essentially the same as the first--by altering the terms "sum" and "refund" to "overpayment." In regard to the first point, however, the paragraph in the acceptance letter, id., referring to a credit under section 6204 was neither part of the acceptance nor a counteroffer; it never became a term in the agreement, nor was it suggested as such. Rather, it was a gratuitous statement of the law. ²

In regard to the second point, the constructions Kehoe puts on the terms used in the offer and acceptance do not avail him. He argues that the use of the word "sum" in the offer meant that the "term of such payment was to be in cash." Memorandum at 5-6. He offers, however, no support, either in the correspondence between the parties or otherwise, for this restrictive and inaccurate interpretation of "sum," and the Court is aware of no such support. He also argues that the Government made a counteroffer by using "overpayment" in its acceptance, id. para. 1, rather than "refund," the term the Government used in acknowledging and restating Kehoe's offer. ³ This change of terms does not alter the meaning of the agreement in this case. First, the term "refund," allegedly restricted to a direct return of money, was neither used nor suggested in either the offer or the acceptance; it could not in this case have become part of the agreement. The offering letter, id. Exh. C, provides no support for finding any term as to the manner of payment, let alone allowing only for a direct return of the settlement amount. ⁴ Secondly, the documents provide no support for a conclusion that the Government at any time understood that Kehoe intended his offer to be restricted to a direct return of money. Even if the Court assumes arguendo that "refund" can refer only to a direct return of money to a taxpayer, as Kehoe contends, rather than to an overpayment that may or may not be returned, depending on whether the taxpayer has outstanding liabilities, the Court would not reach a different result in this case. The onetime use of the term "refund" is scarcely enough--on all of the documents in the case--to assume that the IRS intended to relinquish its statutory authority under 26 U. S. C. §6402 to offset an overpayment for one year against a liability for another year.

Kehoe also argues that the offer did not contemplate IRS discretion to credit the settlement amount against his other outstanding liabilities. 26 U. S. C. §6402 need not have been in his contemplation at all because it has been settled law at least since Von Hoffman v. City of Quincy, 71 U. S. (4 Wall.) 535, 550 (1866), "that the laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as if they were expressly referred to or incorporated in its terms." Prior to the agreement, the IRS had statutory authority to apply an overpayment as a credit against outstanding liabilities for other years, 26 U. S. C. §6402, and the agreement did nothing to negate that authority. The IRS action in this case did not deny Kehoe the benefit of the settlement because he received proper credit of the settlement amount against his 1971 liabilities. Under existing law and his agreement, he can rightly expect no more.

Finally, Kehoe argues that if the IRS wants to collect upon its 1971 assessment, it must do so in a separate collection proceeding pursuant to 31 U. S. C. §227 rather by administrative assessment of the settlement amount under 26 U. S. C. §6402. Section 227 is on its face inapplicable, however, and Kehoe has not provided any authority to suggest otherwise. That section, by its plain terms, applies "[w]hen any final judgment [is] recovered against the United States ." (Emphasis added). Section 6402 was enacted to give the IRS authority to make offsets in cases other than when there are final judgments. Chapman v. United States [74-1 USTC ¶9233], 347 F. Supp. 89, 94 (C.D. Cal. 1972). ⁵

Conclusion

The Court concludes that the parties did reach a settlement agreement and that the Government has performed its part of the agreement by crediting the settlement amount against Kehoe's other tax liabilities. Accordingly, the Government's motion for an order enforcing the settlement agreement and dismissing the complaint is granted.

So ordered.

¹ 26 U. S. C. §6402(a) provides:

In the case of any overpayment, the Secretary or his delegate, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall refund any balance to such person.

² The Court does not decide, of course, that a provision for a direct return of an entire overpayment without deduction for an offset against existing liabilities could not be incorporated into a settlement agreement. It merely decides, in regard to the instant contention, that such a provision was not made part of the agreement in this case.

³ Both parties rely on Empire Ordnance Corp. v. Harrington [57-2 USTC ¶9965], 249 F. 2d 680 (D. C. Cir. 1957), Kehoe for the proposition that "refund" and "overpayment" have different meanings and the Government for the proposition that the use of 26 U. S. C. §6402 with regard to the proceeds of a settlement has been upheld. Both parties are correct, but the decision does not help Kehoe because the Court did not address whether "refund" can refer only to a direct return of money to a taxpayer and, as decided in the text supra, the agreement in the instant case did not incorporate the term "refund" or otherwise require the IRS to return the settlement amount directly to him.

Although Kehoe clearly objects to the use of the compromise amount as a credit against his subsequent tax liabilities, his present insistence on the distinction between "overpayment" and "refund"--and his reliance on the latter--is confusing. In his November 16, 1976 letter, Exh. G to Notice of Motion, he stated: "To reiterate, our . . . offer of settlement of the year 1970 in question in this action is on the basis set forth in our previous offer and the first paragraph of your November 11, 1976 letter." The first paragraph of the Government's November 11, 1976 letter, id. Exh. F, indicated that the Government had "accepted your offer of letter dated December 31, 1975 on the basis of an overpayment." Neither Kehoe's offer nor the Government's letter indicates prior reliance on the term "refund."

⁴ Kehoe argues that because the parties did not agree on the manner of payment, there can be no agreement. He provides no support for this contention. Although it is true as a matter of general contract law that there is no agreement if the parties fail to agree on the essential terms, Interocean Shipping Co. v. National Shipping & Trading Corp., 462 F. 2d 673, 676 (2d Cir. 1972); V'Soske v. Barwick, 404 F. 2d 495, 500 (2d Cir. 1968), cert. denied, 394 U. S. 921 (1969), it is also true that all the terms contemplated by the parties need not be fixed with complete certainty, id. Even were Kehoe able to establish that the precise manner of payment were a term essential to the settlement agreement, he would still have to establish that the agreement as it stands lacks sufficient certainty to be enforceable. Absent some clear indication prior to or contemporaneous with the execution of the contract--of the importance of the manner of payment of a certain sum of money, the Court is unwilling to assume that the transfer of money is so fraught with difficulty as to render the contract unenforceable. Here, there were only two possibilities. The Government would either send Kehoe a check, via the United States Attorney's Office, or credit the money to his outstanding tax liabilities pursuant to 26 U. S. C. §6402. See Letter from Crampton to Ginsberg, dated Mar. 2, 1976, Exh. E. to Notice of Motion. It chose the latter. Kehoe has shown no evidence of materiality or indefiniteness sufficient to warrant a trial of this issue.

⁵ The parties also argue as to the effect of 26 U. S. C. §§ 6321 (Government lien for taxes due) & 6331 (collection of taxes by levy upon taxpayer's property), the Government arguing that it could have achieved the same result under these sections as it did under id. §6402. Because of the conclusions the Court has reached in this case, it is unnecessary to address these additional sections

 

[71-1 USTC ¶9112]Bernhard R. Kurio, Plaintiff v. United States of America , Defendant

U. S. District Court, So. Dist. Tex., Houston Div., Civil Action No. 66-H-509, 429 FSupp 42, 6/15/70

[Code Sec. 7122--Result unchanged by '69 Tax Reform Act]

Compromises: Enforcement as contract: Timeliness of acceptance: Failure to accept unequivocally: Processing errors.--No contract of settlement resulted from negotiations between the taxpayer and Government counsel. The Government's acceptance of the taxpayer's settlement offer was not timely and unequivocal. "* * * the parties' attempts to settle were frustrated", in the words of the Court, "by processing errors in the automatic data processing system of the Internal Revenue Service ( IRS ) which released ripples and waves of governmental action and inaction, human and mechanical. These errors ultimately caused a misapplication of payments made by the plaintiff.

[Code Sec. 6322--Result unchanged by '69 Tax Reform Act]

Period of lien: When lien begins and ends: Evidence.--The Government acted improperly in failing to release or reduce outstanding tax liens against the taxpayer, notwithstanding that the Court had determined in a Memorandum and Order that the taxpayer was not liable for any 1963 and 1964 tax and that the liens based on the assessments for those years were null and void. 02.

Robert I. White, Chamberlain & Hrdlicka, 529 Bank of the Southwest Bldg., Houston , Tex. , for plaintiff. John O. Jones, Leonard B. Tater, Tax Division, Department of Justice, Fort Worth, Tex., for defendant.

Memorandum Opinion

NOEL, District Judge:

This case began as a suit for refund of payroll taxes. Over $89,000 in such taxes for 1963 and 1964 were assessed. Plaintiff paid a portion and sued for refund. The Government filed liens and counterclaimed for the balance.

On the day set for trial, the case became more than a refund suit. When called, Government counsel announced that the parties had agreed to settle the case, and requested leave to amend the Government's answer and counterclaim to so allege. The motion was unopposed and granted. The Government then moved for judgment on an asserted contract of settlement. Plaintiff admitted negotiations for settlement were had, but denied that a contract of settlement had been achieved. The Government's motion was carried with the case.

[Severance of Issues]

Trial was had, on both the refund and contract issues. After considering the record carefully, the Court determined that plaintiff should recover on his claim for refund. The Court also determined that the Government's motion to enforce the claimed contract probably should be denied but that the administration of justice would be best served by a severance of the refund issue from the contract issue. The latter conclusion was reached primarily because preparation of findings of fact and conclusions of law on the contract issue would require a tedious and lengthy examination of the procedure for processing tax returns, and the felt probability that after an adverse determination of the refund issue, the Department of Justice would review the record, perceive the weakness of its contract claim, and recede from the latter out of court.

[Disposition of Refund Issue]

The merits of the refund claim were fully examined in a Memorandum and Order constituting findings of fact and conclusions of law with respect to all issues other than the contract issue, [68-1 USTC ¶9382] 281 F. Supp. 252 (1968). A final judgment was entered as to such issues pursuant to Rule 54(b), Fed. R. Civ. P., in which plaintiff's claim for refund was granted and the Government's counterclaim dismissed insofar as it was based on the assessments for 1963 and 1964. No appeal was taken and such judgment became final. This transformed the posture of the leadings left in the case from a suit by plaintiff for a tax refund, to a suit by the Government on an asserted contract.

Soon after the judgment became final, it became apparent that the Government would not dismiss but continue to press its claim of contract and seek recovery of the amount which it claimed plaintiff had agreed to pay in settlement. The settlement issue remained on the docket. The tax liens outstanding against plaintiff were not released or reduced, notwithstanding the Court had determined in its Memorandum and Order that plaintiff was not liable for any 1963 or 1964 tax and that the liens based on the assessments for those years were null and void. Though judgment on the tax aspect of the case had become final, the lien records in Harris County, Texas, continued to reflect that plaintiff owed the Government over $89,000 in 1963 and 1964 taxes.

[Release of Liens]

Although requested by plaintiff to do so, the Government refused to release or reduce its liens until plaintiff paid the full amount claimed under the settlement. Eventually, to obtain release of the liens, plaintiff found it expedient to pay such amount. He then amended his pleadings and now sues for refund a second time, seeking to recover all that he has paid the Government, both in taxes and in satisfaction of the alleged contract. The Government has not responded to plaintiff's amended complaint, but its prior pleadings manifest its position that it is entitled to all sums plaintiff has paid. The Government's trial amendment which added the Government's claim of settlement had engrafted a cluster of new issues on the original refund suit.

As the evidence developed at trial, it became clear that the parties' attempts to settle were frustrated by processing errors in the automatic data processing system of the Internal Revenue Service ( IRS ) which released ripples and waves of governmental action and inaction, human and mechanical. These errors ultimately caused a misapplication of payments made by plaintiff. The system was incapable of promptly finding and correcting its errors. When the mistakes were finally discovered, the Government failed promptly to admit them. The resulting snarl is now before the Court for resolution.

[No Contract of Settlement]

As anticipated, the Court has concluded that no contract of settlement resulted from the negotiations between plaintiff's and Government counsel. Why this is so--why the words which passed between counsel failed to create a contract--while apparent from the testimony, is best understood from an application of the law of contracts to the pertinent events surrounding the negotiations and ultimate discovery by the Government of its mistake.

Agreements compromising tax litigation are, of course, contracts. As such they are subject to the rules applicable to contracts generally, United States v. Lane [62-1 USTC ¶9467], 303 F. 2d 1, 4 (5th Cir. 1962), unless tax policy requires some other result, as it did for example in United States v. Feinberg [67-1 USTC ¶9176], 372 F. 2d 352 (3d Cir. 1965), aff'd on rehearing en banc [67-1 USTC ¶9176], 372 F. 2d 352, 359 (1967). Before applying any of the general contract rules pertinent here, the Court in each instance has determined whether that rule is consistent with tax policy. All conflicts and potential conflicts are raised and considered herein.

Under general contract law, in considering whether a contract has been formed a court must place itself as nearly as possible in the position of the parties at the time of their negotiations, a process which requires analysis of all pertinent events. Local 787, IUE v. Collins Radio Co., 317 F. 2d 214, 220 (5th Cir. 1963). See generally 3 A. Corbin, Contracts §§ 538, 543A-B (1960 ed. & Supp. 1964) [hereinafter cited as 3 Corbin]. Accordingly, the bulk of this memorandum opinion consists of a detailed statement and analysis of the complex facts.

I. Background

The withholding tax provisions of the Internal Revenue Code of 1954 (hereinafter called "the Code") and the Federal Insurance Contributions Act (FICA) require every employer to deduct and withhold taxes upon the wages he pays his employees. 26 U. S. C. §§ 3101-02 3402. Additionally, the FICA and the Federal Unemployment Tax Act (FUTA) impose taxes upon employers computed as a percentage of wages. 26 U. S. C. §§ 3111, 3301. By regulation, employers liable for withholding and FICA taxes are required to return such taxes quarterly on a prescribed form (hereinafter sometimes called a "941 return"). Treas. Reg. §§ 31.6011(a)-1, -4. FUTA taxes are required to be returned annually on a Form 940. Treas. Reg. §31.6011(a)-3. Employers who fail without reasonable cause to file such returns are subject to penalty. 26 U. S. C. §6651.

[Withholding Tax Deposits]

If an employer's liability for withholding and FICA taxes exceeds $100 for either of the first two months of a calendar quarter, he is required to deposit the tax for that month in a Federal Reserve Bank or authorized commercial bank. Treas. Reg. §31.6302(c)-1; see 26 U. S. C. §6302. During the period relevant here, he then could elect whether to deposit the remainder of his quarterly tax liability in the manner provided for monthly payments, or to enclose payment with his return. ¹ A penalty is prescribed for failure without reasonable cause to make required deposits. 26 U. S. C. §6656.

An employer required to make deposits for a taxable period in 1967 or earlier was also required to prepare a Federal Depositary Receipt for each deposit for validation by a Federal Reserve Bank. The validated depositary receipts and the remittance of any balance due were then attached to the 941 return for the period with respect to which the deposits were made. Treas. Reg. §31.6302(c)-1(a)(3)(ii). The 941 return provided space not only for a summary computation of the employer's tax liability (the total taxable wages paid during the quarter, the amount of income tax withheld, the total FICA taxes due, the total of the enclosed depositary receipts, and the balance due), but also for identification of the depositary receipts by serial number, date, and amount. The depositary receipts thus served to substantiate the amount of tax deposited by the employer, entitling him to a credit on his 941 return for the quarter. ²

An employer submitted a 941 return is required to substantiate the total wages he reports as subject to FICA tax by itemizing the taxable wages paid each employee during the quarter. Such amounts are entered in a schedule provided on the return and on continuation sheets furnished by the IRS for that purpose. Similar sheets are available from the IRS to correct wage information supplied for previous quarters. By completing such sheets and attaching an adjustment computation, an employer can correct a tax liability previously reported.

[Independent Contractors]

As a contractor in the construction industry during 1963, 1964 and 1965, plaintiff subcontracted drywall construction from house and apartment builders. During 1963 and 1964, plaintiff would bid on projects and if his bid was accepted, would arrange with others to perform the services necessary to carry out the jobs. He did not consider the persons with whom he contracted to do the work to be his employees. Rather, he treated them as self-employed independent contractors, and did not withhold any taxes from the amounts he paid them. He filed no 940 or 941 returns, and paid no withholding, FICA, or FUTA taxes.

Since January 1965, plaintiff has employed workers on an hourly basis to do the work required by his contracts with builders. Since then he has withheld payroll taxes. He has filed returns regularly and remitted withholding, FUTA, and FICA taxes to the Government.

[Agent's Report]

During the fourth quarter of 1965, acting pursuant to a policy decision within the IRS to make a test case on a drywall contractor, an agent from the Houston IRS office reviewed plaintiff's books. The agent's report to his superiors contained three findings pertinent to plaintiff's liability for payroll taxes: a determination that plaintiff's payments for the services required by his drywall subcontracts in 1963 and 1964 were "wages" paid "employees"; a computation of the withholding, FUTA, and FICA taxes based on such payments; and, a determination that because plaintiff had failed without reasonable cause to file returns or make monthly deposits, plaintiff was liable for additions to such taxes and for penalties in certain amounts.

In a letter dated December 29, 19 65, the District Director advised plaintiff of the taxes and penalties claimed to be due, proposed adjustments to plaintiff's tax liability for the appropriate periods, and informed plaintiff of his right to administrative review within the IRS . A copy of the agent's report was enclosed. Plaintiff protested the agent's findings and requested a hearing, which was held before the Appellate Division of the Regional Commissioner's Office at Houston on March 15, 19 66. Plaintiff offered evidence and argument of counsel, but the protest was denied.

[Assessment of Tax]

Thereafter, in June and July of 1966, the proposed taxes were assessed against plaintiff. An "assessment" is a technical procedure required by §6201 of the Code. At trial, both plaintiff and Government counsel acted under the assumption that the requisite procedure was followed, and plaintiff offered evidence that assessments were in fact made.

The assessment caused liabilities for payroll taxes to be recorded in the IRS computer's memory bank in the summer of 1966, and thereby created deficiencies and apparent delinquencies in plaintiff's accounts for all four quarters in and for each of the years 1963 and 1964. These accounts were assigned to a revenue officer in the Houston office of the Delinquent Accounts and Returns Branch of the Collection Division of the Office of the District Director. Officers in that branch are commonly referred to as collection officers and are responsible for filing notices of tax liens, serving levies, seizing and selling real and personal property, and recommending "civil actions to secure payment, suits to enforce penalty for failure to honor levies, and penalty assessments as a means of collection or as a method of obtaining compliance with existing laws and regulations." 35 Fed. Reg. 2417, 2453 (1970) (§1118.524 of a statement on IRS organization and functions, a prior version of which is printed in 9 J. Mertens, Federal Income Taxation §49.75, at 119 (1965 rev.) [hereinafter cited as 9 Mertens]).

[Collection Procedures]

Mrs. Maida R. Jennings, the collection officer in the Houston office who had been assigned plaintiff's apparently delinquent accounts, contacted plaintiff's counsel during the summer of 1966 to inform him that the proposed to commence the seizure of assets and other collection procedures. Counsel promptly contacted plaintiff and his accountant, who prepared and filed claims for abatement of the assessed taxes. Thereafter, plaintiff's counsel persuaded Mrs. Jennings and her superior to suspend all collection efforts except the filing of tax liens, pending resolution of the claims for abatement. A notice of lien for the full amount of the unpaid assessment was prepared by Mrs. Jennings and caused to be filed in the Federal Lien Records in Harris County, Texas, on August 8, 19 66.

Plaintiff's claims for abatement were supported by a number of statements given by persons alleged to have been his employees in 1963 and 1964. By statute, 26 U. S. C. §3402(d), and regulation, Treas. Reg. §§ 31.3402(d)-1, 31.3403-1, an employer may obtain credit against his liability for withholding taxes by proving that his employees have paid their income taxes. The IRS has promulgated a Form 727 to assist employers in making such proof. An employee completing the form declares "under the penalties of perjury" that he filed an income tax return, reported the wages received from the employer as income, did not report any amount of tax as withheld by that employer, and paid his tax.

[Obtaining Forms 727]

Plaintiff testified at trial that he and his wife obtained the Forms 727 over a period of months by working late in the evenings and on weekends. Many of the alleged employees had moved out of state and were difficult to locate. Even so, plaintiff and his wife had succeeded in obtaining a number of the statements prior to the hearing before the Appellate Division in March 1966, and obtained others later. The statements obtained prior to the appellate hearing were offered in evidence by plaintiff's counsel, but failed to persuade the Appellate Division that the proposed assessment was excessive.

After suit was filed, plaintiff, through his accountant and counsel, asked the Government to furnish the 1963 and 1964 income tax returns of all persons alleged to have been his employees during those years. After the Government failed to furnish all such returns voluntarily, plaintiff's counsel sought them through discovery procedures, serving Government counsel with requests for admissions and interrogatories, and serving a subpoena duces tecum on an IRS agent who would be a witness at trial. The Government neither opposed nor complied with plaintiff's repeated attempts to discover the missing income tax returns, but simply ignored plaintiff's repeated demands. It would appear that plaintiff proceeded to trial without seeking sanctions from the Court to compel such discovery, and its attendant delay, because of the economic compulsion created by what this Court determined to be invalid tax assessments and liens. But in the manner now to be described, the Government's failure to discover such returns substantially increased plaintiff's burden of preparing his case for trial and making proof.

[Burden of Proof]

A taxpayer suing for a refund has the burden of proving his claim against the Government because he is plaintiff. In this regard, such a suit is akin to a suit against a private defendant for money had and received. Zeeman v. United States [68-1 USTC ¶9406], 395 F. 2d 861, 865 (2d Cir. 1968); Ehlers v. Vinal [67-2 USTC ¶9612], 382 F. 2d 58, 65-66 (8th Cir. 1967); Larchfield Corp. v. United States [67-1 USTC ¶9140] 373 F. 2d 159, 164 (2d Cir. 1966); Gibson v. United States [66-1 USTC ¶15,689], 360 F. 2d 457 (5th Cir. 1966); Young & Rubicam, Inc. v. United States [69-1 USTC ¶9404], 410 F. 2d 1233 (Ct. Cl. 1969). By virtue of the penultimate sentence of §7422(e) of the Code, the taxpayer has an identical burden with respect to issues raised by a Government counterclaim. See Zeeman v. United States , supra, at 866. ³

[Government's Failure To Offer Evidence]

At trial Government counsel was well aware of plaintiff's burden on the refund issue. Indeed, relying only on the rule giving plaintiff the burden, counsel elected not to present any evidence on the refund issue, nor to cross-examine the witnesses called by plaintiff or answer plaintiff's counsel in oral argument. Only on the contract issue did Government counsel offer any evidence (the documents which the Government contends establish the contract of settlement), cross-examine plaintiff's witnesses, or offer oral argument. Counsel for the Government had the right to pursue this strategy, but not to the extent that he would violate this Court's order with respect to discovery and pretrial preparation, which provided in part as follows:

Each attorney who attends [the pretrial conference] will familiarize himself with the pre-trial rules and practices of this Court and will be prepared to accomplish the purposes of Federal Rule of Civil Procedure 16; i. e., simplifying the issues; expediting the trial; and avoiding unnecessary expenditure of time and money to the litigants.

"The Government as a litigant is, of course, subject to the rules of discovery." United States v. Proctor & Gamble Co., 356 U. S. 677, 681 (1958); Campbell v. Eastland [62-2 USTC ¶9637], 307 F. 2d 478, 485 (5th Cir. 1962), cert. denied, 371 U. S. 955 (1963). The Government therefore had no right to ignore plaintiff's discovery demands. Moreover, as representatives of the Government, all personnel connected with the litigation, including counsel, had an obligation "to be frank and fair and disclose all the facts." Campbell v. Eastland, supra, at 485; accord, United States v. San Antonio Portland Cement Co., 33 F. R. D. 513 (W. D. Tex. 1963).

The Government's failure to furnish the returns in response to plaintiff's request and this Court's pretrial procedures had an immediate practical effect on the trial. As already indicated, income tax paid by employees may be offset against an employer's assessed liability for withholding tax and thus entitle him to an abatement of the withholding tax assessment. Moreover, plaintiff established at trial, through the testimony of Government personnel, that self-employment tax paid by alleged employees may be offset against one-half of the alleged employer's assessed liability for FICA taxes. ⁴ Thus by establishing that the persons alleged to have been his employees had declared and paid income and self-employment tax, plaintiff could have satisfied his burden of showing the assessment against him to be excessive.

[Discovery Procedure]

The returns sought by plaintiff from the Government were material and relevant because they were the best evidence of the facts on which this issue turned. They were immediately accessible to all participating IRS and Justice Department personnel, any of whom could have determined their location by computer search in the regional Service Center or the National Computer Center and obtained them by oral request. See Treas. Reg. §§ 301.6103 (a)-1(e), -1(h). They were sought by plaintiff through duly ordered, established, and well understood discovery procedures. Nevertheless, they were not furnished and this increased plaintiff's burden of proving his case beyond that contemplated by the Congress and the courts. In effect, plaintiff was deprived the opportunity of satisfying his burden of proof on an important part of his case.

Although many of the returns sought by plaintiff were not furnished by the Government, many others were. An examination of the latter by plaintiff's accountant and the IRS agent whose investigation had led to the refund suit culminated in a stipulation between the parties filed April 24, 19 67, which reduced plaintiff's maximum potential liability for the 1963 and 1964 taxes assessed against him to $25,629.48. The Government abated the remainder of the assessed taxes because the returns examined indicated that many of the alleged employees had reported and paid the corresponding income and self-employment tax. Plaintiff's accountant testified at trial that had the Government produced the returns corresponding to all the statements under oath which had been obtained by plaintiff, the assessment against plaintiff would have been further reduced by more than $6,000 in withholding taxes, leaving less than $20,000 in dispute. And the record permits the clear inference that had all the returns requested been produced, both the withholding and FICA assessments against plaintiff would have been abated several thousand dollars more.

At trial plaintiff's counsel Mr. White testified that after the stipulation was entered into, he reviewed the evidence then available and reached the conclusion that he would recommend to plaintiff that the case be disposed of by compromise or settlement with an offer to pay the Government between $3,000 and $5,000, taking into account primarily the amount it would cost to try the case.

[Credit Received By Taxpayer]

In late July or early August of 1967, White was informed by the collection officer Mrs. Jennings that on June 2, 19 67, plaintiff had received a credit of $8,159.42 to his 1963-1964 tax liability. The credit had been computed as follows:

Date of Credit                    Amount

April 13, 19
66 .......           $ 25.92

February 7, 19
66 .....            506.77

December 22, 19
65 ....          4,049.45

November 22, 19
65 ....          3,386.27

June 2, 19
67 .........             13.88

June 2, 19
67 .........            177.13

June 2, 19
67 .........         $8,159.42

Mrs. Jennings told White that she did not know the source of the payments or credits. At trial she testified she did not know their source because she was handling only the 1963 and 1964 accounts, and the credits were produced from other years. At that time plaintiff had not been informed that the IRS considered anything amiss in his account for the fourth quarter of 1965, the period--according to date of credit--in which the bulk of the transferred credit was received by the Government. Nor had his account for that quarter been assigned to any revenue officer for collection.

However, something was amiss in plaintiff's account for the fourth quarter of 1965. A [Form] 941 return filed by plaintiff for that quarter had not been processed. This fact was not known to plaintiff, to Mrs. Jennings, or to the IRS computer memory bank, no entry in which reflected the filing of the return.

[Data Processing System Distinguished]

Here, at the first reference to the IRS computer, some precision in terminology is desirable. Technically, a computer is a machine. In the dictionary it is defined as "an automatic electronic machine for performing simple and complex calculations." Merriam-Webster New International Dictionary 468 (3d ed. 1961). On the other hand, an automatic data processing system as employed by the IRS includes people as well as machines of various types, including computers. In common parlance "the computer" is often used in a loose or generic sense to embrace the people involved in the automatic data processing system as well as the machines, and it was so used by witnesses from the IRS . However, the term will be used here in its restricted sense of a machine only, unless otherwise indicated.

The ramifications of the processing errors which prevented processing of the return eventually kept the prospective settlement of the refund suit from reaching fruition. For this reason, although it substantially lengthens this opinion, their source and causes will be traced.

During the fourth quarter of 1965 and for some prior quarters, plaintiff did business under two trade names, "B. R. Kurio Sheetrock Contractor" (hereinafter called "Sheetrock") and "Drywall Specialties and Supplies" (hereinafter called "Drywall"). Most of plaintiff's employees were not members of a trade union. Such employees were designated and paid as employees of Sheetrock. On the occasions when union workers were employed, they were designated and paid as employees of Drywall. Plaintiff's only purpose for the separate designation and payment of employees was for internal control, namely to distinguish between wages paid union and non-union employees. He filed separate [Form] 941 returns showing taxes due by him under each trade name.

[1965 Deposits]

During the fourth quarter of 1965 plaintiff made no deposits under the Drywall trade name, ⁵ but did make two deposits in an authorized depositary under the Sheetrock trade name: $3,918.38 on November 22, 19 65, for the month of October, and $4,049.45 on December 22, 19 65, for the month of November, a total of $7,967.83. Plaintiff obtained a validated Federal Depositary Receipt for each deposit.

Early in 1966 plaintiff caused two [Form] 941 returns to be prepared for the quarter ending December 31, 19 65. Each showed "Bernard Roy Kurio" as employer and owner, and each bore plaintiff's employer identification number. One was prepared for Drywall, the other for Sheetrock. For convenience I will sometimes refer to them as the Drywall and Sheetrock returns, respectively.

The Drywall return was filed on Form 941, revised July 1965. In the appropriate spaces, plaintiff's name, identification number, and Drywall trade name were properly filled in. The other return was filed on a preaddressed Form 941, revised October 1965. The address label correctly indicated plaintiff's name, identification number, and trade name of Sheetrock.

Since no deposits had been made during the fourth quarter of 1965 under the Drywall trade name, that return was accompanied only by an itemized list of the wages paid each employee under the trade name during the quarter and a check for $506.77, the full amount of the taxes shown due under the Drywall trade name for the quarter.

[Depositary Receipts]

The Sheetrock return was not so simple. It was accompanied for purposes of substantiation, not only by an itemized list of wages paid each employee under the Sheetrock trade name during the quarter and a check for $2,967.51 (the balance shown due under the Sheetrock trade name for the quarter), but also by the two validated Federal Depositary Receipts evidencing the deposits made during the quarter and a tabulation correcting wage information submitted for prior quarters in substantiation of an adjustment of plaintiff's payroll tax liability. On the back of the printed form of return, on a schedule provided for that purpose, the serial number, date of deposit, and amount of each depositary receipt, as well as the total amount deposited, were specified. In appropriate spaces on the front of the return, the net adjustment and "Total of enclosed depositary receipts (From Schedule B, other side)" were entered. Save for an immaterial arithmetic error in transcribing the information from the back to the front of the return, it was perfectly prepared.

The Drywall and Sheetrock returns, with their enclosures, were received promptly at the Office of the District Director in Austin , Texas . There the routine of IRS processing commenced.

[System For Processing Tax Returns]

Although a few courts have had occasion to touch on the IRS system for processing tax returns, I have found no reported case describing the system since the advent of automatic data processing and the substitution of the computer for traditional books of account. The system is complex, and any description, to be meaningful, must be detailed. An appreciation of the system and the halting journey through it of the Drywall and Sheetrock returns is necessary to a thorough understanding and disposition of the settlement issue. Therefore, even though such detailed description substantially lengthens this memorandum opinion, it is included as part of the background of the settlement negotiations.

For the past twenty years or more the IRS has gradually been developing a system to utilize computers and other technological innovations to speed the processing of the many millions of tax returns it receives annually. Various stages in the development of this system, which is constantly undergoing modification to render it faster, more efficient and less costly, are described in the literature. ⁶ Many aspects of its operation from early 1966 until late 1967 were also developed in the record of this case through testimony by government personnel at trial. ⁷

Until November 2, 19 66, with few exceptions all returns were filed by the taxpayer with the appropriate district director. There, envelopes were opened, a notation made on the return to indicate whether payment accompanied it, payment checks removed and deposited, changes in name and address noted, and sometimes other clerical tasks performed. The returns were then shipped to the regional computer Service Center , likewise in Austin , for recordation through automatic data processing. ⁸

At the Service Center , each return is assigned a document locator number for identification. The returns are then sorted into blocks (small groups of returns with similar characteristics, e.g., income tax returns with refund claims), and the blocks are assembled into batches. Use of document locator numbers, blocks, and batches is intended to minimize the risks of losing or misplacing returns.

[Document Analysis Branch]

The next step is an examination of each return by an employee in the Document Analysis Branch, ⁹ referred to in the literature as a "specialist." The specialist determines whether the return contains all required information, detects errors and omissions which would render the return unsuitable for keypunching, and identifies the information on the return which will be fed into the computer. Returns which the specialist deems deficient ¹⁰ are diverted to other personnel responsible for contacting the taxpayer to rectify the error or supply the omission. After the return has been rendered suitable for further processing, it is reintroduced into the flow of returns found acceptable to the computer by the specialist in the first instance.

The specialist's identification of the data to be fed into the computer permits other, lower-grade personnel to punch input cards routinely. ¹¹ After the cards have been punched and the punching verified, the cards for each block are run through the Service Center computer. The computer tests the cards for faulty punching and order and mathematically verifies the information taken from the returns. Errors it defects are printed out in error registers. By comparing the error registers and punched cards with the original returns, personnel in the Error Resolution Branch ¹² detect IRS generated errors and identify taxpayer generated errors. The former are corrected and the computer run repeated. Taxpayer-generated errors which cannot be resolved are noted and this information placed with the output magnetic tapes containing the data taken from returns which the specialist has determined for the computer that it will accept. ¹³

[Storage of Output Tapes]

The output tapes generated by the computer at the Service Center are shipped to the IRS National Computer Center near Washington, D. C. This facility contains the Service's master file modules, its tax information for all years for all taxpayers. The magnetic tapes from the Service Center are fed into the computers there to update the master file modules. The computers are programmed to analyze the information in the master files and detect "ostensibly improper deviations from the tax laws." ¹⁴ They generate output magnetic tapes indicating rights to refund, certain kinds of delinquencies, and returns with unusual characteristics. The refund tapes are forwarded to the Treasury Department where they cause refund checks to be printed and mailed. The other magnetic tapes are sent back to the Service Center , where they generate appropriate action by personnel there or in the office of the District Director.

Returning now to the journey of plaintiff's returns through the system just described, plaintiff's Drywall return for the fourth quarter of 1965, on its receipt February 7, 19 66 in the office of the District Director at Austin , Texas , was stamped "Rec'd With Remittance." On the 42nd day of 1966 (February 11) it was given a document locator number, checked by processing clerks for mathematical accuracy, completeness, and the presence of any necessary exhibits, and found to be suitable for entry into the computer. A keypunch operator then entered the information contained in the return onto computer cards. This information, after transfer to magnetic tape and verification in the Service Center , was forwarded to the National Computer Center for entry in plaintiff's master file module for the fourth quarter of 1965.

A printout or transcript of plaintiff's master file module for the fourth quarter of 1965 was introduced in evidence. It is valuable evidence of how plaintiff's returns for that quarter were processed, for its entries correspond to all entries made for that quarter in the module. However, the record reflects that such a printout will never be furnished by the IRS to a taxpayer, even on request. Thus even had plaintiff suspected that the IRS had made a mistake in processing his returns, he would have been denied the opportunity to help discover the mistake and assist in its correction.

The printout which was introduced in evidence reveals that the information on the Drywall return caused two transactions to be recorded in plaintiff's master file module for the fourth quarter of 1965: the filing of the return (which appears as an "assessment" or debit on the transcript), and the receipt of payment (which appears as a "credit"). Since full payment accompanied the return, after these transactions the module continued to indicate a zero balance in plaintiff's account for the fourth quarter of 1965.

Only one other group of transactions attributable to the filing of the Drywall return is reflected in the printout. This was the assessment of a penalty and interest for late filing (the return was one day late), and a subsequent payment of the penalty and interest.

[Receipt Of 1965 Return]

The date of receipt of Sheetrock's fourth quarter return for 1965 was not stamped on the return, nor does the record otherwise reflect when that return reached either the office of the District Director or the Service Center. However, it was received somewhere within the IRS on or before the 40th day of 1966 (February 9), for on that date a document locator number was stamped on the return and on the check which accompanied it, and the latter was deposited by the Government. The check which accompanied the return was dated January 31, 19 66 and drawn on the "Kurio Drywall Company" account, Gulfgate State Bank, Houston , Texas . It was signed by "Mrs. B. R. Kurio" but bore plaintiff's identification number and the legend "4th Qtr 941." It was paid by the bank February 11.

The Government conceded at trial that the two Federal Depositary Receipts totaling $7,967.83 which plaintiff had purchased during the fourth quarter of 1965 were enclosed with the Sheetrock return. However, during the interval between the receipt of the return by the IRS and the inspection of the return by one of several processing clerks, the enclosed depositary receipts for the quarter were mislaid or misplaced. Since the return was not stamped "Rec'd With Remittance," like the Drywall return, it is possible that the depositary receipts became separated in the mail room prior to inspection of the return by one of the mail handlers. But wherever it occurred, the depositary receipts were misplaced, and this simple, routine clerical mistake by IRS personnel, unknown and uncommunicated to plaintiff, compounded his problems with the IRS , which had their genesis in the test case initiated by the IRS .

Some processing clerk, upon finding that the depositary receipts were not present, made a notation on the return to indicate that no depositary receipts had been enclosed, which was contrary to evidence on the back of the return and the true facts. That clerk or some other made another notation elsewhere on the return to indicate that the claimed adjustment had not been substantiated. Eventually, when processing of the Sheetrock return for the fourth quarter of 1965 was completed in September 1967 (eighteen or nineteen months after receipt), credit for the claimed adjustment was allowed. At trial one of the government officials speculated that this was due to a mathematical error or to an administrative decision to waive substantiation. On the whole record the more reasonable explanation is that the tabulation substantiating the claimed adjustment was detached from the remainder of the return at the same time as the depositary receipts, and later located within the Service Center and reaffixed to the return; and, I so find.

Once it had been discovered that no depositary receipts or substantiation of the claimed adjustment was attached to the return, some clerk, presumably a specialist, determined that the absence of those documents rendered the return unsuitable for further processing (unacceptable to the computer), specifically for processing by the keypunch operators. This clerk marked the return with a "Reject" stamp during the 11th week (the middle of March) of 1966, and diverted it as an "imperfect" return to the Error Resolution Branch. What transpired there will be explained in due course.

The Government's first attempt to contact plaintiff with regard to his Sheetrock return was dated April 6, 19 67, fourteen months after receipt of the return, together with two Federal Depositary Receipts and other substantiation at the Service Center . Apparently the depositary receipts had been located when the letter was written, since it identified them by serial number, date, and amount, and stated that additional information was needed to process them. The letter also identified the Sheetrock return for the fourth quarter of 1965, and correctly stated the total tax shown due thereon as $10,935.34. The sum of the depositary receipts was deducted from the total tax shown due, leaving a difference of $2,967.51. The letter asked plaintiff how the difference had been paid. It was signed, "Chief, Correspondence Unit." ¹⁵ Plaintiff immediately responded that the difference had been paid by check, and enclosed a copy of the check.

[Credit For Depositary Receipts]

The printout or transcript of the master file module for plaintiff's account for the fourth quarter of 1965 reflects that on some date between May 8 and June 2, 19 67, the deposits evidenced by the two depositary receipts were credited as payments for that quarter. The two transactions concerning the two depositary receipts reflected in the transcript are identified in the transcript by document locator numbers which reveal their date as May 8, but the record does not reflect the nature of the transactions. However, because the amount shown due on the Sheetrock return was not entered in his master file module as a debit on that date, it is clear that the transactions of May 8 were not the completion of processing of that return. Such completion was not to come for four months more.

Prior to the entry of the depositary receipt credits in plaintiff's master file module on May 8, the only entries there concerned plaintiff's Drywall return. Had the processing of the Sheetrock return been completed, the tax reported by plaintiff on that return would have been reflected in the module as a debit entry. Had the check which accompanied the Sheetrock return also been processed, its entry would have been reflected in the module as a credit, a partial satisfaction of the tax liability declared by plaintiff in his return. But neither of these entries had been made. Therefore, on May 7 the module reflected a zero balance, not an unpaid assessment for the fourth quarter of 1965 equal to the amount of the misplaced depositary receipts.

Because on May 7 the tax declared by plaintiff on the Sheetrock return to be due for the fourth quarter of 1965 had not been entered in his master file module, entry of the transactions of May 8 in the module created a credit balance in his account (an apparent overpayment), not a reduction in the debit balance (an apparent partial satisfaction of a tax liability). From there, the automatic processes as programmed in the computer took over and the incompleteness of plaintiff's accounting record as reflected in the module was automatically converted into erroneous statements of plaintiff's account, as will next be explained.

[Transfer Of 1965 Overpayment]

IRS policy requires that overpayments be credited to accounts showing deficiencies before being refunded, and that net overpayments (i. e., overpayment credits exceeding the total of all deficiencies for that taxpayer) be refunded promptly. Acting, as programmed, to implement this policy, the computer on June 2, 19 67, automatically transferred the apparent overpayment in plaintiff's account for the fourth quarter of 1965 to another account reflecting a deficiency, plaintiff's account for the first quarter of 1964. This produced the unexplained credit in that account brought to White's attention by Mrs. Jennings late in the summer of 1967.

Plaintiff was never notified by the IRS of this apparent overpayment, that is of the reason for the transfer of credits to his 1964 account. He was never notified of the fact of the transfer except by Mrs. Jennings, who was unable to give a reason. All that either plaintiff or White knew in August 1967 was that approximately $8,000 had been credited to one of the accounts in suit. And this is all that Mrs. Jennings knew. Moreover, while it is apparent that the computer "knew" the source of the credits in the sense that the master file module for the fourth quarter of 1965 reflected the transfer out of that account, there is no evidence in the record that any person within the IRS (as distinguished from the master file module stored near Washington, D. C.) had even that much knowledge. Certainly no responsible person knew all the facts at that time, for no action was taken to correct the mistake which is manifest from a comparison of the Sheetrock return with the computer transactions in the 1965 account as reflected by the master file printout or transcript.

[Taxpayer's Offer To Compromise]

On August 18, 19 67--after talking to Mrs. Jennings, but, according to White's testimony, before learning that the 1965 deposits had been misapplied by the computer--White wrote a letter to Government counsel, offering to compromise the 1963-1964 assessment against plaintiff for a total of $2,368.84, representing $1,257.95 in taxes and $1,110.89 in interest. In the letter White stated that plaintiff "has made payments and/or has received credits with respect to the taxes involved" in the amount of $8,188.41, the total being computed from the information (dates and amounts) furnished by Mrs. Jennings a few days prior to the date of the letter. Plaintiff proposed in the letter to concede liability for a portion of the taxes assessed against him and dismiss his suit with prejudice. The Government would apply the $8,188.41 already in his account and the $2,368.84 he proposed to pay to liquidate the conceded liability and would dismiss its counterclaim with prejudice, thereby disposing of the litigation. The offer was to expire automatically unless plaintiff received notice of acceptance on or before October 20, 19 67.

[Amendment To Offer]

On August 26, at Government trial counsel's request, White addressed another letter to him denominated an "amendment to [plaintiff's] offer to compromise," in which he extended the duration of the offer to November 15, and made one other change not material here. White consented to the extension but made it clear that plaintiff was eager to dispose of the case, if not by compromise prior to November 15 then by trial on the previously set date of December 4.

During all this period of time, from March 1966 through August 1967, the rejected Sheetrock return rested in the Error Resolution Branch in the Service Center . Under IRS procedures, the purpose of diverting "unsuitable" returns to the Error Resolution Branch is to correct errors made during processing and to request the taxpayer to correct errors, omissions, and discrepancies detected during processing. Notations made on the Sheetrock return by a specialist before it reached the Error Resolution Branch reflected that payment of the indicated balance due had accompanied the return, but that the depositary receipts and tabulations, substantiating the claimed adjustments were missing. Thus the IRS procedures then in effect required personnel in the Error Resolution Branch, upon receipt of the "rejected" Sheetrock return, to search for the missing depositary receipts (the existence and transmittal of which were clearly shown in the space provided on the return) and adjustment substantiation, and if unable to locate them, to notify the taxpayer of their absence and request an explanation.

[Failure To Notify Taxpayer]

Testimony at trial indicated that IRS procedure requires Error Resolution Branch personnel to mail a notice to the taxpayer requesting any missing substantiation. If there is no reply, the request is furnished to personnel in the Tax Assister section in the Houston IRS office, who make two attempts to contact the taxpayer. If the local personnel are unsuccessful, they notify the Service Center , which resolves the ambiguity against the taxpayer and adjusts his tax liability accordingly.

At trial the IRS official who described such procedure referred during his testimony to an internal IRS memorandum apparently reflecting that attempts to contact plaintiff had been unsuccessful. The memorandum was not offered in evidence. The record does not reflect that the taxpayer plaintiff was ever contacted. It reflects only that the return was not perfected, and that it was again marked with a "Reject" stamp by some clerk somewhere within the Service Center during the 32d week (early August) of 1966. Although the back of the return identified the missing depositary receipts by serial number, date, and amount, there is no evidence that anyone ever attempted to obtain substantiation of the deposit credits claimed by plaintiff, either from the Federal Reserve System or from plaintiff himself. Nor is there any evidence that anyone ever attempted to obtain substantiation of the claimed adjustments from plaintiff.

Proof that something never happened is difficult to make. However, I am convinced from my examination of the rejected Sheetrock return, the other internal IRS documents introduced in evidence at trial, and the internal procedure of the IRS to record each such action, that any effort to substantiate the claimed deposits or adjustments would have been reflected by an appropriate notation on the return. On the whole record, plaintiff's prompt response whenever requests for information were addressed to him, White's long acquaintance with many of the Houston IRS personnel and their knowledge that he represented plaintiff, and the absence of any affirmative indication on the Sheetrock return or elsewhere in the record that any notification was ever sent, I find that the IRS never sought plaintiff's help in its effort to process his Sheetrock return. ¹⁶ This failure of the IRS to contact plaintiff and promptly resolve the error referred to the Error Resolution Branch had a disastrous effect on plaintiff's posture before the IRS . It was the immediate cause of the incomplete recordation in the computer both in the Austin Service Center and the National Computer Center of what had transpired, the transfer of the credits out of the 1965 account, significant subsequent transactions, and other consequences adverse to plaintiff which were not of his making. ¹⁷

[Deficiency]

Apparently as a result of the memorandum just referred to, personnel in the Service Center in Austin caused the computer there to prepare a form of deficiency (Treasury Dept. Form 4188) dated September 1, 19 67, indicating that plaintiff's withholding and FICA tax for the fourth quarter of 1965 had been adjusted to leave a balance due in the amount of $8,243.06. Plaintiff received the notice a few days later. White testified at trial that after studying the information printed on the form, he sensed that somehow the credit for the two depositary receipts purchased during the fourth quarter of 1965 had been misapplied to the first quarter of 1964 and was the source of the credits in the 1964 account. Although the form was so obscure that White could not confirm his intuition, he immediately became concerned that this circumstance might jeopardize the settlement.

On September 5, a few days after the deficiency Form 4188 was prepared in Austin , plaintiff's account for the fourth quarter of 1965 was assigned for collection to Franklin A. Heath, another collection officer in the Houston IRS office. Between September 14 and October 16, after talking with Mrs. Jennings, Heath contacted White to inform him that he had received plaintiff's account for the fourth quarter of 1965. White told Heath that plaintiff had paid the taxes for the quarter and asked Heath to run a check on the account. Heath agreed to do so, but advised White that a tax lien for the amount claimed for the fourth quarter of 1965 would be filed forthwith. This was accomplished on September 25.

On September 14, 19 67, before his conversation with Heath, White had sent a letter to the District Director in Austin stating that plaintiff had paid his payroll taxes for the fourth quarter of 1965 in full, and suggesting that some mistake must have been made in the preparation of the deficiency Form 4188.

Thereafter, but prior to October 16, Heath informed White that the deposits for the fourth quarter of 1965 had indeed been misapplied to the first quarter of 1964. This fact should have been known months earlier to personnel in the Error Resolution Branch, through which the facts were readily ascertainable from plaintiff taxpayer. When so ascertained, they could and should have been recorded in the computer immediately. However, insofar as the record reflects, Heath was the first person in IRS who appreciated just what had occurred and how IRS had incorrectly applied said payments and thereby misstated plaintiff's account in the notice dated September 1, 19 67. To correct the misapplication Heath requested that a reversing entry be made in the records. His request for adjustment was addressed to his superior in Austin , and read as follows:

Two forms 941 were filed for the fourth quarter of 1965. Both returns were paid in full and included depositary receipts, purchased during that quarter. A transfer of credit, in the amount of $8159.42, was made from this quarter to the first quarter of 1964. Please reverse this transfer and abate any assessed interest. This is necessary because there is a court case that is pending and involves the years 1963 and 1964, and payments made by the taxpayer and intended for 1965 should not be allowed as a credit for a prior year. I am recharging the 12-31-65 941 return to the Chief, Taxpayers Service Branch, and it is attached to this request.

Also during the middle of October Government trial counsel telephoned White to say that he was ready to process the August 18 offer, but that due to a mathematical error in White's computation, the indicated tax liability was incorrect and the amount to be paid would have to be increased to $4,200. The record is unclear as to whether Government counsel had prior notice of Heath's discovery of the misapplication of plaintiff's payments. However, White testified that he advised Government counsel of the misapplication of the 1965 payments to the 1964 liability and of his fear that the settlement might break down.

[Amended Offer]

White testified that he decided to abandon his earlier offers of settlement. The letter he wrote in consequence was dated October 16. By its terms, it "contain[ed] Plaintiff's amended offer," although it did not expressly withdraw the prior ones. (Nor is there any other evidence of any express withdrawal.) The letter stated that plaintiff "hereby offers to compromise all of the taxes" assessed for 1963 and 1964 by paying the Government the sum of $4,200. It made no reference to any of the credits in plaintiff's accounts for the periods in suit. Nor did it contain an offer to concede liability for any of the assessed taxes. "[T]he offer contained in this letter" was to expire unless notice of acceptance was received by November 15.

On October 18, after White had notified Government trial counsel of the misapplication of payments by the IRS , the latter's superior in the Fort Worth office acknowledged receipt of plaintiff's "offer dated August 18, 19 67, and the letters amending such offer" and stated the Government's "interpretation" of plaintiff's "proposal." With one exception, the "interpretation" is a precise paragraphrase of the offer "contained" in the October 16 letter. That exception, when read with the language already quoted, suggests that the Government may not have considered the October 16 letter to have entirely superseded the prior letters. It is nevertheless certain that the Government understood the importance plaintiff attached to the November 15 cut-off date.

On November 15, the day plaintiff's offer was to expire, an official in the Tax Division of the Department of Justice in Washington initiated a Government teletype reading "Offer accepted. Letters follow." However, this message was not relayed to the Government's teletype facility in Houston until 7:51 a. m. the next day. Personnel in the Houston office notified White's office at 8:20 a. m. by telephone. Later that morning White sent a telegram to the Tax Division advising the Government of his efforts to obtain a transfer of the funds erroneously credited to plaintiff's account for the first quarter of 1964, and asking if in view of this development the Department wished "to withdraw [its] acceptance."

When White received no response to his telegram, he wrote Government trial counsel on November 20, confirming the prior telephoned advice to him of the erroneous credit and advising him of the exchange of telegrams. On November 22 White wrote Government counsel again, describing with some detail "what we conceive to be the mixup," and again inquiring whether the Government wished to withdraw its acceptance.

On November 27, White telephoned Government counsel and was advised that the Justice Department considered the case settled. At the conclusion of their conversation, White wrote Government counsel that plaintiff remained willing and prepared to settle the case by paying $4,200, but would not pay $7,400 (the approximate amount of the credit from the fourth quarter of 1965 which was then known by all concerned to have been misapplied by the computer) in addition to the $4,200. White further stated in the letter that he had been notified by the District Director's office that day that the misapplied $7,400 had been transferred back to the fourth quarter of 1965. On plaintiff's behalf he made an urgent request for an immediate reply.

The "letter" which was to have "followed" finally reached White the next day. Under date of November 27, the "Chief, Review Section" of the Tax Division of the Department of Justice in Washington announced that plaintiff's offer had been accepted by telegram and that the Government declined to withdraw the acceptance. The letter added that the Government construed plaintiff's offer as conceding that he owed the Government a total of $12,388.41--the credits and payments itemized in the August 18 letter plus the additional $4,200 offered in the October 16 letter.

White responded November 30. His letter stated that the October 16 "amended offer" had superseded and replaced the August 18 offer, and that the acceptance as construed by the Government was unacceptable to plaintiff.

On a date apparently preceding the Government's letter of November 27, 19 67, the Tax Division of the Department of Justice, acting through its trial counsel in this case, contacted the District Director's Office in Austin and requested that the credits not be retransferred to the fourth quarter of 1965. The request was complied with, and the deposit receipt credits remain to this day incorrectly recorded in plaintiff's account for the first quarter of 1964, rather than the fourth quarter of 1965.

[Failure to Correct Mistake]

Before the Tax Division countermanded Heath's request for correction, the misstatement of plaintiff's accounts was apparently a bona fide mistake. On the other hand, when it countermanded Heath's requested correction of the misapplication, the Tax Division acted with knowledge of Heath's analysis and request. Knowing that plaintiff had paid all taxes due for the fourth quarter of 1965, the Tax Division nevertheless perpetuated the mistake as recorded in the computer that plaintiff owed over $8,000 for such quarter. The Tax Division sought to force application of the payments remitted by plaintiff in satisfaction of the 1965 liability (to which liability plaintiff was entitled to have them applied), to the claimed 1964 tax liability. Apparently the Tax Division was attempting to settle the refund suit for $4,200 plus the 1965 payments misapplied to the 1964 account, and thereby empower the Government to collect the 1965 taxes a second time. Its conduct has little in common with the errors which brought about misapplication of the payments tendered by plaintiff for the fourth quarter of 1965.

The foregoing is the background of the alleged settlement and the basis for the Government's motion for judgment.

II. The Alleged Contract

In its motion for judgment, the Government asserts that a contract exists and that it should be enforced in accordance with the terms of its November 27 letter. Plaintiff responds that that letter does not state the terms of his "amended offer." In opposition to the Government's motion for judgment and to its construction of the contract, plaintiff levels three attacks. For two reasons, he contends that there was no contract: first, because the acceptance was untimely, and second, because the acceptance was not responsive to his offer. Alternatively and consistent with his construction of his amended offer, plaintiff argues that if there is a contract it should be construed to terminate the litigation upon payment of $4,200, leaving him free to require the Government to apply the deposit receipt credits in satisfaction of his liability for the fourth quarter of 1965.

Contracts settling or purporting to settle tax litigation have been before many courts, but invariably the controversy has been presented in subsequent litigation. I have encountered no other reported case in which a court was asked, within the confines of the suit purportedly settled, to construe and enforce an alleged settlement. However, on the facts here, it is clear that I have jurisdiction.

In the first place, besides filing the motion for judgment, the Government amended its counterclaim to allege the settlement as an alternate ground for recovery. 28 U. S. C. §1346(c) expressly grants this Court jurisdiction of any Government counterclaim. Belgard v. United States [64-2 USTC ¶9652], 232 F. Supp. 265 (W. D. La. 1964); cf. Cherry Cotton Mills, Inc. v. United States [46-1 USTC ¶9218], 327 U. S. 536 (1946) (construing the corresponding jurisdictional grant to the Tax Court). Second, even if the counterclaim had not been amended, this Court would have had jurisdiction over a claim by plaintiff that the misapplied credits be retransferred to his account for the fourth quarter of 1965. Such a claim would be one in recoupment and is permissible under the authorities. Bull v. United States [35-1 USTC ¶9346], 295 U. S. 247 (1935). Thus it is unnecessary to determine whether the principles of pendent jurisdiction also apply here.

A. Timeliness of the Government's Acceptance

In his letter of October 16 White advised Government counsel that

The undersigned must be advised on or before November 15, 19 67, that Defendant accepts the offer contained in this letter, and upon failing to receive such advice of acceptance this offer is automatically revoked as of November 15, 19 67. (Emphasis added.)

Substantially identical language appeared in the letters of August 18 and 26. The Government's response of October 18 evidenced its understanding that acceptance would not be timely unless it actually reached White on or before November 15:

We are sure you understand that unless you receive from our Washington office a formal notice of acceptance, the Department [of Justice] is in no way committed to a settlement. (Emphasis and brackets added.)

Thus both parties expressed, in terms which could not have been more explicit, their understanding that the timeliness of notice was an essential condition of the offer. The risk of nonarrival was placed entirely on the Government.

The Government also understood the importance plaintiff attached to timeliness. The Government knew, and if it had no prior knowledge it was informed in White's letter of August 26, that the assessments outstanding against plaintiff had placed him in "extreme financial straits" and he was intensely desirous of trying the case, if it had not been previously settled, on December 4, the date set for trial.

On November 15, 19 67, the Department of Justice, Tax Division, prepared an order for the communications branch of the Government to teletype the message "Offer accepted. Letters follow." to White in Houston . The teletype, however, was not received by the Government's communications office in Houston until the following day, November 16, at 7:51 a. m., and was not transmitted to White's office until 8:20 a. m. that day.

[Late Telegram]

Having no rational alternative, the Government concedes that the teletype was late and therefore was ineffectual by itself to create a contract. See generally, 1 A. Corbin, Contracts §§ 35, 67, 74, 78 (1963 ed.) [hereinafter cited as 1 Corbin]; 1 S. Williston, Contracts §§ 50, 53, 76 (3d ed. W. Jaeger 1957) [hereinafter cited as 1 Williston], Restatement of Contracts §§ 35(2), 40(1), 61, and comment a to §40 (1932) [hereinafter cited as Restatement]. The Government's express statement in its October 18 letter prevented the late acceptance from binding it. And unless the Government is bound under a compromise, the taxpayer is not bound. Botany Worsted Mills v. United States [1 USTC ¶348], 278 U. S. 282, 289 (1929). ¹⁸ To overcome this obvious result, the Government urges that upon receipt of the late acceptance from the Government, plaintiff waived his earlier requirement that the acceptance be timely. Such a suggestion evidences a basic lack of understanding of the law of contracts.

By making an offer, a person creates in an offeree a power of acceptance. 1 Corbin §§ 11,35; 1 Williston §50; Restatement §34. As he is free not to make any offer at all, a person making an offer is free to restrict the power of acceptance in any way, reasonable or unreasonable, that he may wish. 1 Corbin §88; 1 Williston §76; Restatement §61. Unless the offeree exercises his power of acceptance before it expires, there is no contract, for there is no power to accept. Therefore, where the offer has terminated by lapse of time, an attempt to accept is ineffectual to create a contract.

[Belated Attempt To Accept]

A belated attempt to accept, although it cannot by itself (or in conjunction with the original offer) create a contract, does ordinarily evidence a willingness to enter into a contract along the lines set out in the initial offer. It thus may well constitute a counteroffer, or stated differently, may create a power of acceptance exercisable by the original offeror. 1 Corbin §§ 74, 89; 1 Williston §§ 92, 93; Restatement §73. If so, a contract will arise if conduct by the original offeror following receipt of the late acceptance amounts to an acceptance of the counteroffer implicit in the late attempt to accept. But whether the counteroffer has been accepted must be determined by reference to the general principles governing acceptance, not some independent and distinct theory of "waiver." 1 Corbin §74; 1 Williston §93; Restatement §73 comment a.

The Government's argument that the offeror may waive untimeliness does violence to the conceptual basis for contractual law. Accord, 1 Williston §§ 92-93; Restatement §73; see 1 Corbin §89. Conduct by the original offeror may amount to a renewal of his original offer or an acceptance of the counteroffer implicit in the defective acceptance. 1 Corbin §89; 1 Williston §§ 53, 92-93; Restatement §73 comment a. Once terminated, however, the original offer can never be revived.

Returning to the instant case, did plaintiff ever accept the Government's counteroffer? The Government's suggestion that he did borders on the irresponsible.

[Taxpayer's Telegram]

Upon learning of the Government's teletype purporting to accept plaintiff's offer, White sent a telegram to the sender of the teletype, an official in the Tax Division of the Department of Justice in Washington , D. C. A copy of White's telegram, introduced in evidence by the Government, reveals that it was communicated to the telegraph company at 10:50 a. m. Central Standard Time (11:50 a. m. Eastern Standard Time (EST)), sent by the company at 12:17 p. m. EST, received at the Department of Justice telegraph office in Washington at 12:24 p. m. EST, and received in the Tax Division there at 1:22 p. m. EST. Because of its significance to the Government's claim of waiver, it is here set out in full precisely as it was received by the Tax Division on November 16, 19 67:

RE BERNARD R KURIO VERSUS UNITED STATES CA66-H-509 ADVISED YOUR TELETYPE RE ACCEPTANCE BY TELEPHONE THIS DATE WITHIN LAST SEVERAL WEEKS ADVISED BY DISTRICT DIRECTOR AUSTIN THAT PAYMENTS DESCRIBED IN PARAGRAPH 2 OF OUR LETTER OF AUGUST 18 19 67 TO TATAR RESPECTIVELY OF $3,386.27 AND $4,049.45 ERRONEOUSLY CREDITED BY DISTRICT DIRECTOR TO KURIO'S 1963 AND 1964 ACCOUNTS AMOUNTS SHOULD HAVE BEEN CREDITED ACCORDING TO DISTRICT DIRECTOR TO 4TH QUARTER 1965 DIRECTOR NOW TAKING STEPS TO APPLY AMOUNTS TO 4TH QUARTER 1965 IN VIEW OF THE FOREGOING DOES JUSTICE DESIRE TO WITHDRAW ACCEPTANCE OF OUR COMPROMISE OFFER OF OCTOBER 16 19 67 ADVISE

[Waiver of Untimeliness]

The Government suggests that by sending this telegram, White "waived" the untimeliness of the purported acceptance. Such suggestion has no basis in either fact or law. White's telegram was neither (a) a renewal of his offer, (b) an acceptance of any Government counteroffer, nor (c) (which is the same as (b)) a waiver of the delayed receipt. It is no more than an inquiry, a request that the Government state its position more precisely in view of the misapplication of payments by the Government identified in plaintiff's telegram.

This interpretation is supported by the importance plaintiff previously had attached to the timely receipt of notice. Cf. NLRB v. Vapor Recovery Systems Co., 311 F. 2d 782 (9th Cir. 1962); 1 Corbin §67, at 277-79; id. §78, at 339-40. White's telegram is insufficient to indicate that he and plaintiff no longer considered it important to reserve two weeks for trial preparation.

The interpretation is confirmed by the incontrovertible evidence that neither White nor the Government considered the Government's teletype as unequivocal. White sent his telegram and the subsequent series of letters in an effort to learn how the "letters" mentioned in the teletype might qualify the Government's apparent unequivocal acceptance. The Government, both before, in the October 18 letter, and after, in the November 27 letter, and in the teletype itself, manifested its insistence that it be the one to select the words in which the contract would be expressed. White's telegram merely expressed his desire that the Government be more explicit. In the circumstances here, his reference to "withdraw[ing an] acceptance" cannot have confused the Government.

Nor did White's subsequent efforts on plaintiff's behalf constitute an acceptance of any outstanding Government offer. His letters of November 20, 22 , and 27 contained increasingly urgent pleas that the Government make its position clear. When coupled with these pleas, plaintiff's expressions in the November 22 and November 27 letters of his continued willingness to settle the case by paying $4,200 did not accept anything. Cf. 1 Corbin §11, at 25-26; id. §15; 1 Williston §26; Restatement §25. Counsel for plaintiff plainly evidenced that the Government had never stated its position to him fully and precisely. The Government could not maintain that any of these letters is an acceptance of a Government offer, and indeed does not so contend here. They merely repeat the question first asked in White's telegram.

The final letter from White, on November 30, was a simple rejection. It also failed to create a contract.

Moreover, to create a contract, an acceptance must be unequivocal. 1 Corbin §82; 1 Williston §§ 72-73; Restatement §58 & comment a thereto. Since both parties viewed the teletype as qualified by the terms of the "letters" which were to "follow," it was so qualified. 3 Corbin §§ 538, 543A-B; 1 Williston §§ 20, 22, 23, 95, 95A. ¹⁹ Viewing the correspondence most favorably to the Government, its acceptance was not received by White until November 28, 13 days too late. White's only act thereafter, the November 30 letter, was outright rejection. By no stretch of the imagination could it be considered a "waiver."

But this is not all. Even assuming for the sake of argument that plaintiff cannot complain of untimeliness, two other equally severe defects inhere in the alleged contract underlying the motion for judgment and the Government's counterclaim.

B. Failure to Accept Unequivocally

As already mentioned, an acceptance, to create a contract, must be unequivocal. A conditioned acceptance may constitute a counteroffer, but does not, without more, bind either party.

The Government's two purported acceptances, its teletype and its November 27 letter, were both qualified, the teletype, by the terms of the "letters" which were to "follow," and the letter, by the restatement of plaintiff's proposal which it contained.

The equivocation apparent to both parties in the teletype has already been discussed. It could create no contract because neither party considered it unqualified.

The Government's letter of November 27 not only purported to restate the terms of plaintiff's offer; it also purported to set out their legal effect. An acceptance which attempts to restate the terms of an offer must be accurate in every material respect, or no contract will result--an inaccurate restatement can constitute no more than a counteroffer. 1 Corbin §86; 1 Williston §72. Moreover, an acceptance conditioned on the creation of certain specific legal relations creates a contract only if those relations flow naturally from the terms of the offer. If they do not, the purported acceptance is a counteroffer. 1 Corbin §87; 1 Williston §78.

[Second Letter Revoked Offer]

Both of the stated principles prevent the Government's November 27 letter from creating a contract. I find that White's October 16 letter did supersede his prior letters and thus constituted a revocation of the prior offers. The offer outstanding thereafter was to compromise the litigation upon payment of $4,200, period. The Government's restatement of that offer, in its November 27 letter, was inaccurate, for it included an express abandonment by plaintiff of his attempts to arrange retransfer of the misapplied credits. And this inaccuracy was quite material.

Secondly, the Government's November 27 letter specified a legal consequence which does not flow naturally from the terms of the offer "contain[ed] in" the October 16 letter. By the carefully worded terms of the November 27 letter, plaintiff under the contract would lose any right he may have had to require application of the deposit receipt credits to his 1965 liability. In this respect the Government's attempt to accept purported to create legal relations different from those proposed by plaintiff.

Although the deposit receipts are not in evidence, it is clear from the record that they identified the Sheetrock return and were designated as applying against the liability shown thereon. ²⁰ It is clear that a taxpayer who specifies the liability against which the payment he tenders should be applied has the right to insist that his instructions be respected. In F. P. Baugh, Inc. v. Little Lake Lumber Co. [60-2 USTC ¶9757], 185 F. Supp. 628, 631 (N. D. Cal. 1960), aff'd in part, rev'd in part, [61-2 USTC ¶9726], 297 F. 2d 692 (9th Cir. 1961), cert. denied, 370 U. S. 909 (1962), the Government conceded that a taxpayer has such a right. Such concession is consistent with the testimony of IRS officials here to the effect that under IRS policy, payments are applied to the period and liability designated by the taxpayer, or if this would create an overpayment, to some other liability of that taxpayer. Language in other cases, see, e.g., Hewitt v. United States [67-2 USTC ¶9486], 377 F. 2d 921, 925 (5th Cir. 1957), suggests that this policy is required by law. In Baugh, the court accepted the Government's concession, applying general contract principles, and the question was not appealed.

Plaintiff's failure, in his October 16 letter, to mention the depositary receipts, the 1965 liability, and the erroneous credits in his 1964 account, certainly did not as a matter of law amount to a proposal that he abandon his attempts to correct a misapplication which was contrary to IRS policy and impermissible in law. By specifying this as a legal consequence of the contract in its November 27 letter, the Government added a condition which would have caused a material and therefore vital variation in the proposal. This circumstance was by itself sufficient to prevent a contract from being formed.

C. Lack of Mutual Assent

If a person wishes to enter into a bilateral contract with someone else, he informs the other person of this by offering to exchange a promise he is willing to make for another promise he would like the other person to make in return. A contract is formed if the offeree agrees to the exchange.

If the offeree's understanding of the offer, that is, of the promises offered and requested, coincides with the offeror's understanding, and his acceptance is unequivocal, there is a contract in accordance with the mutual understanding of its terms. However, complications ensue if the meaning conveyed by either offeror or offeree fails to coincide with the meaning intended. To say that the minds of the parties must "meet" on every material or essential element of the proposed contract is misleading, for such is often not necessary. Nonetheless, because to form a contract the offeree must give the promise requested, the court, as a predicate for deciding whether a contract has been formed, often must place itself in the shoes of each party and determine the meaning each gave to the words which passed between them. See generally 3 Corbin §§ 538, 543A-B; 1 Williston §95.

The circumstances surrounding the settlement correspondence between White and the Government during late 1967 have already been fully developed. The negotiations of a settlement of the 1963 and 1964 assessments took into account, at least from the Government's standpoint, the credit of $8,159.42. It is apparent that until September or October of 1967 no one concerned with the refund suit or the 1963 and 1964 assessments knew the source of the credit. Plaintiff asserts that if he had known its true source, the offer to compromise contained in the August 18 letter never would have been made, and that once the source was discovered, the offer was amended on October 16 to voice the offer in terms of a total figure of $4,200. The Government's letters of October 18 and November 27, as well as the position it has taken since, suggest a failure to apprehend that plaintiff intended by dispatching his October 16 letter to supersede his prior offers. And the record reflects that the Government's failure so to apprehend may not have been entirely unjustified. ²¹ Nor was White unjustified in assuming that the Government understood his October 16 letter as he did himself. ²²

Viewing the correspondence between White and the Government as a whole and in light of the surrounding facts and circumstances, I find and conclude that the terms of the Government's acceptance varied in material respects from the terms of plaintiff's offer. It is clear from the record that plaintiff and the Government failed to assent to the same exchange of promises. For this reason also, the parties failed to enter into a binding contract of settlement. ²³

III . Relief

By virtue of the findings of fact and conclusions of law contained in this Memorandum Opinion, plaintiff is entitled to the following specific relief prayed for in his last amended complaint, namely:

(1) Refund of $15,612.89 together with interest thereon as provided by 26 U. S. C. §6611 and 28 U. S. C. §2411;

(2) Adjustment of the Government's records to reapply the sums remitted by plaintiff with respect to his tax liability for the fourth quarter of 1965 to the correct account, the effect of such adjustment being the creation of a zero balance as of early February 1966 in plaintiff's account for the fourth quarter of 1965; and

(3) Dismissal of the Government's counterclaim.

Plaintiff's final prayer in his last amended complaint, "For any and all other and further relief as may be equitable and appropriate in the premises," requires a careful consideration of the consequences to plaintiff and possible liability therefor, flowing from the manner in which the Government has attempted to collect the taxes originally claimed by it to be due.

The procedure by which the Government determined that plaintiff was liable for 1963 and 1964 payroll taxes, as well as the administrative review afforded him, is set forth in this Memorandum Opinion, supra, and the prior Memorandum and Order, 281 F. Supp. 252 (1968). The proposed taxes were assessed, and plaintiff invoked the aid of the judiciary. To review matters very briefly, examination of the income tax returns of many of the alleged employees revealed that many had paid income and self-employment tax. Much of the assessment against plaintiff was abated, and the parties stipulated that plaintiff's liability for 1963 and 1964 taxes could not exceed $25,629.48. Seeking to limit the amount in controversy still further, as well as to prepare his case for trial, plaintiff invoked the discovery rules to obtain access to the returns the Government failed to furnish voluntarily. The Government did not object to his demand that the returns be furnished. On the other hand, it failed to comply, and plaintiff went to trial lacking reliable evidence.

While this suit was pending, plaintiff learned that the Government was asserting a deficiency for the fourth quarter of 1965. He immediately began atempts to get this mistake corrected. When Agent Heath of the Houston IRS office examined plaintiff's 1963, 1964 and 1965 records, he found that the credits for plaintiff's payments of 1965 payroll taxes had been misapplied to plaintiff's 1964 account. Heath promptly prepared and dispatched a request for correction to the Service Center at Austin , which should have cleared and closed plaintiff's 1965 account. However, before his request was accomplished, a representative of the Department of Justice contacted the Service Center and directed personnel there not to correct the accounts as requested by Agent Heath.

[Failure To Correct Liens]

As a result of intentional conduct, known mistakes in the statement of plaintiff's tax liabilities for 1963, 1964 and 1965 remained uncorrected and, consequently, the liens filed against plaintiff to secure such liabilities also remained uncorrected. The existence of these liens subjected plaintiff to severe economic compulsion. When filed, the liens approximated but did not exceed the amount then claimed by the Government to be due, some $89,000. In April 1967, however, a stipulation limited plaintiff's maximum liability to $25,629.48, and in June, the credits were transferred to the account for the first quarter of 1964, leaving unpaid a maximum of less than $18,000. Nevertheless, the liens remained at $89,000.

In September plaintiff was billed for $8,243.06, and a lien in that amount was filed. The next spring judgment on the refund suit became final, leaving in controversy either $12,443.06, as stated in the Government's letter of Nvember 27, 1967, or $15,612.89, as the Government then interpreted its records. This notwithstanding, the liens remained as before, six or eight times the amount remaining in dispute. And the Government refused, until after plaintiff had paid the $15,612.89 in full, to abate any of this inflated total, in disregard of this Court's announced opinion that the liens based on the 1963 and 1964 assessments were null and void, 281 F. Supp. at 262-64, and the partial final judgment entered pursuant thereto.

The ultimate tactic adopted by the Government was to offer the motion for judgment which for the reasons heretofore set forth, lacked even the slimmest justification in law. In essence, the Government's claim of settlement is frivolous. Conduct of this sort by lawyers has been condemned in the strongest terms. ²⁴ See, e.g., American Bar Ass'n Canons of Ethics, Canon 30; American Bar Ass'n Code of Professional Responsibility, EC 7-4 & DR 7-102 (Final Draft July 1, 19 69).

[Prayer for General Relief]

The prayer for general relief in plaintiff's last amended complaint is thus not unsupported by the record. Plaintiff appears to have been grievously mistreated, but the question posed is not whether he has been wronged, but whether he has suffered compensable damages. Neither party has yet addressed itself specifically to this issue. The methods employed by the Government, or its representatives, under somewhat comparable facts have heretofore been criticized, Seattle-First Nat. Bank v. United States [42-1 USTC ¶9447], 44 F. Supp. 603, 610 (E. D. Wash. 1942) [43-1 USTC ¶9454], aff'd, 136 F. 2d 676 (9th Cir. 1943), aff'd [44-1 USTC ¶9259], 321 U. S. 583 (1944), but neither party has cited, and the Court has not found, any authority for or against assessing damages against the Government or its representatives for conduct like that which occurred here. Nor has either party offered evidence with reference to the damages, if any, plaintiff has suffered as a consequence of wrongful conduct in connection with this suit.

In this posture of the pleadings and record, it would be unjust for this Court to take any action on plaintiff's prayer for general relief at this time. Plaintiff's position at trial, as well as in his last amended complaint, indicates that principally he is interested in obtaining refund of the moneys he never should have had to pay the Government. He is entitled to that immediately, and may, if he wishes, submit a motion for judgment granting such relief, as permitted by Rule 54(b), Fed. R. Civ. P. His general prayer and the Government's response thereto, on the other hand, present a question which cannot properly be resolved under the present pleadings or on the present record. Should either party wish to amend its pleadings in this regard, it may file an appropriate motion within 25 days, with opposition, if any, to be filed within 5 days thereafter. In acting on any such motion, this Court will be governed by Rule 15(a), Fed. R. Civ. P., and will grant leave to amend "freely . . . when justice so requires." And likewise, each party will be given the opportunity to submit additional evidence on the issues raised by such amended pleadings.

[Conclusion]

All facts set out in this Memorandum Opinion, to the extent that they may be relevant to the disposition of the issues presented by the Government's motion for judgment, are hereby found to be facts for the purposes of such disposition. Such finding, however, is not intended to be and is not a finding of any fact concerning any issue which may in the future be raised in a further amendment to the pleadings of the parties. Similarly, the foregoing constitutes conclusions of law with respect to the issues presented by the Government's motion for judgment, to the extent it may be relevant to their disposition.

Should plaintiff desire the Court to enter partial judgment on the issues disposed of herein, he may so move within 25 days, with opposition, if any, to be filed within 5 days thereafter. Attached to such motion should be a proposed judgment consistent with the views expressed in this Memorandum Opinion. In view of judicial notice having been taken by the Court of the automatic data processing procedures of the IRS , entry of judgment will be delayed 10 days after the expiration of said 30 days in order to afford each party the opportunity and additional time in which to point out any apparent misunderstanding or misstatement of such procedures by the Court.

The Clerk will file this Memorandum Opinion and send a copy to counsel for each party.

Amended Memorandum Opinion:

In the memorandum opinion rendered in this case June 15, 1970 , both parties were invited to comment on the Court's discussion of the computer system of the Internal Revenue Service ( IRS ). The Government has responded in a Memorandum from the Service's Acting Assistant Commissioner (Data Processing), which has been filed and denominated its Motion for Clarification. The motion reflects a careful and thoughtful consideration of the Court's description of the IRS automatic data processing system and of the system's handling of the tax returns filed by Plaintiff.

[Clarification of Court's Opinion]

The Acting Assistant Commissioner's motion had prompted clarification of the Court's opinion describing the IRS automatic data processing system, as follows:

1. The first two sentences in the third paragraph on page 8 of the opinion are deleted, and the following substituted therefor:

"The assessment cause liabilities for payroll taxes to be recorded in the summer of 1966 in the records of the IRS , and thereby created deficiencies and apparent delinquencies in Plaintiff's accounts for all four quarters in and for each of the years 1963 and 1964. Such liabilities for 1963 were recorded in the office in a manually prepared ledger account. The liabilities for 1964 were posted to the appropriate account in the IRS computer at the National Computer Center . All such apparently delinquent accounts were assigned to a revenue officer in the Houston office of the Delinquent Accounts and Returns Branch of the Collection Division of the Office of the District Director."

2. The first paragraph beginning on page 21 is deleted, and the following substituted therefor:

"The output tapes generated by the computer at the Service Center are shipped to the IRS National Computer Center near Washington, D. C. This facility contains the Service's computerized tax records for all taxpayers. Such records consist of two major divisions, the Business Master File and the Individual Master File. Within each Master File is an account for each taxpayer. The Entity Section of each account identifies the taxpayer and specifies the information and returns which such taxpayer is required to file. The remainder of the account is the Returns and Accounts Section, which contains the tax liability and accounting data for such taxpayer, and is subdivided into modules (herein called "master file modules"), one module being created and maintained for each tax period for each type of tax.

"The magnetic tapes which are received from the Service Center are fed into the computers at the National Computer Center to update the master file modules. The computers are programmed to analyze the information in the master files and detect "ostensibly improper deviations from the tax laws." ¹⁴ They generate

[Comment's Requiring No Modification] to refund, certain kinds of delinquencies, and returns with unusual characteristics. The refund tapes are forwarded to the Treasury Department, where they cause refund checks to be printed and mailed. The other magnetic tapes are sent back to the Service Center , where they generate appropriate action by personnel there or in the office of the District Director."

3. The first paragraph beginning on page 23 of the opinion is deleted and the following substituted therefor:

"Only one other group of transactions attributable to the filing of the Drywall return is reflected in the printout. This was the assessment of a penalty and interest for late filing (the return was mailed one day late), and a subsequent payment of the penalty and interest."

[Comment's Requiring No. Modification]

Certain comments of the Acting Assistant Commissioner concerning the Court's discussion of the progress of the Sheetrock return through the IRS processing system require no modification of the opinion previously rendered. However, because they reflect a misunderstanding of the thrust of the opinion, this amended memorandum opinion will be extended to consider them.

As the Acting Assistant Commissioner recognizes, the purpose of the processing system is to process tax returns with all reasonable dispatch. Such official remarks quite properly that "The long delay from February 1966 to September 1967 to process the Sheetrock return is inexcusable and is certainly not an acceptable tolerance of the Internal Revenue Service's ADP system." The Commissioner contends, however, that the fault for the delay should be placed on imperfections in the Sheetrock return as well as the processing errors made by the automatic data processing system.

Three imperfections in the Sheetrock return are noted by the Acting Assistant Commissioner. First, the Commissioner asserts that "the filing of a second return, the Sheetrock return, was improper at best and possibly illegal at worst." Amplification of this remark was requested by the Court, and was furnished by an attorney for the Government in a subsequent letter supporting the charge of impropriety by citation of Section 32.6011(a)-7(a) of the Regulations, duly promulgated under the authority of Section 6011 of the Internal Revenue Code:

"Only one return on any one prescribed form for a return period shall be filed by or for a taxpayer."

Two rulings by the IRS , Revenue Ruling 69-522, 1969-2 Cum. Bull. 240; and S. S. T. 182, 1937-2 Cum. Bull. 373, reflect that the Service has previously applied this requirement strictly in circumstances much like those of the instant case. In each of the cited rulings the conclusion was reached that a partnership should file only one 941 form even if it carried on two disparate businesses.

[Charge of Possible Illegality]

On the other hand, the charge of possible illegality cannot be substantiated on the facts of the instant case, and the attorney for the Government in the supplemental response admits as much. The Memorandum for the Acting Assistant Commissioner intimates, and the supplemental response by the Government attorney indicates more specifically that the Internal Revenue Service considers the filing of two returns for one tax period as prima facie a badge of fraud, and has designed its processing system to prevent processing of a second return until the possibility of fraud has been decisively negated.

Efforts by the Internal Revenue Service to detect fraud and tax evasion are to be commended. See, e.g., 26 U. S. C. §§ 6672, 7201, 7206-07. However, the record in the instant case does not suggest that processing of the Sheetrock return was delayed to permit investigation for fraud. Processing was indeed delayed, and for a period which the Government now concedes was "inexcusable", but the record establishes that the Internal Revenue Service failed to take any action whatsoever to substantiate or refute the possibility of fraud. In effect, as it was applied to the Sheetrock return, the IRS processing system was designed merely to prevent the input of a second return; it was not designed to permit the IRS to uncover fraud by preventing such input.

The second and third imperfections in the Sheetrock return which are noted by the Acting Assistant Commissioner are the arithmetical error mentioned in the opinion on page 18 and the claimed overpayment credit mentioned in the opinion on pages 17-18. The Commissioner remarks that the processing system is designed to detect all mathematical errors to permit a review and correction of them, and that any claim for credit like that on the Sheetrock return would require verification, probably by the Social Security Administration, which maintains the records of wages.

But the precise nature of the errors, if any, committed by plaintiff is not material. What is material is the assertion by the Acting Assistant Commissioner that the existence of these errors, each of them undoubtedly common to millions of tax returns filed each year, justifies a substantial delay in the processing of the Sheetrock return. If the officials in charge of the IRS computer system in fact consider this assertion to be valid, their point of view goes far to explain the inordinate delay in processing to which the Sheetrock return was subjected.

The purpose of the computer processing system is not only to process perfect returns with dispatch, it is also to process and correct imperfect returns with dispatch. The court recognizes that an imperfect or an eccentric return will require more time for processing, and does not criticize the IRS computer system, or the officials in charge of such system, for attempting to correct mistakes and examine unusual features. On the other hand, in its original opinion the Court did criticize the IRS system and its supervisors for the absence of procedures permitting errors and eccentricities to be detected and corrected promptly. Such remains the opinion of this Court. That a return is imperfect is no justification for any appreciable delay in processing it. Until the officials in charge of the IRS processing system accept this truth, other taxpayers will be oppressed by that system just as the record reveals Plaintiff was oppressed.

¹ Since the first quarter of 1968, employers whose quarterly liability exceeds the amount deposited by more than $100 have been required to deposit the amount due. Treas. Reg. §31.6302(c)-1(a)(1)(iv).

² Since 1967 the IRS has obtained substantiation of deposits by magnetic tape from the Federal Reserve Banks. Employers no longer are required to obtain validated depositary receipts and attach them to their 941 returns Treas. Reg. §31.6302(c)-1(a)(3)(iii).

³ Often the rule placing the burden of proof on the taxpayer is loosely referred to as a presumption that the taxes assessed against the taxpayer were legally assessed. E.g., Greer v. United States [69-1 USTC ¶9294], 408 F. 2d 631, 633 (6th Cir. 1969); Bar L. Ranch, Inc. v. Phinney [69-1 USTC ¶9287], 300 F. Supp. 839 (S. D. Tex. 1969); cases cited Timken Roller Bearing Co. v. United States [66-1 USTC ¶9151], 38 F. R. D. 57, 61-62 (N. D. Ohio 1964). However, such is not a presumption of the kind considered by the Supreme Court in Leary v. United States [69-2 USTC ¶15,900], 395 U. S. 6, 32-36 (1969), and the cases there discussed; and were it in fact subject to the rules explicated in Leary as applicable to statutory presumptions generally, it might well be invalid, for cases like this one and Pizzarello v. United States [69-1 USTC ¶15,886], 408 F. 2d 579 (2d Cir. 1969), suggest that there may be no rational connection between the facts proved (i. e., that taxes were assessed) and the fact presumed (i. e., that the assessment was proper). Rather than a presumption, this procedural rule is a mere allocation of the burden of proof. Some courts have held that it allocates only the burden of production, saying it "is not evidence itself and disappears upon the introduction of evidence to overcome it." Pizzarello v. United States, supra, at 583, and cases cited; Timkin Roller Bearing Co. v. United States, supra, at 62; cf. Rule 32, Rules of Procedure Before the Tax Court of the United States, promulgated under §7453 of the Code (authorizing the prescription of "rules of practice and procedure (other than rules of evidence)"); Barnes v. Commissioner [69-1 USTC ¶9257], 408 F. 2d 65 (7th Cir. 1969).

The treatment of the rule under discussion as more than an allocation of the burden of proof has been decried as a cause of injustice. Fulton Container Co. v. United States [66-1 USTC ¶9177], 355 F. 2d 319, 324-25 (9th Cir. 1966); David v. Phinney [65-2 USTC ¶9587], 350 F. 2d 371, 377 (5th Cir. 1965) (Brown, J., dissenting), cert. denied, 382 U. S. 983 (1966); cf. Barnes v. Commissioner, supra, at 70 (dissent); F. & D. Rentals, Inc. v. Commissioner [66-2 USTC ¶9491], 365 F. 2d 34, 41 (7th Cir. 1966) (dissent). Certainly the loose terminology rampant in the cases risks confusing the burdens of production and persuasion and the rules of evidence. Shifting burdens and disappearing presumptions mislead. The rule applicable here places the burden of persuasion (and the initial burden of production) on the plaintiff in a refund suit with respect to all issues raised by his complaint and by the Government's counterclaim. It has no effect on the rules of evidence nor on the burdens of production and persuasion with respect to affirmative defenses pleaded by the Government. Cf. Rule 32, Rules of Procedure Before the Tax Court of the United States ("in respect of any new matter pleaded in his answer, it [the burden of proof] shall be upon the respondent"); James M. Pierce Corp. v. Commissioner [64-1 USTC ¶9173], 326 F. 2d 67 (8th Cir. 1964); Commissioner v. Fleming [46-1 USTC ¶10,271], 155 F. 2d 204 (5th Cir. 1946).

⁴ The Government refused to abate the other half of the FICA assessment on the ground that it was a tax on the employer rather than a tax to be withheld from the wages paid employees. Plaintiff thus would not be entitled to an abatement of the remainder of the FICA assessment or of any of the FUTA assessment unless he proved that he had not been an "employer." See 26 U. S. C. §§ 3111, 3301.

The offset against the assessed liability was not dollar for dollar. If the alleged employee filed an income tax return, reported the amounts received from plaintiff as income, and paid the tax shown due on his return, the Government abated the entire withholding tax assessment attributable to wages paid that employee. Similarly, if the alleged employee reported the amounts received from plaintiff as self-employment income and paid the self-employment tax shown due on his return, the Government abated one-half of the FICA assessment attributable to wages paid that employee.

⁵ No deposits were required because all of the union laborers' wages were earned during the third month of the quarter.

⁶ The authoritative description is published periodically by the Commissioner of Internal Revenue in the Federal Register. The latest such statement of IRS organization and functions is dated January 20, 1970 , and is published at 35 Fed. Reg. 2417-56. A prior version is quoted at length in 9 Mertens §§ 49.03-79. Other descriptions may be found in Internal Revenue Service ADP Procedure, 19 A. B. A. Sec. on Tax. Bull. 74 (1966); Meek, ADP 's Tax Administration Revolution: Its Advantages, Effects, and Problems, 24 J. Tax. 3 04 (1966); Barron, The Processing Cycle: What Happens from Filing Date to Action Date, 24 J. Tax. 306 (1966).

⁷ The description which follows is taken from the testimony in the record supplemented by the sources cited in the preceding note, the contents of which are judicially noticed. A careful search by the Court has disclosed that except where indicated below, the sources judicially noticed accurately describe the current operation of the system as described in the current IRS organizatonal statement dated January 20, 1970 . Because of the authority of the sources noticed (their authors being, respectively, the IRS itself, a special committee formed by the American Bar Association Section on Taxation, and two officials within regional service centers), the Court has relied upon them as accurate.

The Court referred to the cited material in reaching its findings in order to appreciate the full import of the testimony developed at trial, concerning the handling of the Drywall and Sheetrock returns during processing. Moreover, the evidence at trial retraced the journey of the returns through the Service Center in considerable detail, but did not fully explain how the processing system is set up or how responsibility is divided between the National Computer Center , the Service Center , and the Office of the District Director. The sources judicially noticed filled in the gaps. Also, reference to the sources judicially noticed was necessary to an understanding of the testimony and exhibits in the record; it thus was akin to reference to dictionary definitions. See Weaver v. United States , 298 F. 2d 496, 498-99 (5th Cir. 1962). See generally 9 J. Wigmore, Evidence §§ 2565, 2568a, 2571, 2580, 2582, 2583 (3d ed. 1940). See also 44 U. S. C. §1507.

⁸ By a 1966 amendment to the Code, Act of Nov. 2, 19 66, 80 Stat. 1107, Congress authorized the IRS to require taxpayers to file returns directly at the Regional Service Centers , rather than first filing with the District Director. The amendment's purpose was to permit elimination of the expense of double handling and transshipping, and to permit the IRS to take full advantage "of the economies inherent in volume processing." S. Rep. No. 1625, 89th Cong., 2d Sess., 3 U. S. Code Cong. & Ad. News 3676, 3678 (1966). In the current IRS organizational statement, initial processing is described in §1117.26, 35 Fed. Reg. 2446-47 (1970).

⁹ Now called the Examination Branch. See §1117.262 of the current IRS organizational statement, 35 Fed. Reg. 2247 (1970).

¹⁰ In the vernacular of the IRS , it is said that the computer will not accept the returns which are in fact rejected by the specialist. In other words, the human and mechanical functions have become so interrelated and interdependent that in the process such functions are practically equated and merged into one concept, "The computer." But, whether or not the computer will accept a given return is not determined mechanically by the computer only. The specialist and the machine share in the determination.

¹¹ The current IRS organizational statement indicates that transcription of the information on returns is achieved in a number of ways, including optical character recognition. See §1117.27, 35 Fed. Reg. 2447-48 (1970).

¹² Now called the Error Correction Branch. See §1117.263 of the current IRS organizational statement, 35 Fed. Reg. 2447 (1970).

¹³ See note 10, supra.

¹⁴ Internal Revenue Service ADP Procedure, supra note 6, at 75.

¹⁵ The record does not reflect whether the Correspondence Unit was a part of the Error Resolution Branch, or working independently of that Branch, and the current IRS organizational statement is not any clearer than the record. It says that the Error Correction Branch "[p]erforms research, perfects and resolves processing and taxpayer errors detected during the work cycles within the Service Center ," §1117.263, 35 Fed. Reg. 2447 (1970), but does not say how. There is a "Correspondence Section" in the "Taxpayer Service Branch" of the "Taxpayer Service Division" (the Error Correction Branch is in the "Examination Division"), but the description of its functions does not indicate whether it is responsible for correspondence required by the Error Correction Branch or not. See §1117.283(2), 35 Fed. Reg. 2449 (1970). Therefore, the record is not clear as to whether or not the work of the Correspondence Section and Error Resolution Branch was correlated.

¹⁶ The record is silent as to why the IRS did not notify the taxpayer plaintiff and request an explanation or assistance in perfecting the return. It reflects only that the return was not perfected. Except for the second "Reject" stamp mentioned above, nothing in the record reveals what happened to the return once it reached the Error Resolution Branch. However, even without the documents which were missing, the return was quite complete. The missing depositary receipts which had been mislaid but were later to be found by the IRS were clearly identified on the return by serial number, date, and amount; and the lengthy tabulation reflecting the wages paid employees during the quarter was attached to the return. Thus it is quite likely that the clerk in the Error Resolution Branch to whom the return was referred assumed that the missing documents had been lost or mislaid by the IRS during processing. That clerk undoubtedly set the return aside to await further action, until the missing documents might turn up.

But whatever the reason for the failure to contact plaintiff, such failure was a severe invasion of plaintiff's rights. Mistakes are inevitable; they cannot be prevented. However, the duty of the Error Resolution Branch was to take steps to clear up the mistake by contacting plaintiff. Whether plaintiff had failed to include the missing documents (and thus was responsible for their absence), or the documents had been mislaid during processing, an inquiry of plaintiff would have given plaintiff notice and the opportunity to assist the IRS in restoring the return to the completeness with which it was originally submitted, in order that his accounts as kept in the IRS computer not be distorted. The duty of the Error Resolution Branch was to prevent the mistake from delaying processing or otherwise injuring plaintiff--to forestall the precise events which later beset the innocent taxpayer.

The entire practice of diverting "imperfect" returns to the Error Resolution Branch to correct taxpayer errors before processing is completed may well be inconsistent with the "self-assessment" theory of taxation. The law requires each taxpayer to make out a return, compute the tax owed, file the return, and pay the tax shown due. 26 U. S. C. §§ 6001, 6011, 6651-55; 9 Mertens §49.81. The law then requires the IRS to assess the tax shown due on the return:

§6201. Assessment authority

(a) Authority of Secretary or delegate.--The Secretary or his delegate is authorized and required to make the . . . assessments of all taxes . . . imposed by this title . . . which have not been duly paid by stamp . . .. Such authority shall extend to and include the following:

(1) Taxes shown on return.--The Secretary or his delegate shall assess all taxes determined by the taxpayer . . . as to which returns . . . are made under this title. [Emphasis added.]

Errors in the return may be corrected in a supplemental assessment at any time within the limitation period. 26 U. S. C. §6204.

A commentator has noted:

The principle of self-assessment by the taxpayer would collapse if the Commissioner were completely at liberty to reject the taxpayer's statement of income simply because such statement of income does not approximate the average income of the taxpayer's occupational classification. The tax is not imposed upon what income should be but upon what income actually is. But the privilege of original self-assessment accorded the taxpayer carries with if the burden of support through the maintenance of records which clearly and accurately reflect income. 9 Mertens §49.100.

The comment applies not just to income taxation, but also to excise and withholding taxation. Its reasoning is pertinent not merely to apparent unreasonableness of reported income, but also to errors apparent on the face of the return. The law seems to and should require that processing of each return continue until all information the return does furnish has been entered in the Government's books of account, which with the advent of automatic data processing have become the computer memory bank in Martinsburg, West Virginia. Any error, discrepancy, omission, or failure to pay tax may be noted during processing, but should not retard processing. There would be time enough to correct mistakes after recordation of the taxpayer's reported liability.

¹⁷ Considering the mass of returns handled in the Service Center , some errors are to be expected. But the system of processing tax returns is fatally defective if mistakes during processing are never discovered. Evaluated from the standpoint of perfecting the system, the most serious mistake was not the temporary loss of depositary receipts and other misplaced documents, but the system's failure to process the Sheetrock return at all. The facts here demonstrate that the automatic data processing system never "learned" that the processing procedures had not performed as they should. It is for this reason that the failure to process was not corrected. Rather the failure to process was compounded within the system until it caused an adverse effect outside the system, the erroneous bill which was sent to plaintiff. In cybernetics the inability of a system to "learn" of its own failure is ascribed to inadequate feedback. Stated differently, feedback is "the property of being able to adjust future conduct by past performance." N. Wiener, The Human Use of Human Beings 33 (1954). See also id. at 24-25, 61. Had feedback within the IRS processing system been effective the failure to process the Sheetrock return (the system's past performance) would have been detected and rectified within the system or brought to the attention of some responsible person before the depositary receipt credits were transferred out of plaintiff's 1965 account. Feedback thus would have permitted future processing of the credits to reflect the past progress (or lack thereof) of the Sheetrock return and its other attachments through the processing system.

While automation and other high-speed techniques of data processing are invaluable as time and money savers, they do not eliminate the need for supervision by qualified people and the exercise of judgment by responsible people. On the contrary, systems employing such techniques require human control of a higher order because they permit (a) data to be secreted away in the recesses of a computer memory bank and (b) line responsibility to be fragmented among a multitude of clerks each with a small specific task. If one person is given a specific tax return and told to enter the information it contains on the Government's books with accuracy, that person, acting rationally, will look to see whether one step in the process has been accurately completed before moving to the next step. This is feedback, "the property of being able to adjust future conduct by past performance," for if the hypothetical person notes that prior processing has failed to achieve the desired results, he will adjust his future conduct accordingly.

In an automated system, however, the Government cannot reasonably rely solely on the rational judgment of the personnel on the line. The personnel on the line--the clerks and machines who actually perform the processing functions--are instructed to perform functions, not to think. They will not detect processing errors unless the person in charge of the system designs methods and procedures for exposing and correcting the system's failures, and implements those methods by assigning specific functions to qualified line personnel. Thus it is the responsibility of the Government as the operator and supervisor of the automated system for processing tax returns to design feedback into the system. If such is not done, or the feedback designed is ineffective, once made any mistake will compound until some aspect of the system breaks down entirely. Such a breakdown occurred in the processing of plaintiff's Sheetrock return.

In this way automation gives the supervisor, not line personnel, the responsibility of determining whether the system does what it is supposed to do or not. He discharges this responsibility by assigning specific tasks to the line personnel calculated to discover and correct the system's failures promptly. How great such responsibility is has been described by Professor Norbert Wiener, the father of cybernetics:

Any machine constructed for the purpose of making decisions, if it does not possess the power of learning, will be completely literalmined. Woe to us if we let it decide our conduct, unless we have previously examined the laws of its action, and know fully that its conduct will be carried out on principles acceptable to us! On the other hand, the machine like the djinnee, which can learn and can make decisions on the basis of its learning, will in no way be obliged to make such decisions as we should have made, or will be acceptable to us. For the man who is not aware of this, to throw the problem of his responsibility to the machine, whether it can learn or not, is to cast his responsibility to the winds, and to find it coming back seated on the whirlwind.

I have spoken of machines, but not only of machines having brains of brass and thews of iron. When human atoms are knit into an organization in which they are used, not in their full right as responsible human beings, but as cogs and levers and rods, it matters little that their raw material is flesh and blood. What is used as an element in a machine, is in fact an element in the machine. Whether we entrust our decisions to machines of metal, or to those machines of flesh and blood which are bureaus and vast laboratories and armies and corporations, we shall never receive the right answers to our questions unless we ask the right questions. . . . Wiener, supra, at 185 (emphasis in original).

¹⁸ The statute of limitation problem present in Cooper Agency v. United States [69-2 USTC ¶9560], 301 F. Supp. 871 (D. S. C. 1969), and cases cited, is not present here. Plaintiff was eager to try the claims covered by the alleged settlement agreement, and tried them almost immediately after the settlement broke down. Therefore, as the Supreme Court said in Botany, 278 U. S. at 289, I can say here that "without determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel, it suffices to say that here the findings disclose no adequate ground for any claim of estoppel by the United States." Moreover, in Cooper Agency and similar cases the contract was complete save for a technicality required by statute. Here the alleged defects in the contract are independent of the statute. Plaintiff relies on general contract law.

¹⁹ Some courts have read certain passages in Professor Williston's treatise, e.g., §94, at 339; §95, at 349-50, as always requiring the court construing a contract to adopt the meaning a reasonable person would give the words used by the parties. However, reference to the passages cited above, as well as to §94 at 343-44, establishes that Professor Williston would not give the teletype here an interpretation different from that given by both plaintiff and the Government.

²⁰ After the depositary receipts were located, but before the credits they represented were credited to plaintiff's account (an operation which under IRS procedure involved entering the information on punched cards, feeding the cards into the Service Center computer for conversion to computer tape, shipping the tape to the National Computer Center, and feeding it into the computer there), the correspondence unit in the Service Center addressed the letter of April 6, 1967, already mentioned, to plaintiff. After plaintiff responded, the credits were applied to the proper account (by use of the procedure just described). It is apparent from the letter of April 6 that the depositary receipts were before its author. Since at one time the depositary receipts were detached from the return, but on April 6, 1967, personnel in the correspondence unit either had located the return or were able from the receipts alone to determine plaintiff's tax liability for the fourth quarter of 1965, it is apparent that the receipts either identified the return or specified the liability. Moreover, although the receipts are not in evidence, the check submitted with them and the Sheetrock return was introduced in evidence by plaintiff. In one corner it contains the legend "4th Qtr 941" and plaintiff's employer identification number. The inclusion of such information on the check is further convincing evidence that the depositary receipts also identified the appropriate period and liability.

Government personnel testified at trial that it is IRS practice to apply deposits evidenced by depositary receipts to the taxable period within which the receipts were purchased. As a practical matter, therefore, a taxpayer would be justified in failing to identify his return or the taxable period on the receipts. However, the record here establishes that plaintiff made such identification.

²¹ As previously noted, the offer of August 18, as amended August 26, was never expressly revoked. Moreover, plaintiff never responded to the October 18 letter from the Government, even though it contained the rather clear implication that the Government considered the August 18 offer merely amended, not superseded.

A private party with reason to know the meaning intended by an offeror may in appropriate circumstances find himself bound to a contract consistent with such meaning, even though his understanding of the offer at the time he accepts it differs from the meaning intended by the offeror. See generally 3 Corbin §610, at 696. But courts often have held that conduct by Government officials which would certainly estop a private party from denying the existence of a contract does not bind the Government to a contract compromising a tax controversy unless the contract was expressly approved by the appropriate Government officials precisely in the manner required by statute, 26 U. S. C. §7122. Probably the most extreme case of this kind is United States v. Feinberg [67-1 USTC ¶9176], 372 F. 2d 352 (3d Cir. 1965), aff'd on rehearing en banc, 372 F. 2d 352, 359 (1967). In view of the prevalence of such decisions, but the apparent absence of a decision on facts similar to those presented here, this Court is reluctant to decide whether acceptance of a taxpayer's offer by Government officials who negligently fail to appreciate the meaning intended by the taxpayer binds the Government to a contract consistent with such intended meaning. Because the alleged contract here is certainly deficient for other reasons, and plaintiff asks that it not be enforced as he construes it unless the Court finds it to exist, it is not necessary in this case to resolve that issue. It therefore will be left open.

²² The implication mentioned in the preceding note, rather clear to one in the Government's position, would likely be apparent only by hindsight to one in White's position. The body of the October 18 letter repeated with precision the terms of the offer "contained" in White's letter dated two days previously. Neither the credits nor any other specific term of the August 18 offer were mentioned. The implication arises by negative inference from the introductory sentence in the October 18 letter, a sentence which one in White's position would be justified in reading hurriedly.

²³ This reason is separate from, although similar to, the principle of law that a contract should be avoided if the parties were mistaken as to a material fact of the agreement. See generally, e.g., 3 Corbin §§ 597-621; Restatement §§ 500-11. A case resolving an equitable claim of this kind in a taxpayer's favor is Loeb v. United States [36-2 USTC ¶9488], 17 F. Supp. 966 (S. D. N. Y. 1936).

²⁴ It should be made clear that the Court does not question the professional integrity or good faith of trial counsel for the Government. It is apparent from the record that trial counsel was acting under explicit instructions from his superiors. As far as trial counsel is concerned, the record reveals at most that by failing to disobey the instructions from his superiors he may have committed an error in professional judgment.

Terry W. Heil and Beverly C. Heil v. Commissioner

Docket Nos. 24578-87, 2163-90., TC Memo. 1994-417, 68 TCM 513, Filed August 22, 1994

[Appealable, barring stipulation to the contrary, to CA-2 and CA-5.-- CCH .]

[Code Secs. 6653 , prior to amendment by P.L. 101-203, 6659 and 6661, prior to repeal by P.L 101-203, and 7122 ]

Compromise: Mutual assent: Penalties.--The IRS and an investor did not enter into a binding settlement agreement concerning deficiencies related to a tax shelter because the parties did not mutually assent to a settlement. The taxpayer failed to indicate his belief that a settlement agreement had been entered into until six months after he received the first of four written indications that the IRS did not believe that a settlement agreement existed. Although the taxpayer asserted that an agreement had been reached when he indicated in response to the IRS 's initial settlement offer, that he wished to compromise, he failed to forward the requested documents. Negligence, valuation overstatement and substantial understatement penalties were imposed because the taxpayer conceded the issues.-- CCH .

Robert M. Wechsler, ¹ 733 Summer St., Stamford, Conn., for the petitioners. Linda J. Wise, for the respondent.

Memorandum Findings of Fact and Opinion

DAWSON, Judge:

These consolidated cases were assigned to Special Trial Judge Robert N. Armen, Jr. pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183. ² The Court agrees with and adopts the Special Trial Judge's opinion, which is set forth below.

Opinion of the Special Trial Judge

ARMEN, Special Trial Judge: Respondent determined a deficiency in and additions to petitioners' Federal income taxes for the taxable years 1982 and 1983 as follows:

                                   Additions to Tax

                                   ----------------

Year  Deficiency Sec. 6653(a)(1)  Sec. 6653(a)(2)  Sec. 6659 Sec. 6661

1982    $8,095       $404.75             1           $2,418

1983      --             --                --             --     $5,711.50

 1  50 percent of the interest due on $8,095.

Respondent also determined that petitioners are liable for additional interest under section 6621(c) for the 1982 taxable year. Finally, in her amendment to answer, respondent claimed an increase in the amount of the addition to tax under section 6653(a)(1) of $1,521.70, for a total addition to tax of $1,926.45 for the 1982 taxable year.

After concessions by petitioners, ³ the only issue for decision is whether respondent entered into a binding settlement agreement with petitioners which resolved all of the previously unsettled issues relating to petitioners' involvement with Energy Resources, Ltd. in 1982 and 1983. If we decide this issue in petitioners' favor, then further proceedings will be required in order to determine the amount, if any, of petitioners' unrecouped investment in Energy Resources, Ltd. in 1982.

Findings of Fact

Some of the facts have been stipulated, and they are so found. At the time that the petition was filed in docket No. 24578-87 (taxable year 1982), petitioners resided in New Canaan , Connecticut . At the time that the petition was filed in docket No. 2163-90 (taxable year 1983), petitioners resided in Dallas , Texas .

In 1982, petitioner Terry W. Heil (petitioner) acquired a beneficial interest in Morgan Investment Trust (the Trust). His total investment ⁴ in the Trust was $15,000.

In both 1982 and 1983, the Trust was a limited partner in Energy Resources, Ltd. (ERL). In 1982, the Trust made capital contributions to ERL in the amount of $35,000. The Trust made no capital contributions to ERL in 1983. The Trust invested in projects other than ERL during the 1982 taxable year.

On their 1982 and 1983 joint Federal income tax returns, petitioners reported flow-through items arising from various activities and transactions of the Trust. Respondent's determinations for 1982 and 1983 related primarily to petitioner's second-tier investment in ERL. Through their attorney, Robert A. Hall, Jr. (Mr. Hall), petitioners filed timely petitions in response to both notices of deficiency.

ERL was part of a special litigation project under the control of the Birmingham District Counsel and Birmingham Appeals offices of the Internal Revenue Service ( IRS ). Settlement Guidelines (the Guidelines) relating to taxpayers who had invested in ERL during the taxable years 1980, 1981, and 1982 were promulgated by the Southeast Regional Office of the IRS on January 27, 1986 . ⁵

The petition relating to the 1982 taxable year (docket No. 24578-87 or the docket) was filed on July 20, 1987. After an answer was filed, docket No. 24578-87 was referred to the Hartford Appeals Office of the IRS (the Hartford Office) for consideration. The docket was then assigned to an appeals officer (the Appeals Officer).

By letter dated October 30, 1987 (respondent's October 30th letter), the Appeals Officer advised Mr. Hall of the availability of the national settlement position and of the existence of the Guidelines. In respondent's October 30th letter, the Appeals Officer invited Mr. Hall to respond by indicating whether his clients wished to settle in accord with the Guidelines. The Appeals Officer indicated that a response was required within 30 days and that if petitioners wished to settle, Mr. Hall should include in his reply documentation of any investment his clients had in ERL. Among the documents specifically requested were copies of petitioners' 1980 and 1981 tax returns. The Appeals Officer later agreed to extend the response period by one week.

The documentation requested by the Appeals Officer was needed to determine the amount that petitioner had invested in ERL and the amount, if any, of the investment that had been recouped by petitioners. The Guidelines provided that taxpayers were entitled to deductions equal to the amount of their unrecouped investment in ERL.

Mr. Hall responded to respondent's October 30th letter in writing on December 8, 1987 (petitioners' December 8th letter). In petitioners' December 8th letter, Mr. Hall indicated that petitioners wished to settle and included a copy of a $15,000 check (the check), which designated the Trust as payee. At that time, Mr. Hall was unable to obtain from petitioners copies of their 1980 and 1981 tax returns; he requested that the Appeals Officer attempt to obtain them internally. ⁶ Other than the check, which designated the Trust and not ERL as payee, no documentation regarding either the amount petitioner had invested in ERL or the amount, if any, of the investment that had been recouped by petitioners was included with petitioners' December 8th Letter.

The Appeals Officer never submitted a settlement proposal to his reviewer. Instead, he recommended that petitioners' case be forwarded to District Counsel for trial preparation. The Appeals Officer's reviewer during the relevant time period, an Associate Chief in the Appeals Office (the Associate Chief), agreed with the recommendation of the Appeals Officer because there was inadequate proof of the amount of petitioners' investment in ERL and because it was unclear whether any part of such investment had been recouped. At that time, only the Associate Chief or the Chief of the Hartford Office was authorized to enter into a settlement agreement regarding this type of case on behalf of respondent. ⁷

By letter dated February 9, 1988 (respondent's February 9th letter), petitioners were advised that their case was being transferred to District Counsel for trial preparation. Respondent's February 9th letter, signed by the Associate Chief, indicated that the case was being transferred because a "mutually satisfactory basis of settlement had not been reached." Mr. Hall received a copy of this letter; however, he did not respond in writing.

This Court issued an Order dated April 21, 1988 (the April 21st Order), directing the parties to file a status report with the Court by June 8, 1988. Respondent filed a timely report indicating that settlement was unlikely and that no compelling reasons existed to preclude calendaring the case for trial. This status report was served on petitioners through their representative, Mr. Hall. Petitioners failed to file a status report.

On May 24, 1988 , Linda Wise (Ms. Wise), acting on behalf of Birmingham District Counsel, wrote to Mr. Hall indicating that respondent might still be willing to enter into a settlement agreement, but on terms less favorable to petitioners than those initially offered to them, if certain information and documentation relating to petitioner's investment in ERL was provided, including copies of petitioners' 1980 and 1981 tax returns (respondent's May 24th letter).

The documentation requested by Ms. Wise, like the documentation requested by the Appeals Officer, was needed to determine the amount that petitioner had invested in ERL and the amount, if any, of the investment which had been recouped by petitioners.

Apparently in response to respondent's May 24th letter, Mr. Hall wrote to Ms. Wise on July 21, 1988 (petitioners' July 21st letter). In petitioners' July 21st letter, Mr. Hall stated, in part:

Neither my clients nor I have any information associated with their investment in Energy Resources, Ltd. since the general partner has abandoned the limited partners and thus no information is available with which to make an informed decision as to my clients' position with respect to their investment in Energy Resources, Ltd.

On August 1, 1988 (respondent's August 1st letter), Ms. Wise responded to Mr. Hall by stating, in part:

This is in response to your letter of July 21, 1988 . Your failure to respond to our letter of May 24, 1988 , has been treated as a rejection of the final settlement offer for the shelter in this case. Accordingly, it appears at this point that the only way to resolve this case without trial is for the petitioners to fully concede the determinations made in the notice of deficiency.

Since no information has been provided in response to our informal discovery requests, we must resort to formal discovery. * * * As a partner in Energy Resources, Ltd. (Energy), petitioners have a legal right to access to the partnership's records and are considered to have custody of such records for purposes of the Tax Court's discovery procedures.

The first written indication that petitioners believed a settlement had been reached was in a letter dated August 5, 1988 , sent by Mr. Hall to Ms. Wise (petitioners' August 5th letter). In petitioners' August 5th letter, Mr. Hall indicated that he, on behalf of petitioners, had accepted the initial settlement offer tendered by respondent.

Also in August 1988, Mr. Hall provided copies of petitioners' 1981 and 1982 Federal Income tax returns to respondent. ⁸

In February 1990, after petitioners' current representative had entered his appearance, petitioners amended their petition in docket No. 24578-87 to include "a second count alleging petitioners' acceptance of a binding settlement".

Opinion

Petitioners contend that a binding settlement agreement was entered into by Mr. Hall on behalf of petitioners and by the Appeals Officer on behalf of respondent. The question of whether the parties entered into a binding settlement agreement which resolved all previously unsettled issues relating to petitioner's involvement with Energy Resources, Ltd. in 1982 and 1983 can be broken into three component questions.

The first component question is whether Mr. Hall and the Appeals Officer entered into a settlement agreement. If we find that the Appeals Officer and Mr. Hall did enter into an agreement, then we must decide whether the Appeals Officer had authority to enter into a binding settlement agreement on behalf of respondent. Finally, if we conclude that the Appeals Officer had the requisite authority, the remaining question is whether the binding settlement agreement resolved all previously unsettled issues relating to petitioner's involvement with Energy Resources, Ltd. in 1982 and 1983.

We begin with the issue of whether a settlement agreement was entered into by the Appeals Officer and Mr. Hall. To resolve this issue, we apply general principles of contract law. Robbins Tire & Rubber Co. v. Commissioner [Dec. 29,612 ], 52 T.C. 420, 435-436 (1969), supplemented by [Dec. 29,839 ] 53 T.C. 275 (1969). Objectively ascertainable mutual assent is a prerequisite to the formation of a contract. 17A Am. Jur. 2d, Contracts, secs. 27 and 28 (1991); 1 Williston on Contracts sec. 3 :5 (4th Ed. 1990).

Petitioners contend that respondent's October 30th letter, from the Appeals Officer to Mr. Hall, was an offer and that petitioners' December 8th letter, from Mr. Hall to the Appeals Officer, was an acceptance of that offer. ⁹ Petitioners maintain that the documentation requested by the Appeals Officer was necessary only to compute the amount of the deduction to which petitioners are entitled. Consistent with that premise, petitioners contend that the documentation was not a prerequisite to entering into a settlement agreement.

Respondent, in contrast, characterizes the requested documentation as a necessary foundation to an agreement. She contends that respondent's October 30th letter was not an offer, but rather a preliminary step towards entering into a settlement agreement. Alternatively, respondent contends that even if the October 30th letter was an offer, petitioners' December 8th letter was, at best, a counteroffer since it did not include all information necessary to enter into the settlement agreement.

It is well established that, as a general rule, the Commissioner's determinations are presumed correct and that the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a); Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111, 115 (1933).

We are unpersuaded that the parties mutually assented to the formation of a contract. See Klein v. Commissioner [90-1 USTC ¶50,251 ], 899 F.2d 1149, 1152-1153 (11th Cir. 1990), affg. an unpublished Order of this Court. We found petitioners' former representative, Mr. Hall, a credible witness. Nevertheless, Mr. Hall's testimony at trial was inconsistent with his conduct between December 8, 1987 , and August 1988. As noted above, petitioners, through the testimony of Mr. Hall, maintain that the documentation requested by the Appeals Officer was necessary only to compute the amount of the deduction to which petitioners are entitled and that the documentation was not a prerequisite to entering into a settlement agreement. However, we think that this view is unsupported by the record.

Petitioners had ample opportunity to indicate their belief that a settlement agreement had been entered into by the parties; however, they failed to do so until 6 months after they received the first written indication that respondent did not think that a settlement agreement existed. We view as implausible the idea that petitioners would not have protested in writing that a settlement agreement had already been entered into by the parties when it appeared that respondent was moving towards trial.

Petitioners missed opportunities to express the view that a settlement agreement existed on the following occasions: (1) Petitioners did not respond in writing to respondent's February 9th letter advising them that their case was being forwarded to District Counsel for trial preparation since no settlement had been reached; (2) petitioners did not file a status report in response to the Court's April 21st Order to do so, even after respondent had filed her report indicating that settlement was unlikely and that there was no reason for the case not to be set for trial; (3) in responding to respondent's May 24th letter, which offered settlement on terms less favorable to petitioners than those initially offered, petitioners disavowed having sufficient information available to enter into an agreement; and (4) petitioners did not amend their petition to include the allegation that petitioners had entered into a settlement agreement until February 16, 1990 , approximately 2 years after they first received written notice that respondent did not view the case as settled.

The Court is unable to reconcile petitioners' silence regarding the existence of an agreement on each of these occasions with the view expressed in petitioners' August 5th letter that an agreement had been reached 8 months earlier, with documentation needed only to calculate the amount of the deduction to which petitioner would be entitled. We are therefore unable to conclude that the requisite mutual assent existed at the time of the initial exchange of letters between the Appeals Officer and Mr. Hall.

Having decided that no settlement was entered into by the parties, and petitioners' having conceded these cases in that event, we sustain respondent's determinations for both the 1982 and 1983 taxable years. ¹⁰

To reflect the foregoing,

Decisions will be entered for respondent.

¹ Petitioners were originally represented by Robert A. Hall, Jr. Mr. Hall withdrew as counsel in anticipation of testifying as a material witness in this case.

² 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.

³ Petitioners concede that if no binding settlement agreement was entered into by the parties, respondent's determinations should be sustained for both of the years in issue. Moreover, petitioners concede that even if the parties did enter into a binding settlement agreement, petitioners would be liable for the sec. 6661 addition to tax under the terms of such agreement.

⁴ Our use of the term "investment" in this Opinion is for convenience only and is not intended to suggest any legal conclusion regarding the substance of the transaction.

⁵ Although the Guidelines do not directly relate to the 1983 taxable year, they do provide the manner in which the addition to tax for substantial understatement under sec. 6661 will be applied for "1982 and subsequent years". The only determination in the deficiency notice for the 1983 taxable year was that petitioners were liable for this addition to tax. See supra note 3.

⁶ Although it was not standard practice to do so, the Appeals Officer did make a limited effort to locate petitioners' 1980 and 1981 returns. However, he determined that he would not be able to obtain them expeditiously.

⁷ However, neither the Associate Chief nor the Chief was authorized to enter into a settlement agreement that did not satisfy the Guidelines.

⁸ It appears that Mr. Hall provided the copies to Ms. Wise, but the record is not entirely clear on this point.

⁹ Petitioners have also suggested that Mr. Hall had, on petitioners' behalf, accepted respondent's offer in a prior conversation. Whether or not conversations occurred between Mr. Hall and respondent alters neither our analysis nor our conclusion; thus, we need not address this matter.

¹⁰ We note that respondent bears the burden of proof with respect to the increased amount of the addition to tax under sec. 6653(a)(1) for 1982. Rule 142(a); Truesdell v. Commissioner [Dec. 44,500 ], 89 T.C. 1280, 1292 (1987). The amount of this addition determined in the notice of deficiency reflected a computational error. We are satisfied that respondent has carried her burden of proof as to the increased amount.

 

Brian J. O'Sullivan and Leslie J. O'Sullivan v. Commissioner

Docket No. 30571-88., TC Memo. 1994-395, 68 TCM 407, Filed August 18, 1994

[Appealable, barring stipulation to the contrary, to CA-9.-- CCH .]

[Code Sec. 166 ]

Bad debts: Motive.--A former attorney was denied a business bad debt deduction for amounts repaid to lenders who had loaned amounts to his wholly- owned corporation. The amounts borrowed and guaranteed by the attorney were used as a capital contribution to a limited partnership engaged in real estate development. The corporation was a partner in that partnership. At the time the loan guarantees were made, the attorney's dominant motive was the protection of his investment in the limited partnership rather than the protection of his salary from the corporation.

[Code Secs. 6651 and 6662 ]

Failure to file return: Negligence: Reasonable Cause: Advice: Tax professional, reliance reasonable.--A request for an extension to file an income tax return was valid. Reasonable cause existed for the failure to pay the tax due along with the request. The taxpayers sought advice from an accounting firm and fully apprised the firm of all the facts. They made a bona fide and reasonable estimate that they had no tax liability based on the information available to them when they requested the extension. The negligence penalty was not imposed because of the taxpayers' reasonable reliance on the advice of competent tax advisers.

[Code Sec. 7122 ]

Compromises: Acceptance of offer.--A settlement offer written by an appeals officer which was not signed by the taxpayer or approved for execution by the IRS was not binding on the IRS .

[Code Sec. 7422 ]

Civil actions for refund: Collateral estoppel.--The doctrine of collateral estoppel did not apply because there was no adjudication of the issues by a Court on the merits. The fact that the issues were similar to those that were the subject of a settlement which applied to prior tax years was not sufficient to invoke the doctrine.-- CCH .

John W. Sunnen, for the petitioners. Patrick W. Lucas and Michael R. McMahon, for the respondent.

Memorandum Opinion

DAWSON, Judge:

This case was assigned to Special Trial Judge Helen A. Buckley pursuant to the provisions of section 7443A(b)(4) and rules 180, 181, and 183. ¹ The Court agrees with and adopts the opinion of the Special Trial Judge.

Opinion of the Special Trial Judge

BUCKLEY, Special Trial Judge: Respondent determined a deficiency in petitioners' 1984 Federal income tax in the amount of $52,124, together with additions to tax and increased interest as follows:

Additions to Tax and Increased Interest, Secs.

----------------------------------------------

6651     6653(a)(1) 6653(a)(2)  6659   6621(c)

$13,031    $2,606       1      $15,637 applies

 1  50 percent of the interest due on the

deficiency.

 

After concessions, ² the issues are: (1) Whether respondent is collaterally estopped in this case because of a settlement made in a case involving petitioners' 1986 tax year; (2) whether respondent made a settlement offer to petitioners for 1984 which they accepted; (3) if respondent is not bound by a settlement offer or by principles of collateral estoppel, whether petitioners are entitled to a business bad debt deduction; (4) whether petitioners' return was timely filed; and (5) whether petitioners are liable for additions to tax for negligence.

Some of the facts have been stipulated, and they are so found. The stipulation of facts and attached exhibits are incorporated herein by reference. Petitioner Brian J. O'Sullivan (hereafter petitioner) resided in Los Angeles , California , when the joint petition herein was timely filed. Petitioner Leslie J. O'Sullivan resided in Vancouver , British Columbia , Canada , at that time. Petitioners filed a joint Federal income tax return for 1984 in Fresno , California .

Collateral Estoppel. Petitioner previously filed a petition in docket No. 24421-90 for a redetermination of respondent's notice of deficiency, which according to petitioner, entailed the same issues as those in this case but in regard to later years, 1986 and 1987. That case was settled by a stipulated decision entered on March 9, 1993 . Petitioners contend that the settlement in that case serves to collaterally estop respondent from pursuing her contentions in this case. We do not agree. It has long been held that collateral estoppel only applies in instances where there has been an adjudication of the merits. Even were we to assume that the facts in the two cases were identical in nature (which in any event we would be unwilling to do), neither this Court nor any other court has made a determination of either the facts or the law. The principle of collateral estoppel is that there has been a prior determination, and that the party should not be given a second opportunity to retry the same issue. Fox v. Commissioner [Dec. 32,484 ], 61 T.C. 704 (1974); Almours Secur., Inc. v. Commissioner [Dec. 9521 ], 35 B.T.A. 61 (1936). As we stated in Fox v. Commissioner, supra at 711:

The general principle of collateral estoppel or estoppel by judgment is that a fact decided in an earlier suit is conclusively established between the parties and their privies in a later suit, provided that such fact was necessary to the judgment of the first suit. Hyman v. Regenstein, 258 F.2d 502, 509-511 (C.A. 5, 1958), certiorari denied 359 U.S. 913 (1959). Once the issue is actually determined, it cannot be relitigated between the parties, even in a suit on a different cause of action. ***

No facts have previously been litigated regarding the bad debt loss. Petitioners' contention that respondent is bound by the earlier settlement is without merit.

Acceptance of a Settlement. Petitioner further contends that there has been an offer of a settlement and an acceptance in this case which precludes respondent from doing anything other than accepting a "no deficiency" settlement.

One of the issues originally in this case, the so-called Arbutus issue, has been settled by stipulation with respondent conceding the issue. On Schedule C of their Federal income tax return for 1984, petitioners indicated a business activity of "Wind Turbines" which is the activity relevant to the Arbutus issues. On the same schedule was also listed the bad debt deduction of $160,000, which is the subject of the case at bar. When respondent determined that she would issue "no change" reports on those cases involving the Arbutus wind turbines, the Appeals Officer, Mr. Kelley, sent to petitioner the following letter under date of April 21, 1992 :

For our records, I request that you sign two (2) additional copies, enclosed, of the Tax Court Decision Documents. As you will note, nothing has changed from the documents signed by you and returned to me on February 21, 1992 .

Petitioner Leslie O'Sullivan signed a copy which was contained in the administrative file of this case. There is no evidence of any sort that petitioner Brian O'Sullivan signed a copy, and it is clear that the decision document was not executed on behalf of respondent. No such stipulated decision document was sent to this Court for filing and entering.

The decision document was not approved for execution by appeals officer Kelley's supervisor. Petitioners, however, contend that the holding of this Court in Haiduk v. Commissioner [Dec. 46,888(M) ], T.C. Memo. 1990-506, compels a holding that this case has been settled. We do not agree. In Haiduk, respondent by letter extended an offer to petitioners who were investors in a national litigation project, with specific settlement terms. Taxpayers met the time frame and terms for acceptance of the offer. Respondent subsequently refused to proceed with the settlement since petitioners had enjoyed tax benefits from the project in years not before the Tax Court. We held that "An agreement to settle a lawsuit, voluntarily entered into, is binding upon the parties, whether or not made in the presence of the court and even in the absence of a writing." In Haiduk, it was clear that respondent had made an offer to settle and petitioners had timely notified respondent of their acceptance of the offer. Such is not the case here. Unlike Haiduk, there is nothing in the record to indicate that both sides had ever agreed to anything. The decision document was not signed either on behalf of respondent or by petitioner. The case at bar, unlike those cited by petitioners, does not represent the situation where an agreement had been reached and one or the other side attempted to "back-out" of it. Here the agreement had not been reached. We hold that respondent, having never entered into a binding agreement to settle this case, is not so bound.

Business Bad Debt Loss. We turn now to the substantive issue. First, we will give some background about petitioner Brian O'Sullivan. Petitioner received an undergraduate degree from Stanford University and a law degree from the University of Toronto in 1976. After spending the required year articling, petitioner practiced law in Vancouver , British Columbia , from 1977 to 1981. Sometime during the summer of 1980, petitioner became quite interested in various aspects of real estate development, mainly in the southern area of British Columbia . He considered several potential developments, and finally put together a project which became known as the Barclay Street project. It was petitioner's hope to enter into a joint venture agreement with an experienced developer in which petitioner would be a partner in a building project. It was also petitioner's intention to leave the practice of law.

After discussions with several developers, petitioners discussed the Barclay Street project with Mr. Earle, a principal of Markland properties, a real estate developer. Petitioner, who was intending to leave the practice of law, emphasized that it was incumbent for him to receive a "salary" while working on the project. The final partnership agreement entered into for the Barclay Street development was between Markland Properties Ltd. (hereafter Markland) and 220029 B.C. Ltd. 220029 B.C. Ltd. was a British Columbia corporation in which petitioner held all of the stock. Its name was subsequently changed to Coram Development Corp., and future references to Coram are to this corporation.

The terms of the partnership agreement provided that each party would make an initial capital contribution of Can$150,000, and that Markland and Coram were each to hold 500 units of the partnership. The agreement further provided that capital accounts were to be set up for each partner and that no partner had a right to withdraw amounts. However, the agreement also provided that distributions might be made from time to time to the partners, and that such amounts were to be charged to their capital accounts. Although the partnership agreement does not so explicitly provide, it was agreed with Markland that Coram would receive Can$5,000 per month.

Petitioner withdrew from his law firm and no longer engaged in the practice of law. Rather, he devoted his full time and attention to the development of Barclay. It was petitioner's expectation that it would take about 2 years to fully develop and sell the Barclay Street project. The plan was to build luxury condominiums on the property. In arriving at his agreement with Markland, petitioner emphasized that a necessary element of the deal was that he receive a monthly draw so that he would have funds for living expenses. Both parties to the agreement understood that the Can$5,000 was critical to petitioner. The Can$5,000 payments were made to Coram, however, rather than to petitioner. Further, the monthly payments were, in accordance with the partnership agreement, subtracted from Coram's capital account on the books of the partnership. As of September 30, 1981 , Coram received Can$25,000 from the project; of this amount Coram expended Can$22,621.44 on expenses, for a net profit of $2,378.56. Petitioner reported receiving Can$2,500 from Coram on his 1981 Federal and British Columbia Individual Income Tax Return.

In order to make the initial capital contribution, petitioner caused Coram to borrow Can$50,000 from Straight Forward Productions Inc., and the same amount from Richard F. Nicholls and Rita Nicholls, both borrowings supported by promissory notes and by petitioner's personal guarantee. The remaining amount of Can$50,000 came from petitioner.

The partnership acquired the necessary funds for the real estate through a mortgage with Yorkshire Trust Company (hereafter Yorkshire ) in the amount of $1,000,000. Yorkshire demanded, and received, the personal guarantees of Mr. Earle of Markland and petitioner. In addition to a variable interest rate, Yorkshire was to receive one-third of the profit from the project as an interest bonus.

The overall management, control, administration, and operation of the business was vested in Markland. It was the plan, however, that petitioner should work full-time on the preconstruction stages of the project, such as obtaining necessary licenses, zoning requirements, use permits, meeting with architects and contractors, and so forth. In any event, an experienced employee of Markland worked with petitioner on these matters.

Before the project got off the ground, however, financial considerations forced a change of plans. Interest rates had gone up to 21 percent, Markland was paying 3 percent over prime on its borrowings, and Mr. Roger Earle, principal of Markland, decided in June of 1981 not to proceed further with the development. As a result, petitioner no longer received the monthly Can$5,000 draw, and as he termed it "it was a disaster". Petitioner was out of work with no income prospects. He subsequently went to work for another real estate development group, Strand Properties, and he made $22,500 during the balance of 1981 working on Strand 's projects.

As a direct result of working for Strand , petitioner developed some ideas which he believed might serve to recoup the Barclay project. He brought to Markland the suggestion that they might turn the project into residential rentals for which there were potentially available some British Columbia subsidies. These projects were called Multiple Unit Residential Building projects (MURB). To become eligible for Province support, it was necessary that footings be poured on the land prior to the end of 1982. The plan was to sell limited partnership interests in the project, and once financing for the MURB was obtained, petitioner would once again receive his monthly Can$5,000 draw. Markland was agreeable to entering into a limited partnership agreement with Coram, but this time required that petitioner personally guarantee Coram's obligations. The agreement was entered into on March 26, 1982 . The limited partnership, however, was unable to obtain the necessary financing. Sometime in April of 1982 Yorkshire Trust commenced foreclosure proceedings against the real property.

Financial statements for the Barclay Street project, to December 31, 1982 , indicate a total loss on the project of Can$1,042,007.33. Coram's share of the loss was Can$521,003.67, less a development profit of $100,000, ³ for a net loss of Can$421,003.67. Petitioner was liable for this amount, under his various guarantees, as well as Can$50,000 to Richard and Rita Nicholls and Can$50,000 to Straight Forward Productions.

Petitioner borrowed $160,000 from Arbutus, a company of which he was president, in January of 1984. Petitioner executed a demand promissory note in favor of Arbutus. Arbutus wired funds representing the $160,000 to the respective creditors. Thus, the amount of $80,030 was credited to Markland by Arbutus, as well as $40,170 to Courtney Smith, and $40,085 to Richard Nicholls. The debt which petitioner owed to Arbutus was "forgiven" by Arbutus, apparently through a redemption of petitioner's shares in Arbutus in 1985.

Petitioner claimed on his 1984 return that he had a business bad debt loss in the amount of $160,000 for 1984. Respondent contends that the loss is a capital loss, and allowed a deduction of $3,000.

During 1981, petitioner's trade or business was that of being an employee of Coram. Petitioner realized only Can$2,500 during that year from Coram; the balance of his earned income came from his law firm, DeBou & Company, or from the work he did from Strand . His total earned income from employment for the year was Can$30,000, and this was the amount petitioner reported to Canadian taxing authorities.

Coram became insolvent in 1982.

Petitioner bears the burden of proving that respondent's determination is incorrect. Rule 142(a); Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933).

Section 166(a)(1) provides the general rule that there shall be allowed as a deduction any debt which becomes worthless within the taxable year. However, in case of a taxpayer other than a corporation, section 166(a)(1) is not applicable to a nonbusiness debt. Sec. 166(d)(1)(A) . Section 1.166-5(b)(1) , Income Tax Regs., provides that a nonbusiness debt is any debt other than (1) a debt which is created, or acquired, in the course of the trade or business of the taxpayer, determined without regard to the relationship of the debt to a trade or business of the taxpayer as of the time the debt becomes worthless, or (2) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. Our inquiry, then, is to determine whether the guarantees on which petitioner made payment were proximately related to his trade or business as of the time he entered into the guarantees in 1981 and 1982. See Weber v. Commissioner [Dec. 49,983(M) ], T.C. Memo. 1994-341.

In both 1981 and 1982, petitioner was an employee of Coram, and his trade or business was that of being an employee. Petitioner, accordingly, must prove that his dominant motivation in entering into the guarantees of the two Can$50,000 notes in 1981 was to protect his salary as an employee of Coram, but that entity at the most paid petitioner only Can$2,500 during that year. We find that petitioner's dominant motivation was not to protect his salary from Coram, but rather to increase his potential for profit through his ownership of the Coram shares. As stated in United States v. Generes [72-1 USTC ¶9259 ], 405 U.S. 93, 103 (1972), "in determining whether a bad debt has a 'proximate' relation to the taxpayer's trade or business, as the Regulations specify, and thus qualifies as a business bad debt, the proper measure is that of dominant motivation, and that only significant motivation is not sufficient."

Throughout the course of the trial, petitioner referred to the Can$5,000 monthly payments which Coram was to receive as his salary, and on brief petitioner continues with such terminology. This Court is not bound by petitioner's self-serving classification of the payments. See, e.g., Tokarski v. Commissioner [Dec. 43,168 ], 87 T.C. 74 (1986). The record is quite clear that Coram was taking withdrawals of capital of Can$5,000 per month, and neither Coram nor petitioner were receiving any such sums as salary.

In 1981, petitioner contributed Can$50,000 of his own funds to Coram and indebted himself on guarantees in the amount of Can$100,000. As we stated in Garner v. Commissioner [Dec. 47,754(M) ], T.C. Memo. 1991-569, affd. [93-1 USTC ¶50,167 ] 987 F.2d 267 (5th Cir. 1993), "the larger the taxpayer's investment, the smaller his salary, and the larger his other sources of gross income, the more likely are the courts to find a dominant nonbusiness motive for the guaranty." Further, the Supreme Court in Whipple v. Commissioner [63-1 USTC ¶9466 ], 373 U.S. 193, 202 (1963), stated that: "Devoting one's time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged." Here, as in Whipple, the business activity was that of the corporation, not the petitioner.

Petitioner's testimony, coupled with that of Mr. Earle, the principal of Markland, shows that the anticipated profits of the Barclay Street project might result in excess of a half-million Canadian dollars to both petitioner and Markland. Their hope was to sell the project at a substantial profit. While the expectations might have been overly optimistic, we find that it was petitioner's hope of realizing such profit from his capital investment of Coram that was his dominant motivation for entering into the guarantees.

Petitioner in 1982, in his hope of saving his investment, undertook additional guarantees to Markland. Here, too, his testimony was that he did so in order to obtain the so-called "salary". The 1982 agreement, however, nowhere provides for payment of any salary to petitioner, and in fact petitioner did not receive any salary from either Coram or Markland.

We find that petitioner's dominant motivation in entering into the guarantees in both 1981 and 1982, was not to protect any salary he might have received as an employee of Coram. Accordingly, the payments made in 1984 on the various guarantees do not represent business bad debt losses. Because of our holding in this regard, it is unnecessary to consider respondent's alternative arguments.

Timeliness of Petitioner's 1984 Return. Respondent contends that the 1984 Federal income tax return was not timely filed, even though petitioners filed a request for an extension to October 15, 1985 , within which to file the return. When petitioners filed the extension request, they did not include any payments and estimated on the extension request that their additional tax liability was zero. Respondent bases her position upon Rev. Rul. 79-113 , 1979-1 C.B. 389, which in effect holds that a failure to make a reasonable effort to estimate income on an extension request serves to make the extension request invalid. Petitioners sought accounting advice in connection with their 1984 Federal income tax return from the firm of Ernst & Whinney, and we believe that they fully apprised that firm of all relevant facts. Petitioners relied upon the advice given. We further note that both petitioners were citizens of Canada when they sought such advice about U.S. tax laws. The fact that we have come to a substantive conclusion about the bad debt issue different from that of petitioners does not in itself indicate that petitioners filed their extension request with a lack of due care or reasonable cause. We find that petitioners made a bona fide and reasonable estimate of their tax liability based on the information available to them when they requested the extension. See Crocker v. Commissioner [Dec. 45,675 ], 92 T.C. 899, 908-909 (1989). Accordingly, petitioners are not liable for the addition to tax for failure to file timely.

Negligence. Respondent determined that petitioners are liable for an addition to tax for negligence. Negligence under section 6653(a) means lack of due care or a failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner [Dec. 42,540 ], 85 T.C. 934, 947 (1985). Petitioners contend that they are not liable for these additions to tax because they reasonably relied upon the advice of Ernst & Whinney regarding how to properly report the tax consequences of the 1984 payments on the guarantees. We have held that reasonable reliance on the advice of competent tax advisers fully informed as to the relevant facts may be sufficient to avoid the imposition of the addition to tax for negligence. Weis v. Commissioner [Dec. 46,479 ], 94 T.C. 473, 487 (1990). We believe petitioners so reasonably relied on Ernst & Whinney, and we hold they are not liable for the addition to tax for negligence.

To reflect the foregoing,

Decision will be entered under Rule 155.

¹ Section references are to the Internal Revenue Code in effect for the year at issue; Rule references are to the Tax Court Rules of Practice and Procedure.

² The parties entered into a Stipulation of Settlement of tax shelter adjustments relating to the Arbutus Wind Turbines project. Respondent conceded all Arbutus issues, including that petitioners are not liable for additions pursuant to sec. 6659 and increased interest pursuant to sec. 6621(c) .

³ Markland eventually developed the Barclay Street property as a cooperative housing project for the City of Vancouver , for which it received $200,000, of which one-half was credited to petitioner's account under the guarantees.

 

Nelda J. Gillilan v. Commissioner

Docket No. 20993-92., TC Memo. 1993-366, 66 TCM 398, Filed August 18, 1993

[Appealable, barring stipulation to the contrary, to CA-5.-- CCH .]

[Code Secs. 6225 , 6231 and 7122 ]

[Deficiency: Notice: Assessment: Settlement agreements: Bankruptcy of a partner: Partnership items.]P and H jointly owned an interest in a partnership. P and H signed a Form 870-L(AD), offering to settle partnership and affected items with R. Prior to R's signing the Form 870-L(AD), H filed a bankruptcy petition. P and H later signed a Form 870, consenting to the immediate assessment and collection of tax. R then assessed against P. R subsequently issued a deficiency notice to P and H for the tax previously assessed. R moves to dismiss for lack of jurisdiction on the ground that, due to the prior assessment, there was no deficiency determination and the deficiency notice therefore was invalid. See sec. 6212(a) , I.R.C.1. Held: The Form 870-L(AD) signed by P and H was a single offer to settle the liability of both P and H. The filing of H's bankruptcy petition brought into effect an automatic stay, precluding R from settling as to H. 11 U.S.C. sec. 362(a) . R's purported acceptance of P and H's offer to settle therefore was void, and the assessment based thereon was invalid. Accordingly, R's deficiency notice was not invalid on account of a prior assessment. R's motion to dismiss for lack of jurisdiction on that ground is denied.2. Held: We dismiss for lack of jurisdiction on the ground that respondent's deficiency notice (which pertains only to partnership and affected items) was issued prior to the completion of partnership-level proceedings, and therefore invalid. Sec. 6225 , I.R.C. Sec. 301.6231(c)-7T(a) , Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), which provides that partnership items of a partner named as a debtor in a bankruptcy proceeding will be treated as nonpartnership items as to such partner, does not apply to petitioner. Dubin v. Commissioner [Dec. 48,500 ], 99 T.C. 325 (1992).

William E. Bailey, 1999 Bryan St. , Dallas , Tex. , for the petitioner. James R. Turton, for the respondent.

Memorandum Findings of Fact and Opinion

 

HALPERN, Judge:

By notice of deficiency dated June 19, 1992, respondent has determined income tax deficiencies of $5,120 and $216 for 1983 and 1984, respectively, along with an addition to tax under section 6661 of $1,280 for 1983.

The sole issue raised by the parties is whether we should grant respondent's motion to dismiss, on the ground that the prior assessment of those amounts rendered the deficiency notice invalid.

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

Findings of Fact

 

Some of the facts have been stipulated and are so found. The stipulation of facts filed by the parties and attached exhibits are incorporated herein by this reference. Petitioner resided in Texas at the time the petition herein was filed.

Petitioner and her husband were married and lived in the State of Texas , at all times during the years at issue. Texas is a community property State . On December 22, 1983, petitioner's husband acquired an interest in a partnership, "Startrac Partnership" (Startrac). Petitioner and her husband filed joint Federal income tax returns for the years at issue, in which they claimed losses from Startrac. Following an examination of Startrac's returns for 1983 and 1984, respondent determined adjustments to those returns and, on March 23, 1987 , sent to the tax matters partner of Startrac a notice of final partnership administrative adjustment (FPAA), disallowing certain losses and determining additions to tax, under sections 6653(a)(1) and (2), 6659 , and 6661 , and determining increased interest under section 6621 . ¹ On June 1, 1987, the tax matters partner of Startrac timely filed its petition for readjustment of partnership items in this Court (docket No. 16561-87). As of the date this opinion was filed, that litigation has not been completed.

On June 21, 1991 , and June 29, 1991 , petitioner and her husband (respectively) signed a Form 870-L(AD), "Settlement Agreement for Partnership Adjustments and Affected Items" (settlement agreement), offering a settlement to respondent whereby they agreed to the adjustments to partnership items determined by respondent in the FPAA and to the individual partner additions to tax under section 6661 and to the increased interest under section 6621 , but not to the other additions to tax. Petitioner and her husband also offered (1) to waive the restrictions on assessment of any deficiency attributable to partnership items, provided in section 6225(a) ; (2) to waive the restrictions provided in section 6213(a) ; and (3) to consent to the assessment and collection of additions to tax under section 6661 and increased interest under section 6621(c) attributable to partnership items (plus interest provided by law). The following instruction appears on the settlement agreement:

If an offer is executed for a tax year in which a JOINT RETURN OF A HUSBAND AND WIFE was filed, it must be signed by both spouses, unless one spouse, acting under a power of attorney, signs as agent for the other.

On July 24, 1991, petitioner's husband filed a bankruptcy petition in the United States Bankruptcy Court for the Northern District of Texas. Petitioner did not join her husband in filing that petition. On August 7, 1991, respondent signed the Form 870-L(AD), accepting (or purportedly accepting) the offer to settle. On October 24, 1991, petitioner and her husband signed a Form 870, "Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment" (consent to assess), consenting (or purportedly consenting) to the immediate assessment and collection of unpaid taxes and interest resulting almost entirely from the agreed 1983 and 1984 adjustments.

On February 24, 1992, respondent assessed the 1983 tax (plus interest), the 1984 tax, and the additional interest under section 6621 as to 1984 against petitioner. On April 6, 1992, respondent assessed the addition to tax under section 6661 and additional interest under 6621 as to 1983 against petitioner. On June 19, 1992 , respondent sent a notice of deficiency to petitioner and her husband for the previously assessed 1983 and 1984 taxes (on the ground that Startrac's claimed losses were not allowable), and an addition to tax under section 6661 as to 1983. On September 18, 1992, petitioner timely filed a petition with this Court. On November 13, 1992, respondent timely filed an answer.

On April 5, 1993, respondent moved to dismiss this case for lack of jurisdiction, on the ground that the notice of deficiency was invalid. On April 19, 1993, petitioner opposed that motion. Oral argument was held on April 21, 1993, and a stipulation of facts was filed on April 28, 1993.

Opinion

 

I. The Parties' Arguments

Respondent argues that, because the amounts determined in the deficiency notice previously were assessed, pursuant to petitioner's signing the settlement agreement, there was no deficiency determination and the deficiency notice therefore was invalid. See sec. 6212(a) . ² Accordingly, respondent moves for dismissal in her favor.

Petitioner opposes respondent's motion, arguing that the assessment was invalid, there was a deficiency, and respondent's deficiency notice therefore was valid against petitioner. In support of her contention that the assessment was invalid, petitioner argues that the settlement agreement was not binding on her as to Startrac's losses (and the resultant additions to tax), primarily for two reasons. First, petitioner argues that the settlement agreement had no effect whatever because (i) the offer made to respondent was to settle both her and her husband's liability, (ii) petitioner's husband's bankruptcy, which occurred before respondent signed the settlement agreement, precluded respondent from thereafter accepting that offer, and (iii) no agreement was reached to settle only petitioner's liability, because no such offer ever was made by petitioner. Second, petitioner argues that (i) the settlement agreement pertains only to "partnership items", (ii) her husband's bankruptcy converted all of her partnership items to nonpartnership items, and therefore (iii) the settlement agreement, pertaining only to nonexistent items, had no effect.

II. Was There a Settlement Agreement?

A. No Settlement Agreement as to Petitioner's Husband

On June 21 and 29, 1991, petitioner and her husband, respectively, signed the Form 870-L(AD), offering to settle certain partnership items (and additions to tax) with respondent.That offer, of course, could not constitute an agreement until accepted by respondent. ³ Prior to respondent's accepting the offer, petitioner's husband filed a bankruptcy petition. The filing of that petition brought into play the automatic-stay provision of the Bankruptcy Code, which reads in part as follows:

§362 . Automatic Stay.

(a) Except as provided in subsection (b) of this section, a petition filed under section 301 , 302 , or 303 of this title * * * operates as a stay, applicable to all entities of--

* * *

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;

11 U.S.C. sec. 362(a) (1990). The effect of the automatic stay is to void any action in violation thereof. E.g., Kalb v. Feuerstein, 308 U.S. 433, 438 (1940). Accordingly, to the extent that respondent's acceptance of the offer was in violation of the automatic stay, that action is void. See id.

It seems apparent, and respondent does not appear to contest, that respondent's purported acceptance of the offer was an impermissible act (i) to create a lien against either petitioner's husband's property or that of the estate, or (ii) to collect, assess, or recover a claim against petitioner's husband. 11 U.S.C. sec. 362(a)(4)-(6). Accordingly, respondent's purported acceptance is void as it pertains to petitioner's husband. See Kalb v. Feuerstein, supra. It is less clear, however, whether respondent's purported acceptance is valid as to petitioner.

B. No Settlement Agreement As To Petitioner

Notwithstanding petitioner's protestations to the contrary, we see no reason why the automatic stay would preclude respondent from reaching an agreement with petitioner, who had not filed for bankruptcy. From our vantage point, the critical inquiry is whether, in this instance, such an agreement was reached. More specifically, we must determine whether the offer made by petitioner and her husband to respondent consisted of one single offer to settle the liability of both spouses, or rather consisted of two independent offers, whereby each spouse offered to settle his or her respective liability (regardless of whether any agreement might be reached with the other). If it was the former, then the settlement agreement is invalid because respondent's purported acceptance was void on account of the automatic stay; if it was the latter, then respondent must prevail (on this issue) because her acceptance of petitioner's offer would be valid, notwithstanding that her purported acceptance of the other offer was not. We think there was only one offer and that the settlement agreement therefore is invalid.

The following instruction appears on Form 870-L(AD):

If an offer is executed for a tax year in which a JOINT RETURN OF A HUSBAND AND WIFE was filed, it must be signed by both spouses, unless one spouse, acting under a power of attorney, signs as agent for the other. [Emphasis added.]

The settlement contemplated by Form 870-L(AD) therefore appears to be one between respondent and both spouses, not just one. Admittedly, an unsigned Form 870-L(AD) is nothing more than respondent's standard form for soliciting an offer, and nothing printed thereon would preclude a taxpayer from making, or respondent from accepting, some different offer. That, however, does not appear to have occurred. Petitioner and her husband merely filled in the appropriate settlement terms and signed the form; they did nothing to indicate a deviation between their offer and that solicited by respondent. ⁴ We therefore conclude that no deviation was intended.

Accordingly, the only offer made was to settle the liability of both petitioner and her husband. On account of the automatic stay, respondent's purported acceptance of that offer is void. See 11 U.S.C. sec. 362(a) . No offer ever was made to settle petitioner's liability independent of her husband's, and thus no settlement agreement was reached to that effect. Therefore, we are unable to conclude that respondent's assessment (based on the invalid settlement agreement) was valid as to petitioner, ⁵ and we cannot dismiss in respondent's favor on the ground that the amounts at issue properly have been assessed.

III . Jurisdiction Over Partnership Items

A. TEFRA Procedures

The unified audit and litigation procedures applicable to partnership items are found in sections 6221 -6233. Those procedures (the TEFRA procedures) were enacted as part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 401(a) , 96 Stat. 648. The TEFRA procedures provide a method for adjusting "partnership items" in a single, unified partnership proceeding, rather than in separate proceedings with each partner. Sec. 6621 . Until such partnership-level proceeding is completed, respondent generally may not assess a deficiency attributable to a "partnership item" against any partner. Sec. 6225 . Moreover, because the tax treatment of an "affected item" depends upon the partnership-level determination, affected items generally cannot be tried as part of a partner's tax case prior to the completion of the partnership-level proceeding. E.g., Dubin v. Commissioner [Dec. 48,500 ], 99 T.C. 325, 328 (1992). Accordingly, if the items at issue in this case are partnership items (or affected items), respondent lacks the authority to assess a deficiency with regard thereto. If that is the case, we must dismiss for lack of jurisdiction on the ground that respondent's deficiency notice is invalid. ⁶ Therefore, we now consider whether the items here at issue are partnership items (or affected items).

B. Partnership Items and Affected Items: General Rule

A "partnership item" is any item required to be taken into account for the partnership's taxable year, to the extent the regulations provide that such item more appropriately is determined at the partnership level than at the partner level. Sec. 6231(a)(3) . The regulations provide that items of partnership income, gain, loss, deduction, and credit generally are partnership items. Sec. 301.6231(a)(3)-1(a)(1)(i) , Proced. & Admin. Regs. An "affected item" is any item affected by a partnership item. Sec. 6231(a)(5) . Additions to tax and additional amounts are affected items. Sec. 301.6231(a)(5)-1T(d) , Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5, 1987). Accordingly, unless some exception applies, petitioner's loss from Startrac will be a partnership item, and the addition to tax at issue will be an affected item.

C. The Bankruptcy Rule; Dubin

Pursuant to section 6231(c)(2) , the Secretary has the authority to provide by regulation that certain items otherwise treated as partnership items are to be treated as nonpartnership items if the treatment of such items as partnership items would interfere with the effective and efficient enforcement of the Internal Revenue Code. The Secretary has determined that the treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere with such effective and efficient enforcement. Sec. 301.6231(c)-7T(a) (the bankruptcy regulation), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987). That regulation provides as follows:

(a) Bankruptcy. The treatment of items as partnership items with respect to a partner named as a debtor in a bankruptcy proceeding will interfere with the effective and efficient enforcement of the internal revenue laws. Accordingly, partnership items of such a partner arising in any partnership taxable year ending on or before the last day of the latest taxable year of the partner with respect to which the United States could file a claim for income tax due in the bankruptcy proceeding shall be treated as nonpartnership items as of the date the petition naming the partner as debtor is filed in bankruptcy. [Emphasis added.]

Petitioner argues that the bankruptcy rule applies to her, as well as her husband, notwithstanding that only her husband has filed for bankruptcy. ⁷ In support of her argument, petitioner cites section 6231(a)(12) , which provides that "Except to the extent otherwise provided in regulations, a husband and wife who have a joint interest in a partnership shall be treated as 1 person." Inasmuch as community property unquestionably qualifies as joint property, section 301.6231(a)(12)-1T(a) , Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6793 (Mar. 5, 1987), section 6231(a)(12) , if nowhere superseded, would cause petitioner and her husband to be treated as one partner for purposes of the bankruptcy rule; in that event, such rule would apply to petitioner, as well as her husband, converting all partnership items to nonpartnership items.

The one-person rule of section 6231(a)(12) , however, is superseded by section 301.6231(a)(12)-1T(a) (paragraph (a)), Temporary Proced. & Admin. Regs., supra, which provides as follows:

(a) In general. For purposes of subchapter C of chapter 63 of the Code, spouses holding a joint interest in a partnership are treated as partners. Thus, both spouses are permitted to participate in administrative and judicial proceedings. * * *

Paragraph (a) reverses the general rule of section 6231(a)(12) , providing, as a new general rule (subject to exception), that spouses with a joint interest will be treated as two distinct partners. As explained in Dubin v. Commissioner [Dec. 48,500 ], 99 T.C. at 331-334, we believe that the terms "person" and "partner", as used in section 6231(a)(12) and paragraph (a), respectively, have the same meaning, and that paragraph (a)'s two-partner rule therefore supersedes the one-person rule of section 6231(a)(12) . Accordingly, since the bankruptcy rule applies only to the partner (or person) in bankruptcy, it does not apply to petitioner. Id. Petitioner's partnership items therefore are not converted to nonpartnership items by the bankruptcy rule. Therefore, petitioner's share of Startrac's losses is a partnership item (and the other items at issue are affected items).

Petitioner argues that Dubin should not apply to this case, and that petitioner's partnership items were converted to nonpartnership items upon the filing of petitioner's husband's bankruptcy petition. In support of that argument, petitioner makes various contentions, the relevance of which we cannot ascertain. Inter alia, petitioner contends: (1) The settlement agreement (Form 870-L(AD)) was without effect on July 24, 1991 (the date of the bankruptcy petition), because respondent had not yet accepted the offer by signing it; (2) the filing of the bankruptcy petition resulted in the dissolution of Startrac under Texas law; (3) on July 24, 1991 , neither petitioner nor her husband could be Startrac's tax matters partner or otherwise act on its behalf in a TEFRA proceeding; and (4) as of July 24, 1991 , all of petitioner's community property interest in Startrac ceased as such interest became property of her husband's bankruptcy estate pursuant to 11 U.S.C. sec. 541(a)(2) . None of those arguments persuades us that Dubin is distinguishable from this case or was decided incorrectly. Accordingly, we follow Dubin, as explained above.

D. Conclusion

Petitioner's share of Startrac's losses is a partnership item. Accordingly, respondent may not assess a deficiency attributable to such losses against petitioner prior to the completion of Startrac's partnership-level proceedings. Sec. 6225 . That has not yet occurred, and respondent's notice of deficiency therefore is invalid. We shall dismiss for lack of jurisdiction.

An appropriate order will be entered.

¹ Startrac was a partnership subject to the rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 401(a) , 96 Stat. 648. See secs. 6221 -6233.

² In order to determine a deficiency, respondent must determine that the tax due exceeds the (1) sum of (i) the amount shown as the tax by the taxpayer on her return, and (ii) the amounts previously assessed (or collected without assessment) as a deficiency, minus (2) the amount of rebates made. Sec. 6211 . Respondent argues that, because the tax determined to be due previously was assessed, no deficiency was determined. Petitioner concedes that, if the entire tax due validly was assessed, the notice of deficiency was invalid, and respondent's motion should be granted.

³ It is well established that general principles of contract law govern the compromise and settlement of tax cases. E.g., Robbins Tire & Rubber Co. v. Commissioner [Dec. 29,612 ], 52 T.C. 420, 435-436 (1969).

⁴ Petitioner's husband had not yet filed his bankruptcy petition and his signature therefore was valid at that time.

⁵ Respondent has not argued that, even if the settlement agreement (Form 870-L(AD)) was invalid, the consent to assess (Form 870) is sufficient to render the purported assessment valid as to petitioner. We do not believe that the Form 870 renders the purported assessment valid in this case.

⁶ Curiously, although both parties have presented arguments as to whether petitioner's share of Startrac's losses is a partnership item, neither has argued that we ought to dismiss for lack of jurisdiction on that ground. Nevertheless, we raise the question on our own. Inasmuch as the parties have briefed the one issue critical to that determination, we will not request further assistance in connection therewith.

⁷ At this stage of our analysis, a holding that the bankruptcy regulation applies would compel the conclusion that respondent's deficiency notice is valid. Thus, it may seem strange that it is petitioner, rather than respondent, who argues the applicability of the regulation. As noted above, petitioner makes that argument in an attempt to prove the settlement agreement inapplicable, on the ground that the settlement agreement (even if valid) applies only to partnership items, and that her share of Startrac's losses, by virtue of the bankruptcy rule, is a nonpartnership item. Respondent, as noted, argues to the contrary.

 

2002-1 USTC ¶50,166] In re Lewis M. Smallwood, Sylvia J. Smallwood, Debtors

U.S. Bankruptcy Court, West. Dist. Ark. , Fort Smith Div., 01-70143, 1/3/2002

[Code Secs. 6672 and 6871 ]

Trust fund recovery penalty: Assessment: Notice: Certificate of assessment.--

The government met its burden of proof in establishing that a trust fund recovery penalty was properly assessed against married debtors who objected to the government's proof of claim filed in the debtors' bankruptcy case. An authentic certificate of assessment was presumptive proof of a valid assessment of the debtors' tax liability. Additionally, the government presented prima facie evidence that proper notice was given. The certificate of assessment was presumptive proof of proper notice.

[Code Secs. 6871 and 7122 ]

Offer in compromise: Acceptance of offer: Certificate of assessment.--

Married debtors' tender of a check to the government did not constitute an offer in compromise that would have discharged their tax liability. The government and the debtors agreed that an offer to compromise the tax liability of the debtors was never accepted in writing by an authorized official. Moreover, a certificate of assessment reflected that the debtors' offer in compromise was rejected.

[Code Sec. 7402 ]

Burden of proof: Summary judgment.--

Married debtors, who objected to the government's proof of claim filed in their bankruptcy case and to whom the burden of proof shifted upon the government's satisfaction of its burden of proof, failed to submit any evidence that would show a genuine issue of material fact. Thus, the government's motion for summary judgment was granted. BACK REFERENCES: ¶41,605.36

Kenneth W. Cowan, for debtors. Andrew T. Pribe, for U.S. John T. Lee, trustee.

ORDER GRANTING UNITED STATES OF AMERICA 'S MOTION FOR SUMMARY JUDGMENT

FUSSELL, Bankruptcy Judge:

Pending before the Court is the United States 's motion for summary judgment filed on October 1, 2001, regarding the debtors' objection to the claim of the Department of Treasury/Internal Revenue Service [ IRS ]. The debtors responded to the United States 's motion for summary judgment on October 29, 2001. For the reasons stated below, the Court grants the United States 's motion and overrules the debtors' objection to the claim of the IRS .

PROCEDURAL HISTORY

The debtors filed their chapter 7 bankruptcy petition on February 8, 2001. On May 30, 2001 , the debtors filed a general unsecured proof of claim on behalf of the IRS in the amount of $198,723.67 plus interest for the "Trust Fund portion of withholding taxes for Border City Foods." ¹ On June 11, 2001 , the trustee, John Terry Lee, filed his objection to that claim on the grounds that (1) there was no showing that an assessment of individual liability had been made by the IRS and (2) the debt appeared settled through accord and satisfaction because the debtors tendered an offer in compromise and the IRS deposited the debtors' check. On June 18, 2001, the debtors filed an amended Proof of Claim on behalf of the IRS . The amended claim stated that the IRS 's claim was an unsecured priority claim, not a general unsecured claim. On June 26, 2001, the trustee filed his objection to the amended claim for the same reasons stated in his earlier objection.

On June 29, 2001, the Department of Treasury/Internal Revenue Service filed its own proof of claim in the amount of $207,699.46, also providing that the claim was an unsecured priority claim. On September 13, 2001, the debtors objected to the IRS 's claim for the same reasons the trustee had objected to the earlier claims filed by the debtors on behalf of the IRS . On October 12, 2001, the trustee withdrew his objections to the IRS 's claims as moot.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §1334 and 28 U.S.C. §157, and it is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(B). The following findings constitute findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

SUMMARY JUDGMENT

Federal Rule of Civil Procedure 56 provides that summary judgment shall be rendered if the pleadings, depositions, answers to interrogatories, admissions, and affidavits show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. ² The burden is on the movant to establish the absence of a material fact and identify portions of the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits that demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The burden then shifts to the non-moving party, who must then "go beyond the pleadings and by her own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.' " Id. at 324 (quoting Fed. R. Civ. P. 56(e)). In ruling on a summary judgment motion, the court views the facts in the light most favorable to the non-moving party and allows that party the benefit of all reasonable inferences to be drawn from the evidence. Ferguson v. Cape Girardeau Cty., 88 F.3d 647, 649-50 (8th Cir. 1996).

The IRS has a dual burden of establishing the nonexistence of a genuine issue of material fact. The initial burden is the burden of production, which shifts to the debtors if satisfied by the IRS . The second, and ultimate, burden is the burden of persuasion, which remains with the IRS . Celotex Corp., 477 U.S. at 330 (J. Brennan, dissenting) (citing 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure §2727, p.121 (2d ed. 1983)). The initial burden may be discharged by the IRS showing there is an absence of evidence to support the debtors' case. Id. at 325. Before shifting that burden, however, the Court needs to determine if the IRS has met its burden of persuasion as to the issues presented.

ISSUES PRESENTED

To determine whether the IRS is entitled to summary judgment regarding the debtors' objection to the claim of the IRS , the Court must decide two issues: (1) whether the debtor, Lewis Smallwood, was properly assessed a trust fund recovery penalty pursuant to 26 U.S.C. §6672, and (2) whether the debtors' tender of $86,470.00 to the IRS discharged any liability in accord and satisfaction.

POSITIONS OF THE PARTIES

In its " United States of America 's Statement of Undisputed Material Facts in Support of Its Motion for Summary Judgment," the IRS submitted a statement of alleged undisputed material facts. Each of the alleged facts were supported by either an attached Exhibit A (Certificate of Assessments, Payments, and Other Specified Matters), attached Exhibit B (Declaration of Conrad Jacobsen, Revenue Officer with the IRS ), or a pleading in the Court file. The alleged material facts are as follows:

1. On August 7, 2000 , Lewis Smallwood was assessed $198,723.67 by the Internal Revenue Service pursuant to Section 6672 to the Internal Revenue Code. This assessment is referred to herein as "trust fund recovery penalty."

2. On January 8, 2001 , Debtors submitted an offer in compromise to the Internal Revenue Service's Taxpayer Advocate Service seeking to compromise the trust fund recovery penalty.

3. On or about January 24, 2001 , Debtors delivered to the Taxpayer Advocate Service of the Internal Revenue Service the sum of $86,470 by cashier's check.

4. This check was accompanied by a letter from their attorney, Bruce H. Bethell, which stated:

"I recently submitted Form 656 on behalf of the captioned Taxpayer. With this letter I submitt [sic] a deposit in the amount of $86,470.00, representing the full amount of the Offer previously tendered.

"The enclosed check is tendered on the condition that the Offer in Compromise is accepted. If the Offer is rejected, the enclosed check must be returned to my attention.

"Please contact me if you have further questions regarding the enclosed."

5. The Internal Revenue Service deposited this check.

6. On February 8, 2001 , Debtors filed their petition in bankruptcy initiating these bankruptcy proceedings.

7. On March 22, 2001 , the Trustee, John T. Lee, sent a letter to the Internal Revenue Service demanding the $86,470 payment made by Debtors to the Internal Revenue Service be turned over to him as part of the bankruptcy estate.

8. On or about May 2001, the Internal Revenue Service sent to the Trustee the $86,470 payment in accord with his demand.

9. The offer in compromise submitted by the Debtors in January, 2001, has never been accepted in writing by an authorized official of the United States .

In their "Debtors' Response to United States of America's Motion For Summary Judgment" and "Debtors' Statement of Disputed Material Facts in Response to United States of America's Motion For Summary Judgment," the debtors dispute that on August 7, 2000, Lewis Smallwood was assessed $198,723.67 by the IRS because the United States failed to provide sufficient proof that a notice of balance due (the assessment) was in fact issued to the debtors. The debtors also dispute that a 60 day preliminary notice was mailed or delivered to the debtors in accordance with 26 U.S.C. §6672. ³ (2) Timing of notice.--The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days. The debtors did not submit an affidavit or any documents supporting their position, and stated in their response that "they do not dispute any of the matters stated in Mr. Jacobson's [sic] Declaration (i.e. affidavit)." The debtors did not dispute paragraphs two through nine, as set forth above. Finally, in their "Brief in Support of Debtors' Response to United States of America 's Motion For Summary Judgment," the debtors raise the defense of accord and satisfaction as to their tender of $86,470.00 to the IRS . Neither side disputes that the debtor is a person required to collect, account for, and pay over any tax imposed by the Internal Revenue Code, and who willfully failed to do so.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

IRS 's Burdens of Production and Persuasion--Trust Fund Recovery Penalty

The first issue before the Court is whether the debtor, Lewis Smallwood, was properly assessed a trust fund recovery penalty pursuant to 26 U.S.C. §6672. The debtors dispute that the debtors were properly assessed because the IRS failed to provide proof that a notice of balance due (the assessment) was issued to the debtors. However, the IRS attached to its statement of material facts in support of its motion for summary judgment a Certificate of Assessments, Payments, and Other Specified Matters showing that the trust fund recovery penalty was assessed against the debtor Lewis Smallwood on August 7, 2000 . This document shows the taxpayer's name and social security number, the type and amount of tax, and the date of assessment. It was attached to a Form 2866, Certificate of Official Record, attesting to the authenticity of the Certificate of Assessments, Payments, and Other Specified Matters. Form 2866 was under seal and bore the signature of the Field Director of the Submission Processing Unit (Austin). According to Federal Rule of Evidence 902(1), a document bearing a seal purporting to be that of the United States , and a signature purporting to be an attestation, requires no extrinsic evidence of authenticity as a condition precedent to admission. Fed. R. Evid. 902(1); see also United States v. Darveaux, 830 F.2d 124, 126 (8th Cir. 1987). Further, the Certificate of Assessments, Payments, and Other Specified Matters is presumptive proof of a valid assessment. United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1017-18 (11th Cir. 1989) (quoting United States v. Dixon [87-2 USTC ¶9485], 672 F.Supp. 503 (M.D. Ala. 1987)); see also Hefti v. Internal Revenue Service [93-2 USTC ¶50,591], 8 F.3d 1169, 1172 (7th Cir. 1993). The Court finds that the United States has established that the claimed tax liability was properly assessed against the debtors and has met its burden of production and persuasion in this regard.

The debtors also dispute that a 60 day preliminary notice was mailed or delivered to the debtors in accordance with 26 U.S.C. §6672(b). The debtors argue that absent the 60 day preliminary notice, no trust fund recovery penalty can be imposed under 26 U.S.C. §6672(a). Section 6672(b) states that no penalty shall be imposed under §6672(a) unless the taxpayers are notified that they shall be subject to an assessment of the penalty. The notification shall precede any subsequent notice and demand of the penalty by at least 60 days.

As stated above, a Certificate of Assessments, Payments, and Other Specified Matters is presumptive proof of a valid assessment. The certificate is also presumptive proof that proper notices were given to the taxpayer prior to the assessment in the manner prescribed by the Internal Revenue Code. Hopkins v. Department of Treasury, Internal Revenue Service (In re Hopkins ), 192 B.R. 760, 762 (D. Nev. 1995). This comports with the presumption of regularity discussed by the Eighth Circuit in United States v. Ahrens [76-1 USTC ¶9241], 530 F.2d 781 (8th Cir. 1976). The court stated,

"The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties."

United States v. Chemical Foundation, Inc., 272 U.S. 1, 14-15, 47 S.Ct. 1, 6, 71 L.Ed. 131 (1926). A corollary to the general rule may be stated as follows:

"*** (A)ll necessary prerequisites to the validity of official action are presumed to have been complied with, and *** where the contrary is asserted it must be affirmatively shown."

Lewis v. United States , 279 U.S. 63, 73, 49 S.Ct. 257, 260, 73 L.Ed. 615 (1929).

Aherns [76-1 USTC ¶9241], 530 F.2d at 785-86.

In the light of the above cases and the presumption of regularity, the Court finds that the United States has presented prima facie evidence that proper notice was given to the debtors prior to the assessment of the §6672(a) trust fund recovery penalty. Hence, the United States has met its burden of production and persuasion as to the first issue. ⁴

IRS 's Burdens of Production and Persuasion--Accord and Satisfaction

The second issue before the Court is whether the debtors' tender of $86,470.00 to the IRS discharged any liability in accord and satisfaction. The debtors assert that when the IRS deposited the check tendered by the debtors' attorney, the IRS accepted the offer in compromise, thereby satisfying their debt under accord and satisfaction. The IRS contends that an offer in compromise is not accepted until the taxpayer is notified in writing by an authorized official of the United States .

Settlement of tax claims is governed by 26 U.S.C. §7122. Under §7122(a), "[t]he Secretary may compromise any civil or criminal case arising under the internal revenue laws. . . ." 26 U.S.C. §7122(a). However, there are formal, exclusive procedures for settling tax claims set forth in the Code of Federal Regulations. See 26 C.F.R. §301.7122-1T (2001). First, an offer to compromise a tax liability "must be submitted according to the procedures, and in the form and manner, prescribed by the Secretary. An offer to compromise a tax liability must be signed by the taxpayer under penalty of perjury and must contain the information prescribed or requested by the Secretary." Id. §301.7122-1T(c)(1). Second, an offer to compromise is not accepted by the IRS until "the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative." Id. §301.7122-1T(d)(1). Finally, any monies submitted with an offer to compromise "are considered deposits and will not be applied to the liability until the offer is accepted unless the taxpayer provides written authorization for application of the payments. . . . If an offer is rejected, any amount tendered with the offer, including all installments paid on the offer, will be refunded, without interest." Id. §301.7122-1T(g).

In this case, the parties agree that the offer to compromise the tax liability of the debtors has never been accepted in writing by an authorized official of the United States . In fact, the Certificate of Assessments, Payments, and Other Specified Matters reflects that the debtors' offer in compromise was rejected on June 15, 2001 . Without written authorization from the IRS of acceptance of the offer to compromise, the tax liability cannot be discharged in accord and satisfaction. The United States has met its burden of production and persuasion as to the second issue.

Debtors' Burden of Production

The Court finds that the IRS has met its dual burdens of production and persuasion as to both issues, and the burden of production now shifts to the debtors to present specific facts that would show a genuine issue for trial. The debtors did not submit any affidavits, depositions, answers to interrogatories, or admissions on file to show there is a genuine issue for trial as to either issue before the Court. In fact, the debtors rely on the affidavit of Conrad Jacobsen that was submitted by the IRS .

As to the first issue, the debtors only stated in their response to the IRS 's motion that they disputed an assessment was issued to the debtors. Without evidence to the contrary, the Court finds that a valid assessment was issued to the debtors as evidenced by the Certificate of Assessments, Payments, and Other Specified Matters. Likewise, the debtors produced neither an affidavit from the debtors or any evidence to support their claim that the notice required under §6672(b) was not mailed or delivered to the debtors. Again, without evidence to the contrary, the Court finds that under the presumption of regularity, the 60 day preliminary notice required under §6672(b) was properly mailed or delivered to the debtors prior to the imposition of the §6672(a) penalty.

As to the second issue, the parties agree that the debtors' offer in compromise was never accepted in writing by the IRS as required by 26 U.S.C. §7122, and the Court finds as a matter of law that the tender of $86,470.00 by the debtors did not discharge any liability of the debtors in accord and satisfaction.

CONCLUSION

The last two sentences of Federal Rule of Civil Procedure 56(e) state,

[w]hen a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

Fed. R. Civ. P. 56(e). These sentences were added "to disapprove a line of cases allowing a party opposing summary judgment to resist a properly made motion by reference only to its pleadings." Celotex Corp., 477 U.S. at 325; see also Webb v. Lawrence Cty., 144 F.3d 1131, 1134 (8th Cir. 1998) ("non-movant cannot simply create a factual dispute; rather, there must be a genuine dispute over those facts that could actually affect the outcome of the lawsuit"). The United States has met its dual burdens of production and persuasion, and the debtors have not responded with any specific facts that would show there is a genuine issue for trial. Under Federal Rule of Civil Procedure 56, summary judgment is appropriate in this case. The Court grants the United States of America 's motion for summary judgment, and the debtors' objection to the Department of Treasury/Internal Revenue Service's claim in the amount of $207,699.46 is overruled.

IT IS SO ORDERED.

¹ Under Fed R. Bankr. P. 3004, if a creditor fails to file a proof of claim, the debtor may do so in the name of the creditor. If the creditor later files a proof of claim, its proof of claim supercedes the proof of claim filed by the debtor on behalf of the creditor.

² Fed R. Civ. P. 56 is made applicable in contested matters pursuant to Fed. R. Bankr. P. 9014, which states, in part, that Fed. R. Bankr. P. 7056 applies in contested matters. Fed. R. Bankr. P. 7056 states that Fed. R. Civ. P. 56 applies in adversary proceedings, and then sets forth Fed. R. Civ. P. 56.

³ 26 U.S.C. §6672 states, in relevant part:

(a) General rule.--Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

(b) Preliminary notice requirement.--

(1) In general.--No penalty shall be imposed under subsection

(a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.

⁴ On November 5, 2001, in reply to the debtors' response to the United States 's motion for summary judgment, the IRS submitted an additional affidavit and attached Domestic Return Receipt signed by Ms. Milton Smallwood on January 4, 2000, as additional evidence that notice of the assessment was given to the debtors. The Court did not consider this additional affidavit in finding that the United States met its burden of production and persuasion

 

 

[2002-1 USTC ¶50,117] Dorothea C. Asbury, Plaintiff v. Internal Revenue Service, Defendant

U.S. District Court, West. Dist. Pa., CIV . 01-555, 11/2/2001

[Code Sec. 7122 ]

Tax levies and collection: Settlement offers: Legal obligation to accept or reject offer in compromise: Discretionary authority to accept or reject.--A proposed tax levy and collection action against an individual was not barred because the government failed to entertain a settlement or other compromise of her liability. The taxpayer failed to assert any Internal Revenue Code provision that establishes the government's legal obligation to compromise its action against her. The government has discretion to accept or reject any offer in compromise of a tax liability but is not legally obligated to even consider such an offer.

ORDER OF COURT

LANCASTER, Judge:

This is an appeal from a proposed tax levy and collection under the Internal Revenue Code. Plaintiff appeals on the basis that the defendant "has abused its discretion and has otherwise acted improperly in refusing to entertain a settlement or other compromise of its proposed tax levy and collection under Internal Revenue Code, section 6320 et seq." Complaint ¶5. By this action, plaintiff conveys the impression that the IRS has a legal obligation to compromise its action with her. Plaintiff has failed to cite to any code provision or regulation in support of this position.

Moreover, the only mechanism by which the IRS may compromise a tax case before referral to the Department of Justice is pursuant to 26 U.S.C. §7122. Section 7122 clearly states that the Secretary may compromise any civil or criminal tax case prior to referral to the Department of Justice. The decision to accept or reject a compromise offer, however, is discretionary and cannot "be compelled by any action." Addington v. U.S. [99-1 USTC ¶50,441], 75 F.Supp.2d 520, 524 (S.D. W. Va. 1999); see also Carroll v. IRS [64-2 USTC ¶9687], 14 A.F.T.R. 2d (RIA) 5564 (E.D.N.Y. 1964).

Accordingly, plaintiff fails to state a claim for which relief can be granted. Defendant's motion to dismiss is granted.

BY THE COURT

 

[2001-1 USTC ¶50,350] Inverworld, Ltd., Plaintiff v. United States of America , Defendant

U.S. District Court, D.C., Civ. 93-1704-LFO, Civ. 93-0544-LFO, 2/9/2001, 2001 U.S. Dist. LEXIS 3087.

[Code Sec. 7122 ]

Compromises: Acceptance of offer: Refund suit: Foreign corporation: Withholding tax.--A Cayman Islands corporation's suit for refund of federal withholding taxes was dismissed, with prejudice, in accordance with a closing agreement with the government. A letter sent by the taxpayer that purported to modify its settlement offer to include an offer-in-compromise with regard to tax years not at issue was ineffective. The taxpayer presented no evidence that the proper parties received the letter before the government accepted its offer.

Mark Jerome Friedman, Piper, Marbury, Rudnick & Wolfe, LLP, Baltimore, Md., T Barry Kingham, Curtis, Mallet-Prevost, Colt & Mosle, Washington, D.C., Turner P. Smith, Curtis, Mallet-Prevost, Colt & Mosle, New York, N.Y., for plaintiff. Stuart David Gibson, David A. Hubbert, Department of Justice, Washington , D.C. 20530 , for defendant.

MEMORANDUM

OBERDORFER, District Judge:

Plaintiff InverWorld, Ltd. is a financial services corporation located in the Cayman Islands . Plaintiff brought these actions to recover refunds of federal withholding taxes collected by the IRS for calendar year 1989, (Civil Action Number 93-0544), and income taxes, including penalties and interest, collected for the fiscal years ended June 30, 1984 through 1986, (Civil Action Number 93-1704). Both cases were stayed several years ago pending a decision in the United States Tax Court, which was expected to resolve several related substantive tax issues. In June 1996, the Tax Court held that InverWorld was not a "withholding agent," although it ultimately ruled against InverWorld on other grounds. InverWorld's motion for reconsideration was denied in May 1997, and a monetary judgment was entered by the Tax Court on February 25, 1998. Appeals of the Tax Court decisions are pending in the Fifth and D.C. Circuits.

Over the last several years, the parties have engaged in settlement discussions and reported regularly on the progress of those discussions in jointly-submitted consent orders, which were entered by the Court. Counsel for both parties signed or gave permission to opposing counsel to sign each of the orders. ¹ In consent orders filed last year, counsel reported that on February 2, 2000, plaintiff's counsel sent a letter to the Department of Justice, Tax Division, offering to settle both of the cases before the Court as well as claims arising from the cases litigated in the United States Tax Court. See October 3, 2000 Consent Order, Appendix 1; March 28, 2000 Consent Order, Appendix 2, February 2, 2000 Letter from Turner Smith to Stuart Gibson and Joan Oppenheimer, Appendix 3. The plaintiff's offer included the following terms:

(1) InverWorld will dismiss with prejudice its claims in the District Court refund litigation to any of the funds still in the hands of the Internal Revenue Service obtained in the March 1992 seizure from company bank accounts. That would leave the government with $ 10,135,115 plus interest accrued from March 1992.

(2) In exchange, the Internal Revenue Service would waive InverWorld, Ltd.'s Tax Court deficiencies, penalties and interest. The IRS would further forgo any collection efforts directed at any affiliated companies, officers, directors or other individuals with respect to InverWorld Ltd.'s Tax Court deficiencies.

(3) InverWorld Ltd. would abandon the appeal pending in the D.C. Circuit Court of Appeals. The Tax Court's Memorandum Opinion and Findings of Fact would thereby remain undisturbed.

February 2, 2000 Letter from Turner Smith to Stuart Gibson and Joan Oppenheimer, Appendix 3.

Because of the magnitude of the settlement, approval by the Associate Attorney General was required to effect a formal acceptance by the United States . Over the next several months, the settlement proposal made its way up the chain of command. In a Consent Order filed October 3, 2000, the parties reported that they anticipated the remainder of the review process would be completed by December 10, 2000:

Counsel for the parties report that on February 2, 2000, the plaintiff submitted a written offer to settle these two related cases, and the related cases which were litigated in the United States Tax Court, and are now pending on appeal in the United States Court of Appeal for the Fifth and D.C. Circuits. . . .

The parties anticipate that the remainder of the review process will be completed within 60 days.

October 3, 2000 Consent Order, Appendix 1.

On December 6, 2000, the proposal was accepted by the Associate Attorney General. In a letter dated December 8, 2000, the Acting Assistant Attorney General, Paula M. Junghans, notified plaintiff's counsel that the February 2, 2000 offer had been accepted:

This refers to your offer dated February 2, 2000, to settle the above-titled cases on the following basis:

1) InverWorld, Ltd. will dismiss with prejudice its claims in the district court refund litigation, and the Government would retain $10,135,115 obtained by levy on March 2, 1992;

2) The Internal Revenue Service will waive any further collection of the Tax Court deficiencies, including penalties and interest, against InverWorld, Ltd., affiliated companies, officers, directors, or other individuals;

3) Inverworld, Ltd. will dismiss with prejudice its appeals to the D.C. Circuit Court of Appeals.

This is to advise you that this offer has been accepted on behalf of the Attorney General.

Our trial attorney in the district court case and our appellate attorney in the District of Columbia Circuit Court of Appeals cases will be in touch with you concerning the filing of appropriate stipulations for dismissal in those cases.

December 8, 2000 letter from Acting Assistant Attorney General, Paula M. Junghans to Turner P. Smith, Appendix, 4.

The parties notified the Court of the acceptance in a consent order which was submitted to and entered by the Court on December 8, 2000. The order stated:

Counsel for the parties have previously reported that on February 2, 2000 , the plaintiff submitted a written offer to settle these two related cases, and the related cases which were litigated in the United States Tax Court, and are now pending on appeal in the United States Court of Appeal for the Fifth and D.C. Circuits. . . .

Counsel report that on December 6, 2000 the Associate Attorney General decided to accept the settlement offer. Counsel for the parties are preparing the necessary documents to effect the settlement. They expect to file a Stipulation of Dismissal within the next two weeks.

December 8, 2000 Consent Order, Appendix 5. A Stipulation of Dismissal has not been filed.

The United States now moves to dismiss these actions, contending that plaintiff submitted a settlement proposal, which the United States accepted. Consequently, there is no longer any case or controversy pending between the parties for the claims at issue in these lawsuits.

Federal courts are courts of limited jurisdiction with authority over only cases and controversies as described in Article III of the Constitution. "It is incumbent upon federal courts trial and appellate to constantly examine the basis of jurisdiction." Save the Bay, Inc. v. U.S. Army et al., 639 F.2d 1100, 1102 (5th Cir. 1981); Louisville & Nashville R.R. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908). This duty has been set forth in Federal Rule of Civil Procedure 12(h)(3), which requires: "Whenever it appears by suggestion of the parties or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action." Defendant has suggested the jurisdictional issue. Based on the undisputed facts, it appears that the parties have settled the tax liability issues before this Court. Therefore, no case or controversy remains, and this action must be dismissed.

Plaintiff contends that jurisdiction is proper because the parties never settled the case. Specifically, plaintiff asserts that it withdrew or modified its February 2, 2000 settlement proposal in a September 26, 2000 letter sent by its counsel to T. Richard Sealy, III , an Internal Revenue Service (" IRS ") attorney in Austin , Texas and copied to Les Pruski of the IRS in San Antonio , Texas . At that time, the IRS was auditing plaintiff for fiscal years 1990-1992, years not at issue in this litigation, and not referred to the Department of Justice. Plaintiff noted in its letter that it had "decided to make an Offer-in-Compromise for those final tax years" based on "doubt as to collectibility." ² September 26, 2000 letter from Turner Smith to T. Richard Sealy, Appendix 6. In the IRS Form 656 attached to its letter, plaintiff proposed to settle the 1990-1992 tax years by including those years "in an Offer-in-Compromise previously filed with the Internal Revenue Service governing tax years 1984-1989 (subject to an appeal from a decision of the Tax Court)." See September 26, 2000 letter and attachment from Turner Smith to T. Richard Sealy, Appendix 6. Neither plaintiff, nor its counsel, contends that it sent this letter to the Department of Justice, Tax Division attorneys handling the tax years at issue here.

Contrary to plaintiff's assertion, the September 26, 2000 letter did not effectively modify or revoke the February 2, 2000 offer-in-compromise. A withdrawal of an offer is not effective unless it reaches the offeree prior to the defendant's acceptance of the offer. See Tayloe v. Ins. Co., 50 U.S. (9 How.) 390, 13 L.Ed. 187 (1850). Revocation of an offer "is not effective unless it has been communicated to the offeree. It is not enough merely to mail a notice of revocation, properly addressed to the offeree; the power of revocation will remain unaffected until the letter has been received." 1 Corbin on Contracts P. 2.19, 224 (Revised Ed. 1993). Here, plaintiff failed to address the letter to the offeree. Plaintiff has presented no evidence that it sent the September 26, 2000 letter to the Department of Justice, or that the Department of Justice received the letter, prior to defendant's December 6, 2000 acceptance of the February 2, 2000 offer. If plaintiff meant the September 26 letter as a modification or revocation of its February 2 offer to settle, it should have made certain that the letter reached the attorneys at the Department of Justice, Tax Division.

In addition, the September 26, 2000 letter refers to a possible settlement of plaintiff's tax liability for years not at issue in this litigation. The IRS had not referred these years to the Department of Justice, therefore, the IRS had authority to settle any disputes related to them without action by the Department of Justice. Any such settlement by the IRS would not disturb the offer then-pending before the Department of Justice.

Finally, the Consent Orders never mentioned any revocation or modification of the February 2, 2000 settlement proposal. The Consent Orders, including the two filed after September 26, 2000, refer only to the February 2, 2000 proposal without mention of any modification or revocation. Had plaintiff meant its September 26, 2000 letter to the IRS attorney to be a revocation, its counsel should have mentioned it in the Consent Orders. Indeed, plaintiff, through its counsel, conceded in the December 8, 2000 Consent Order that the United States had accepted its February 2, 2000 settlement proposal. ³ See December 8, 2000 Consent Order, Appendix 5.

It could be argued that entry of a formal Stipulation is a necessary predicate to an order of dismissal. However, entry of a Stipulation would be a mere formality. The lack of one cannot create a case or controversy where, as here, there is none. ⁴

There being a settlement of the tax liability issues before this Court, no case or controversy presently exists. Accordingly, an accompanying order dismisses these actions because the Court no longer has jurisdiction over them.

For the reasons stated in an accompanying memorandum, there is no longer any case or controversy before the Court. Therefore, this Court lacks subject matter jurisdiction over these cases. Accordingly, it is this 12th day of February 2001 hereby

ORDERED: that the defendant's Motion to Dismiss (Civil Action No. 93-0544, Dkt. 78) is GRANTED, and it is further

ORDERED: that these cases are hereby DISMISSED with prejudice.

¹ Each of the Consent Orders were signed by Stuart Gibson, counsel for the United States Department of Justice, Tax Division, and by Mr. Gibson for Inverworld's counsel, Turner Smith. Mr. Gibson states that, in preparing the Consent Orders, he would send a copy, by facsimile, to Mr. Smith in New York . Mr. Smith would review the draft and propose changes, if necessary. After agreeing on the Consent Order, Mr. Smith would advise Mr. Gibson that he was authorized to sign the Consent Order on his behalf, and Mr. Gibson would sign the Consent Order, indicating that he signed it with Mr. Smith's permission. See Declaration of Stuart Gibson, p. 2. Mr. Smith has never asserted that he did not consent to allow Mr. Gibson to sign the Consent Orders for him. Nor has he asserted that he did not agree with the content of the Consent Orders.

² Doubt as to collectibility is defined on Form 656 as "I have insufficient assets and income to pay the full amount." Submitting an offer for this reason requires the submission of a completed Form 433 Statement of Financial Condition, which plaintiff also attached to its letter.

³ On the eve of the status conference on January 11, 2001, plaintiff attempted to replace the counsel who transmitted the (now) accepted offer through channels to the Attorney General. The offer was made for the plaintiff, not his counsel, and it is bound by the Attorney General's acceptance.

⁴ The parties have not cited, and independent research has not discovered, any authority to the co

 

[98-1 USTC ¶50,417] United States of America , Plaintiff v. Eleanor Fay Ressler, Paul Eugene Ressler, Cullman Savings and Loan Association, and State of Alabama Department of Revenue, Defendants

U.S. District Court, No. Dist. Ala., Northeastern Div., Civ. CV-96-S-2464-NE, 3/16/98

[Code Sec. 6321 ]

Lien for taxes: Priority: State liens: Perfection of liens: Assessment.--Federal tax liens were superior to state (Alabama) tax liens, even though the state had notified the taxpayer of her state deficiencies before the federal deficiencies were assessed. The federal assessments themselves perfected the federal liens, while the state notices of deficiency were simply the start of a multi-step process to determine and collect the state deficiencies.

[Code Sec. 6323 ]

Lien for taxes: Priority: State liens: Perfection of liens: Assessment: Judgment creditor.--Federal tax liens were superior to state ( Alabama ) tax liens, even though the state had notified the taxpayer of her state deficiencies before the federal deficiencies were assessed. The federal assessments themselves perfected the federal liens, while the state notices of deficiency were simply the start of a multi-step process to determine and collect the state deficiencies. The state also did not qualify as a judgment creditor superior to the federal government. Although the state had determined its final assessments and recorded its liens before the federal liens were recorded, it had not reduced its liens to judgment in a court of record.

[Code Sec. 7122 ]

Settlement: Offer in compromise: Acceptance: Evidence.--The co-owner of property foreclosed by a federal tax lien failed to show that he and the government had reached a settlement to release the property from the lien. There was no evidence that the government accepted his offer in compromise..

MEMORANDUM OPINION

SMITH, District Judge:

The United States filed this action on behalf of the Internal Revenue Service to foreclose its liens upon two parcels of real property jointly owned by defendants Paul Ressler and the State of Alabama . The State of Alabama executed against the same property and obtained a Sheriff's Deed on December 16, 1994, foreclosing the undivided interest of defendant Eleanor Ressler in the real property which is the subject of this case.

The federal and state tax liens both arise from tax years 1988 through 1992. Tax returns for those years were received by the State of Alabama and the Internal Revenue Service at approximately the same time. The State recorded its lien before the IRS .

I. BACKGROUND

This case involves a conflict between a federal tax lien arising under the provisions of 26 U.S.C. §§6321 and 6322, and, an antecedent state tax lien arising under Alabama Code §40-29-20.

Section 6321 of the federal statute provides that:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321. Section 6322 adds:

[T]he lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.

Alabama Code §40-29-20 is substantially similar to 26 U.S.C. §6321, and provides that:

If any person liable to pay any tax . . . neglects or refuses to pay the same, the amount . . . shall be a lien in favor of the State of Alabama upon all property and rights to property, whether real or personal, tangible or intangible, belonging to such person.

Following a pretrial conference, the parties entered into the following stipulations:

1. Prior to 1990, defendants Eleanor Ressler and Paul Ressler jointly acquired two parcels of real property in Cullman County , Alabama . The first parcel was approximately 31 acres and identified with a street address of 1104 County Road 998. The second parcel was approximately one acre and identified with a street address of 1121 County Road 998.

2. Cullman Savings Bank has mortgage lien against the 31-acre parcel which is senior to all other liens against that parcel, including the federal and state tax liens.

3. Federal income taxes were assessed against Eleanor Ressler based on tax returns filed with the Internal Revenue Service, on the dates and for the amounts stated below:

                                                                 Unpaid

                                  Date Return     Date Tax     Amount of

YEAR                               Received       Assessed     Assessment

1988 ..........................  June 16, 1993 August 16, 1993 $30,984.40

1989 ..........................  June 16, 1993 August 23, 1993 $36,488.69

1990 ..........................  June 16, 1993 August 30, 1993 $25,566.14

1991 ..........................  June 16, 1993 August 30, 1993 $23,074.22

1992 ..........................  June 14, 1993   July 19, 1993 \$23,022.11

 

4. On July 30, 1993, the State of Alabama entered and mailed Notices of Tax Determination and Demand for Payment to Eleanor Ressler for state income tax liabilities for the years 1988 and 1989. On August 3, 1993, the State of Alabama entered and mailed Notices of Tax Determination and Demand for Payment to Eleanor Ressler for state income tax liabilities for the years 1990, 1991, and 1992. The state income tax liabilities approximated $17,000.

5. The State of Alabama made preliminary income tax assessments against Eleanor Ressler for those same tax years for an adjustment to the admitted tax liabilities to the State of Alabama on October 22, 1993, which totaled approximately $17,000.

6. The State of Alabama made five final income tax assessments for those same tax years for an adjustment to the admitted tax liabilities to the State of Alabama on January 20, 1994, which totaled approximately $17,000.

7. On February 11, 1994, the State of Alabama filed a Notice of Lien for Taxes in the Office of the Judge of Probate, Cullman Country , Alabama for the state income tax liabilities of Eleanor Ressler for the three years 1986 to 1992.

8. Or May 13, 1994, the Internal Revenue Service filed a Notice of Federal Tax Lien in the Office of the Judge of Probate, Cullman County , Alabama for the federal income tax liabilities of Eleanor Ressler for the years 1988 to 1992.

9. A Sheriff's Deed concerning the two subject parcels was executed in favor of the State of Alabama on December 16, 1994 based on a judgment execution by the State of Alabama against the remaining interest of Eleanor Ressler. The Sheriff's Deed was signed on June 13, 1995, and recorded in Cullman County Probate Court on January 17, 1997. The State of Alabama did not provide notice to the Internal Revenue Service of the described execution and deed. The Sheriff's Deed did not alter or foreclose any prior interests, liens, or levies of either the State of Alabama or the Internal Revenue Service.

10. The United States filed this foreclosure action on September 19, 1996 and filed a Notice of Lis Pendens with the Office of the Judge of Probate, Cullman County , Alabama on or about the same day.

(Stipulated Facts filed November 12, 1997 : Document No. 22.)

The action presently is before the court on the United States ' motion for partial summary judgment and defendant Paul Ressler's motion to compel settlement. Upon consideration of the pleadings, briefs, and evidentiary submissions, this court concludes the government's motion is due to be granted and defendant's motion denied.

II. GOVERNMENT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

The United States moves for partial summary judgment on the issue of the priority of the federal and state tax liens. Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment shall be granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact that the moving party is entitled to judgment as a matter of law." "An issue of fact is 'material' if it is a legal element of the claim under the applicable substantive law which might affect the outcome of the case." Allen v. Tyson Foods, Inc., 121 F.2d 642, 646 (11th Cir. 1997) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986)). "It is 'genuine' if the record taken as a whole could lead a rational trier of fact to find for the nonmoving party." Id.

The moving party has the initial burden of showing the absence of a genuine issue as to any material fact. Id. In determining whether this burden is met, the court must view the evidence "and all factual inferences arising from it in the light most favorable to the nonmoving party." Id. (quoting Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L. Ed. 2d 142 (1970)). Once the movant's initial burden is met, the burden shifts to the nonmoving party to point out "specific facts showing that there is a genuine issue for trial." Id. (quoting Fed. R. Civ. P. 56(e)). In meeting its burden, the nonmoving party may "avail itself of all facts and justifiable inferences in the record taken as a whole." Id. (quoting Tipton v. Bergrohr GMBH-Siegen, 965 F.2d 994, 998 (11th Cir. 1992) (citation omitted)). "The evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor." Allen, 121 F.3d at 646 (quoting Tipton, 965 F.2d at 999 (citations omitted)). Even so, a "mere 'scintilla' of evidence supporting the [nonmoving] party's position will not suffice; there must be enough of a showing that the jury could reasonably find for that party." Id. (quoting Walker v. Darby, 911 F.2d 1573, 1577 (11th Cir.1990)).

Thus, "[t]he basic issue before the court on a motion for summary judgment is 'whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.' " Id. (quoting Anderson v. Liberty Lobby, Inc., 447 U.S. 242, 251, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986)).

III . TAX LIEN PRIORITY

Federal Tax liens do not automatically acquire priority over all other liens. United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449, 113 S.Ct. 1526, 1528, 123 L.Ed.2d 128 (1993). Rather, the priority of federal tax liens in relation to competing liens is a federal question, determined by application of the common law rule of "the first in times is the first in right." United States v. New York Britain [54-1 USTC ¶9191], 367 U.S. 81, 85, 74 S.Ct. 367, 370, 98 L. Ed. 520 (1954); see also United States v. Acri [55-1 USTC ¶9138], 348 U.S. 211, 213, 75 S.Ct. 239, 241, 99 L. Ed. 264 (1955) (priority of federal tax liens is "always a federal question to be determined finally by the federal courts"). A lien which is first in time will be deemed first in right if, but only if, it is "perfected" under federal law. McDermott [93-1 USTC ¶50,164], 507 U.S. at 449, 113 S.Ct. at 1528 ("Our cases deem a competing state lien to be in existence for 'first in time' purposes only when it has been 'perfected'. . . .") (citing New Britain [54-1 USTC ¶9191], 347 U.S. at 84, 74 S.Ct. at 369). The first question this court must answer then is, which liens were perfected first?

A. Which Liens Were Perfected First?

The court's analysis depends in part upon the dates on which various events occurred, and the legal significance of those events. The following chart summarizes relevant information.

     Event         1988      1989      1990      1991      1992

Federal Tax

Returns

Received ......   
6/16/93
   
6/16/93
   
6/16/93
   
6/16/93
   
6/14/93
 2 

State's Motion

& Demand

Letters .......   
7/30/93
   
7/30/93
    
8/3/93
    
8/3/93
    
8/3/93

Federal Taxes

Assessed ......   
8/16/93
   
8/23/93
   
8/30/93
   
8/30/93
   
7/19/93
 3 

State's

Preliminary

Assessment ....  
10/22/93
  
10/22/93
  
10/22/93
  
10/22/93
  
10/22/93

State's Final

Assessment ....   
1/20/94
   
1/20/94
   
1/20/94
   
1/20/94
   
1/20/94

State's Notice

of Lien Filed .   
2/11/94
   
2/11/94
   
2/11/94
   
2/11/94
   
2/11/94

IRS
's Notice of

Lien Filed ....   
5/13/94
   
5/13/94
   
5/13/94
   
5/13/94
   
5/13/94

Sheriff's Deed

Executed ......  
12/16/94
  
12/16/94
  
12/16/94
  
12/16/94
  
12/16/94

1. Perfection of federal liens

Federal tax liens need not be filed to gain priority over competing interests: rather, they are perfected at the time taxes are assessed. 26 U.S.C. §6322 ("the lien imposed by section 6321 shall arise at the time assessment is made"); see also, e.g., McDermott [93-1 USTC ¶50,164], 507 U.S. at 448, 113 S.Ct. at 1527 ("Upon that assessment", the law created a lien in favor of the United States on all real and personal property belonging to the [taxpayer]") (emphasis added). Thus, only events which occurred before the federal tax assessments could act to prime the resulting federal liens.

Here, federal taxes were assessed against the Resslers for the years 1988 through 1992, respectively, on the following dates:

1988 ......................................................  August 16, 1993

1989 ......................................................  August 23, 1993

1990 ......................................................  August 30, 1993

1991 ......................................................  August 30, 1993

1992 ......................................................    July 19, 1993

(Stipulated Facts at 2. §3.) IRS assessments are presumptively correct. Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933). Moreover, the State of Alabama stipulates that the assessment dates for the years 1988 through 1991 are accurate. Accordingly, the court accepts the assessment dates for those years as the dates on which federal liens arising from those assessments were perfected.

The State of Alabama refused to stipulate to the accuracy of the 1992 assessment date provided by the IRS , however. The state argues that, because all the returns were mailed to the IRS on the same date and in the same envelope, the 1992 assessment could not have been made more than one month before the others, as claimed by the United States . Evidence must be construed in the light most favorable to the non-moving party on a motion for summary judgment. Therefore, the court rejects the proffered date for the 1992 assessment. Instead, the court assumes that the 1992 federal tax assessments occurred after the state's notice and demand letter was mailed, consistent with the other tax years. ⁴ In any event, that curious discrepancy does not change the result in this case. The state liens must have been perfected before the federal tax assessments arose if they are to prime the federal liens. Only one event could possibly have accomplished that: the mailing of the state's notice and demand letters.

2. Perfection of state liens

The State of Alabama mailed "Notices of Tax Determination and Demands for Payment" for tax years 1988 and 1989 to Eleanor Ressler on July 30, 1993 , and, for tax years 1990, 1991, and 1992 on August 3, 1993 . Both actions occurred before federal taxes for those years were assessed. ⁵ No other action by the State occurred before the last federal tax assessment was made on August 30, 1993.

Therefore, the perfection question reduces to whether Alabama 's liens were perfected at the time of its notice and demand letters. If so, the State's liens prevail. If not, the federal liens are superior.

The rule for perfection of non-federal liens is different than the rule for federal liens. Non-federal liens are "perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." New Britain [54-1 USTC ¶9191], 347 U.S. at 84, 74 S.Ct. at 369.

Most courts also impose an additional requirement: summary enforceability. Monica Fuel, Inc. v. Internal Revenue Service [95-2 USTC ¶50,477], 56 F.3d 508, 512 (3d Cir. 1995) ("We agree that a right to enforce a lien summarily (that is, without a judicial proceeding) is a requirement of choateness in addition to the tripartite rule of fixed identity, property and amount"); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990) ("[T]he state lien holder must show that he had the right to enforce the lien at some time prior to the attachment of the federal lien"), cert. denied, 501 U.S. 1212, 111 S.Ct. 2815, 115 L. Ed.2d 987 (1991); T. H. Rogers Lumber Co. v. Apel, 468 F.2d 14, 18 (10th Cir. 1972) ("This requirement can be met only if the claim is final; that is; not subject to a judicial contest as to its amount, and also only if it is enforceable by summary proceedings") [citations omitted]; United States v. Utah State Tax Comm'n, 642 F. Supp. 8, 10 (D. Utah 1983) (nonfederal lien must be summarily enforceable and not have conditions that affect its viability); cf. Burrus v. Oklahoma Tax Commission, 59 F. 3d 147 149 (10th Cir. 1995) (explaining its holding in T. H. Rogers to mean "that at the time of enforcement, whenever that should occur, a lienholder may satisfy its debt by resort to a summary proceeding because the lien will be both choate and perfected") see also United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. at 453 n.5, 113 S.Ct. at 1530 n.5 (lien on property not yet owned was not perfected because it was not definite, contingent, and summarily enforceable at time of filing).

The United States does not dispute that, at the time of the state's notice and demand letters, the identity of the lienors and the property subject to the liens were established. The two questions presented here are: whether the amount of the state's liens was established at the time of notice and demand; and whether the state's liens were summarily enforceable at the time of notice and demand.

(a) Was the amount of the lien established?

The Supreme Court instructs that the proper focus of such an inquiry is on whether the state's liens were free from "contingencies" that would prevent execution at the relevant time. See Security Trust & Savings Bank, 340 U.S. at 50, 71 S.Ct. at 113. In Security Trust, the Supreme Court refused to accord priority to an attachment lien not yet reduced to judgment, because "[n]umerous contingencies might arise that would prevent the attachment lien from ever becoming perfected by a judgment awarded and recorded. Thus, the attachment lien is contingent or inchoate--merely a lis pendens notice that a right to perfect a lien exists." Id.

A review of the statutory two-step procedure under which Alabama tax authorities enforce that State's tax liens reveals that the amounts of such liens are not fixed at the time a notice and demand letter is issued. Instead, that letter begins an arms-length negotiation process between the taxpayer and the Alabama Department of Revenue designed to uncover the actual amount of taxes owed. A taxpayer who does not pay the requested amount upon receipt of a notice and demand letter will receive a preliminary assessment of his tax liability, as determined by the Department of Revenue. The taxpayer has a 30 day period within which to object to that assessment. Upon timely objection to a preliminary assessment, the department

shall schedule a conference with the taxpayer for the purpose of allowing the taxpayer and the department to present their respective positions, discuss any omissions or errors, and to attempt to agree upon any changes or modifications to their respective positions.

Alabama Code §40-2A-7(b)(4)(a). A final assessment is made only after those objections are resolved. ⁶ Id. at 7(b)(4)(b). Hence, any assessment made before a taxpayer has had an opportunity to effect such "changes or modifications" cannot be said to have fixed the amount of the lien for purposes of priority. Under this statutory scheme, the State's liens clearly were subject to "[n]umerous contingencies" of the sort described in Security Trust at the time the notice and demand letters were sent.

Indeed, the State characterizes its preliminary assessment as a complaint, and the final assessment as a judgment. (State of Alabama , Depart of Revenue's Brief in Opposition to the Motion for Partial Summary Judgment of the Internal Revenue Service at 6 and 9.) such characterizations support a finding that the State's notice and demand letter was nothing more than a first estimate of the Resslers' tax deficiency, subject to "changes or modifications" upon timely, valid objections by the Resslers. ⁷

(b) Were the liens summarily enforceable?

In United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964), the Supreme Court concluded that a state tax lien primed competing federal tax liens because it was "summarily enforceable" upon assessment and demand. Vermont [64-2 USTC ¶9520], 377 U.S. at 359 and n. 12, 84 S.Ct. at 1272-73 and n. 12 ("it is as true of Vermont's lien here as it was of the federal lien in New Britain that 'The assessment is given the force of a judgment, and if the amount assessed is not paid when due, administrative officials may seize the debtor's property to satisfy the debt' "). The State of Alabama glosses over this significant distinction by asserting that the summary enforceability of the Vermont lien "was not basic to [the Court's] decision." [State of Alabama , Department of Revenue's Brief in Opposition at 7.] Yet, the distinction is fundamental, because Alabama law--contrary to the State's assertion--does not permit summary enforcement of tax liens. Rather, the statute cited by the State permits enforcement only after the appeals period following a final assessment has expired, not before. See Alabama Code 40-23-23(a) ("If any person liable to pay any final assessment of tax neglects or refuses to pay the same or fails to appeal such final assessment within 30 days, it shall be lawful for the Commissioner to collect such tax [by] levy upon all property . . . belonging to such person") (emphasis supplied). Final assessment in this case occurred on January 20, 1994. Thus, the state's power to summarily enforce its lien arrived 30 days later, six months too late to prime the federal liens.

In summary, Alabama 's tax liens were not perfected upon notice and demand for two reasons. First, the amounts of the liens were subject to revision upon timely objection by the Resslers, and thus were not fixed at the time notice and demand was sent. Second, Alabama tax authorities had no power to enforce liens against the Resslers until 30 days after the State had issued a final assessment of their tax liability, an event which occurred six months after federal taxes were assessed. Accordingly, Alabama 's liens were not "first in time" for purposes of priority over federal liens.

That determination does not end the court's inquiry, however, because there are limited statutory exceptions to the common law rule. The second question before the court is whether the State tax liens fall into one of the categories of liens enumerated it 26 U.S.C. §6323(a), which are exempt from the "first in time, first in right" rule.

B. Is the State a "judgment lien creditor"?

Title 26, United States Code, Section 6323(a) creates certain exceptions to the "first in time, first in right" rule of priority:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

Under this provision, federal liens which have not yet been filed cannot prime certain non-federal liens. The State contends it is entitled to the protection of §6323 as a judgment lien creditor by virtue of either its final assessment on January 20, 1994, or its notice of lien filed on February 11, 1994. Both events occurred before the IRS recorded its liens in Cullman County Probate Court on May 13, 1994. ⁸ Thus, this court must determine whether those acts were sufficient to bring the State's liens under §6323's protective wing. ⁹

Although the term, "judgment lien creditor," is not defined in the statute, the Supreme Court has interpreted it "in the usual, conventional sense of a judgment of a court of record. . . ." United States v. Gilbert Associates, Inc. [53-1 USTC ¶9291], 345 U.S. 361, 364, 73 S.Ct. 701, 703, 97 L.Ed. 1071 (1953). In Gilbert Associates, the Court considered "whether the Town of Walpole, New Hampshire, or the Federal Government has the prior right to a fund in the hands of a state court receiver of the respondent-taxpayer, an insolvent corporation." Gilbert Associates [53-1 USTC ¶9291], 345 U.S. at 362, 73 S.Ct. at 702. The Supreme Court of New Hampshire held that the town's assessments for ad valorem taxes, which preceded filing of the federal government's tax liens, were "in the nature of a judgment" under the law of New Hampshire, making the town a judgment creditor under 26 U.S.C. §3672; the predecessor statute to §6323. The United States Supreme Court reversed, holding that, although "[t]he state is free to give its own interpretation for the purpose of its own internal administration, . . . the meaning of a federal statute is for this Court to decide." Id. at 363, [53-1 USTC ¶9291], 73 S.Ct. at 703. The Court elaborated:

A cardinal principle of Congress in its tax scheme is uniformity, as far as may be. Therefore, a "judgment creditor" should have the same application in all the states. In this instance, we think Congress used the words "judgment creditor" in §3672 [now §6323] in the usual, conventional sense of a judgment of a court of record, since all states have such courts. We do not think Congress had in mind the action of taxing authorities who may be acting judicially as in New Hampshire and some other states, where the end result is something "in the nature of a judgment, while in other states the taxing authorities act quasi-judicially and are considered administrative bodies."

Id. at 364, [53-1 USTC ¶9291], 73 S.Ct. at 703-04. ¹⁰ Thus, the Court concluded that "whatever the tax proceedings of the Town of Walpole may amount to for the purpose of the State of New Hampshire, they were not such proceedings as resulted in making the Town a judgment creditor within the meaning of §3672 [now §6323]." Id. at 365, [53-1 USTC ¶9291], 73 S.Ct. at 704. This court finds that analysis persuasive in the present case.

The principle of "uniformity" would be undermined if each state could decide that its particular procedures for assessing and recovering past-due taxes rendered it a judgment lien creditor entitled to priority even without a conventional court judgment. That is essentially what the State of Alabama is asking this court to do--deny priority to federal liens which arose and were recorded before the State reduced its liens to judgment. Admittedly, the State issued its final assessment and recorded its liens before the IRS recorded its liens. The State did not, however, reduce its liens to judgment in a court of record before the IRS recorded its liens. Under the holding of Gilbert, such a judgment is necessary to garner the protection of §6323.

Accordingly, the State's reliance on State v. Woodroof, 46 So. 2d 553 ( Ala. 1950), and the Department of Revenue's view that a final assessment is "like a judgment," are unavailing. Neither the Alabama Supreme Court's nor the Department of Revenue's internal understanding of the nature of the State's tax recovery procedures is dispositive on this federal question, particularly in light of the Supreme Court's contrary holding in Gilbert Associates.

Additionally, United States Department of Treasury regulations interpreting the phrase, "judgment lien creditor," instruct that: "The term 'judgment' does not include the determination of a quasi-judicial body or of an individual acting in a quasi-judicial capacity such as the action of State taxing authorities." 26 C.F.R. §301.6323(h)-1(g). The Supreme Court has long recognized that an agency's interpretation of a statute it is charged with enforcing should be given "considerable weight," and should not be disturbed unless it appears from the statute or legislative history that Congress intended a different construction. Chevron U.S.A. , Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). No contrary intent is evident.

Although the State claims that the Supreme Court's decision in United States v. Speers [66-1 USTC ¶9101], 382 U.S. 266, 86 S.Ct. 411, 15 L.Ed.2d 314 (1965), raises doubts about the present validity of Gilbert Associates, this court disagrees. Speers simply is not applicable to the present case: it involved priority rights conferred by federal bankruptcy laws, not priority rights conferred based on a particular state's tax assessment procedures. Thus, as the Supreme Court recognized, Speers raised "no problem of evaluating widely differing state laws, . . . no possibility of unequal application of the federal tax laws, depending upon variances in the terms and phraseology of different state and local tax assessment statutes and judicial rulings thereon." Speers at 271, at 414. Rather, it involved "an unequivocal statement by Congress that [a trustee in bankruptcy] shall have 'all' the rights of a judgment lien creditor. . . ." Id. In the absence of any similar pronouncement by Congress or the Supreme Court with regard to state tax liens like those at issue in this case, the State of Alabama is not entitled to invoke the status of a judgment lien creditor to ward off the priority of federal tax liens.

Finally, the State suggests that a failed Congressional effort to clarify the phrase "judgment creditor" supports its rendering of the term. The proposed legislation purportedly would have made clear that §6323 does not protect those who "have not actually obtained a judgment in the conventional sense." From the failure of that legislation, the State seems to be suggesting that this court should infer that such a construction of the phrase was rejected by Congress. An equally valid inference, however, is that such a clarification was unnecessary given the clear holding of Gilbert Associates.

Although this court concedes that the State of Alabama may be the "sovereign more diligent," in the sense that it recorded its liens first, §6323 requires diligence of a specific sort: i.e., diligence in obtaining a judgment in a court of record. In that regard, the State's delay in obtaining such a judgment is fatal to its claim of priority.

IV. DEFENDANT PAUL RESSLER'S MOTION TO COMPEL SETTLEMENT

Ressler claims a settlement was reached under which both the State of Alabama and the IRS agreed to release all tax liens against Ressler in exchange for his payment of $32,000. Such a scenario would permit Ressler to remove himself from the priority dispute between the State and the IRS . Yet, Ressler presents no evidence to support a finding that such a settlement exists.

The United States concedes that Ressler made a settlement offer, but the United States ' two written responses to that offer clearly, and in bold print, state: "Unless you receive a formal notice of acceptance from this office, the Department is in no way committed to a settlement." (Response of United States to Motion to Compel Settlement, Exhibits 1 and 2.) No such "formal notice of acceptance" is before the court. Thus, the court finds that no settlement agreement was reached, and Ressler's motion is due to be denied. ¹¹

V. CONCLUSION

For the foregoing reasons, plaintiff's motion for partial summary judgment is due to be granted, and defendant Paul Ressler's notion to compel settlement is due to be denied. An order consistent with this memorandum opinion shall be entered contemporaneously herewith.

DONE.

¹ The State of Alabama does not stipulate to these dates for the 1992 tax year. See infra note 4 and accompanying text.

² This date is disputed by the State of Alabama : see discussion at page 8-9 infra.

³ This date also is disputed by the State of Alabama : see discussion at page 8-9 infra.

⁴ The precise date on which the 1992 assessment occurred cannot be ascertained from the present record.

⁵ As already noted, for purposes of deciding this motion, the court assumes that the 1992 federal taxes were assessed after the state's notice and demand letter was mailed, consistent with the other tax years.

⁶ An accelerated procedure is permitted when the Department of Revenue makes a jeopardy determination, i.e., when the department believes the taxpayer is about to remove the subject property from state jurisdiction or otherwise take steps which would make recovery by the state impossible. See Alabama Code §40-29-91. No such jeopardy determination was made in this case.

⁷ The court notes that the amount of at least one of the assessments was, in fact, changed between the time of the preliminary assessment and final assessment. For example, the penalty amount of $543.17 recited in the preliminary assessment for 1991 was increased to $599.36 in the subsequent final assessment for that year. See Defendant State of Alabama 's Evidentiary Submission in Opposition, Exhibit 5 at 6-7.

⁸ See supra stipulation 8 at page 3.

⁹ The state obtained a judgment in the Probate Court of Cullman County, Alabama on December 16, 1994, but that judgment came too late to prime the federal tax liens.

¹⁰ The Court noted one tax treatise's agreement that "assessments, though they may be enough like judgments to definitely establish a demand for taxes, are not technical judgments." Gilbert Associates [53-1 USTC ¶9291], 345 U.S. at 364 n.2, 73 S.Ct. at 704 n.2 .

¹¹ The court recognizes Ressler's need to have the tax liens on his property released by impleading a sum of money ($32,000) into this court. The IRS has agreed to accept that sum as substituted collateral for its tax liens, but the State of Alabama apparently has not so agreed. In the absence of such an agreement, the court must deny Ressler's motion.