Chief Counsel Advice 200220026, March 28, 2002
CCH IRS Letter Rulings Report No. 1316, 05-22-02
IRS REF : Symbol: CC:PA:CBS:Br2-GL-129835-01

Uniform Issue List Information:

UIL No. 17.32.00-00

Assessment authority

- Compromises

UIL No. 9999.98-00

Miscellaneous issues

- Not able to identify under present list

[Code Sec. 6201 and 7122 ]

MEMORANDUM FOR ASSOCIATE AREA COUNSEL, SB/SE:7 ( SACRAMENTO )

FROM: Michael L. Gompertz, Senior Technician Reviewer, Branch 2 (Collection, Bankruptcy & Summonses)

SUBJECT: Advisory Opinion-Offer in compromise on behalf of minor child

This memorandum responds to a request for advice. You have asked us to review your memorandum to an SB/SE Group Manager discussing the circumstances under which a minor or his or her parent may sign and submit an offer in compromise of the minor's tax liability. In accordance with I.R.C. §6110(k)(3) , this Chief Counsel Advice should not be cited as precedent. This writing may contain privileged information.

ISSUES

1. Is a minor child legally bound by a compromise agreement that the child enters into with the Internal Revenue Service under section 7122 of the Internal Revenue Code?

2. Is a minor child legally bound by a compromise agreement signed on behalf of the child by a parent or by the legal guardian of the child's property?

3. May a parent compromise the parent's liability under section 6201(c) of the Internal Revenue Code? Would such a compromise have any effect on the child's liability?

CONCLUSIONS

1. Under generally applicable state law, minors may repudiate, avoid, or disaffirm their contracts. Thus, a section 7122 compromise would not legally bind a minor and we recommend that the Service not enter into compromises with minors.

2. In general, a minor child would have the right to repudiate, avoid, or disasffirm a compromise signed on behalf of the minor child by a parent or other person, including the legal guardian of the minor's property. A parent's or other person's status as legal guardian of a minor's property does not include the capacity to compromise the minor's tax liability. If, however, a state court specifically authorizes a parent or other person to compromise the minor's tax liability, then the compromise could not be repudiated, avoided, or disaffirmed.

3. If the tax liability at issue is attributable to services of the minor, the parent is personally liable for the tax under I.R.C. §6201(c) if the child does not pay the tax. A parent may execute a compromise with respect to the parent's liability; however, the compromise would not impact the child's tax liability.

DISCUSSION

ISSUE 1

The Service's authority to enter into compromises with taxpayers comes from I.R.C §7122 which provides, "The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense." The Secretary has delegated this authority to the Commissioner, who has then delegated it to various officials throughout the Service. See Delegation Order No. 11.

The regulations pertaining to section 7122 set forth the permissible grounds for offers in compromise, including doubt as to liability, doubt as to collectability, and the promotion of effective tax administration. The regulations further provide that a taxpayer's offer is not accepted "until the IRS issues a written notification of acceptance to the taxpayer." Treas. Reg. §301.7122-1T(d)(1). As a general rule, acceptance of an offer in compromise will conclusively settle the liability of the taxpayer specified in the offer, and under §301.7122-1T(d)(5), neither the taxpayer nor the Government will be permitted to reopen the case unless the taxpayer supplied false information or documents to support the offer, the taxpayer has concealed assets, or a "mutual mistake of material fact sufficient to cause the offer agreement to be reformed or set aside is discovered." Further, any offer in compromise is strictly construed according to requirements set out in section 7122 and the regulations. See Botany Worsted Mills v. United States, 278 U.S. 282 (1929) [1 USTC ¶348 ]; Klein v. Commissioner, 899 F.2d 1149 (11th Cir. 1990) [90-1 USTC ¶50,251 ]; Bowling v. United States, 510 F.2d 112 (5th Cir. 1975) [75-1 USTC ¶9333 ].

Section 7122 of the Code and the regulations thereunder govern the formation and legal effect of offers in compromise. Also, generally applicable principles of contract law may provide guidance on issues not addressed by section 7122 and the regulations thereunder. See United States v. Feinberg, 372 F.2d 352 (3d Cir. 1965) [67-1 USTC ¶9176 ]; United States v. Lane, 303 F.2d 1 (5th Cir. 1962) [62-1 USTC ¶9467 ]. In recognition of this concern, the Service requires the taxpayer to submit a Form 656 setting forth the essential terms of payment including the tax liabilities covered, and the taxpayer's obligations, including the amount and the time in which the taxpayer has to pay.

We agree with your conclusion that a court may set aside a compromise if the court were to conclude that a party to the compromise lacked the ability to knowingly consent to its terms. Section 12 of the Restatement (second) of Contracts provides, "No one can be bound by contract who has not legal capacity to incur at least voidable contractual duties." The restatement further provides that a natural person manifesting consent has full legal capacity unless he is under a guardianship, an infant, mentally ill, or intoxicated. With certain exceptions, minors have the power of repudiating or disaffirming most contractual obligations. See Farnsworth on Contracts, §4.4 (2d Ed. 2000). Under California law, a person under the age of eighteen is a minor. Cal. Fam. Code §6500.

Neither the Internal Revenue Code nor the Treasury Regulations address a minor's capacity to compromise a tax liability. Nor are we aware of any case law under I.R.C. §7122 addressing the capacity of a minor to compromise a tax liability. Thus, a court would most likely look to state law to resolve this issue.

As you note, Cal. Fam. Code §6700 provides that a minor may contract in the same manner as an adult, subject to the power to disaffirm the contract under Cal. Fam. Code §6710 . Section 6701 provides, however, that a minor cannot give a delegation of power, make a contract relating to real property or an interest therein, or make a contract relating to personal property not in the minor's immediate possession or control. Thus, contracts relating to these transactions are void and need no disaffirmance. See Deason v. Jones, 45 P.2d 1025 ( Cal. App. 1935); Tracy v. Gaudin, 285 P. 720 ( Cal. App. 1930).

Section 6710 provides, "a contract of a minor may be disaffirmed by the minor before majority or within a reasonable time afterwards." An exception is set out in Section 6712 , which provides that a reasonable contract for "necessaries" may not be disaffirmed on the basis of minority. Although the California statute does not list the items which are "necessaries," they are unlikely to include a compromise of federal taxes. The term "necessaries" is narrowly interpreted and generally refers to items of support necessary for human life such as food, clothing, lodging, and medical services.

Thus, under California law, a minor entering into a compromise with the Service would retain a unilateral right to disaffirm the compromise prior to or within a reasonable time after reaching the age of majority. This principle would also apply under the laws of most other states. A compromise agreement with a minor would not serve the Service's policy goal of conclusively settling the tax liability. Thus, we recommend that the Service not enter into compromises with minors. This is consistent with the principle that the Service has broad discretion in deciding whether to accept or reject an offer in compromise and may reject an offer if it determines that compromise is not in the Government's best interest. See Policy Statement P-5-100 ("The ultimate goal is a compromise which is in the best interest of both the taxpayer and the Service.").

ISSUE 2

You raise the issue of whether a parent or other person has the authority to compromise a minor's taxes on his or her behalf. Because section 7122 and the regulations thereunder are silent on this issue, courts would most likely seek guidance from state statutes and generally applicable principles of common law, which Congress presumably intended to apply to offers in compromise.

We are not aware of any generally applicable principle of state law under which a minor child has the power to appoint another person to execute an offer in compromise on the child's behalf. Further, Cal. Fam. Code §6701(a) provides that a minor may not give a delegation of power, and case law interprets any attempt to do so by a minor to be void. See Morgan v. Morgan, 34 Cal. Rptr. 82 (Cal. App. 1963) (holding a minor's attempt to appoint an agent to endorse checks was void). Similarly, the appointment of an agent to enter into a compromise would also be void. See also, Infants, 43 C.J.S. §111 (West 1978) (indicating that under state law a minor cannot absolutely bind himself by the appointment of an agent or attorney; the acts of the agent or attorney under such an appointment are generally voidable by the minor and may be absolutely void). Accordingly, we agree with your conclusion that a parent could not enter into a compromise of a child's tax liability with the Service on the basis of a Form 2848 power of attorney. If, however, a court specifically authorizes the parent or other person to enter into a compromise of a minor child's tax liability, then the parent or other person would by reason of this authorization have the authority to execute the compromise agreement on the child's behalf.

We conclude that a minor child is not absolutely bound by a compromise signed by a parent or other person on the minor's behalf. For this reason, we recommend that the Service not enter into such compromises. Our conclusion that the minor is not absolutely bound applies even if the parent or other person has been appointed legal guardian of the minor's property. A compromise settles the personal liability of the taxpayer in addition to affecting the Service's ability to collect the tax liability from the taxpayer's assets. Therefore, a parent or other person would not have the legal capacity to enter into a compromise on behalf of a child merely because the parent or other person has legal authority to control or dispose of the child's property. The parent's or other person's acts in entering into a compromise on the minor's behalf would most likely be voidable by the minor or, alternatively, these acts may be absolutely void as noted above. In the context of closing agreements, I.R.M. 8.13.1.2.9.1, states that a closing agreement with a minor should be signed by the legal guardian of the minor's property. We note, however, that the I.R.M. does not address the minor's right to disaffirm, void, or repudiate agreements with the Service.

ISSUE 3

Section 6201(c) of the Code provides that any income tax assessed against a child for income under section 73 attributable to services of the child is "considered as having also been properly assessed against the parent" if the tax is not paid. Under section 6201(c) , the parent has a tax liability separate from that of the child. The parent could enter into a compromise of the parent's liability under section 6201(c) , but this would have no impact on child's liability. A compromise binds "the taxpayer specified in the offer" under Treas. Reg. §301.7122-1T(d)(5) and has no effect on a party not named in the offer (in this situation, the minor child).

Accordingly, we recommend you amend your memorandum to address these concerns. If you have any further questions, please contact the attorney assigned to this matter at (202) 622-3620 .

[62-1 USTC ¶9467]United States of America, Appellant v. Robert C. and Dorothy S. Lane, Appellees United States of America, Laurie W. Tomlinson, District Director of Internal Revenue Service, Philip T. McEnery, Revenue Officer, Henry W. McMillian, Chief, Collection Division, and Furman L. Engelo, Revenue Agent, Appellants v. Robert C. Lane, Appellee

(CA-5), U. S. Court of Appeals, 5th Circuit, Nos. 19142, 19143, 303 F2d 1, 5/9/62

[1954 Code Sec. 7122 and 1939 Code Sec. 3761]

Compromises: Default by taxpayer: Revival of original tax liability.--Where the taxpayer failed to file sworn statements of annual income pursuant to the terms of a collateral income agreement which accompanied an agreement for compromise of his tax liability for the years 1947 through 1953, the compromise agreement was breached and the Government was entitled to revive the original tax liability, subject to credit for previous payments made under the compromise agreement. The compromise agreement was a contract and the provisions for revival of original tax liability upon default were clear and unmistakable. Judgment of District Court was reversed. .

Louis F. Oberdorfer, Assistant Attorney General, Lee A. Jackson, I. Henry Kutz, John A. Bailey, Thomas H. McPeters, Department of Justice, Washington 25, D. C., Edward F. Boardman, United States Attorney, Miami, Fla., for appellant. Robert C. Lane, Huntington Bldg., Curtiss B. Hamilton, Miami, Fla., for appellee.

Before TUTTLE, Chief Judge, and JONES and BELL, Circuit Judges.

TUTTLE, Chief Judge:

The primary issue on this appeal is whether the Government can revive the original income tax liability of a taxpayer who has breached a compromise agreement covering the liability. The District Court resolved this question adversely to the Government. We reverse.

The facts giving rise to this controversy are undisputed. During 1954 and 1955, the taxpayer, Robert C. Lane, ¹ made offers to representatives of the Commissioner of Internal Revenue in compromise of his outstanding income tax liability for the years 1947, 1948, 1949, 1952 and 1953. The indebtedness, amounting to $54,253.69, arose from the taxpayer's failure to pay liabilities disclosed on his returns and was not attributable to any deficiency assessment. Liability for this indebtedness was not contested by the taxpayer, negotiations at all times being based on his financial inability to pay.

On December 2, 19 55, the taxpayer was notified by letter from the office of the Commissioner that his previously submitted offer in compromise, the terms of which were contained in two documents, was accepted upon the terms proposed. Part of the taxpayer's offer in compromise was submitted on standard Treasury Form 656-C, a document entitled "Offer in Compromise (Deferred Installment Payments)", and provided for the payment by the taxpayer of $29,816.78 as follows:

"$2500.00 remitted with this Offer and; Balance payable $400.00 per month until paid in full. Installments to begin on the 1st day of month following notification of acceptance of offer."

This document also contained the following provision:

"As part of this offer, it is agreed that upon notice to the proponent of the acceptance of this offer in compromise of the liability aforesaid, the proponent shall have no right, in the event of default in the payment of any installment of principal or interest due under the terms of the offer, to contest in court or otherwise the amount of the liability sought to be compromised, and that in the event of such default the Commissioner of Internal Revenue, at his option, (1) may proceed immediately by suit to collect the entire unpaid balance of the offer, or (2) may disregard the amount of such offer and apply all amounts previously paid thereunder against the amount of the liability sought to be compromised and may, without further notice of any kind, assess and/or collect by distraint or suit (the restrictions against assessment and/or collection being hereby specifically waived) the balance of such liability." (Italics added).

The second document making up the compromise agreement was a so-called "collateral income agreement". This document recited that its purpose was "to offer additional consideration for the acceptance of the offer in compromise." In addition to the sum of $29,816.78 mentioned above, the collateral income agreement obligated the taxpayer to make annual payments, from 1955 through 1967, based upon a graduated percentage of "Annual Income" in excess of $15,000, the term "Annual Income" being expressly defined in the agreement. Although by the terms of the collateral agreement the taxpayer would not be liable for any annual payments unless his income exceeded $15,000, he was required to furnish the District Director of Internal Revenue with an annual statement of his income for the preceding calendar year regardless of the amount. The annual payments were to be paid to the District Director on or before the fifteenth day of the fourth month next following the close of the calendar year and were to be accompanied by a sworn statement of annual income. The collateral agreement expressly stated:

"That the default agreement and the waiver of the statute of limitations on assessment and collection as contained in the printed Form 656-C are also applicable in the event any provision of this collateral agreement is not carried out in accordance with its terms."

On March 22, 19 56, the District Director requested the taxpayer, by letter, to furnish a sworn statement of annual income for 1955, and cautioned him that failure to comply could result in an action to collect the full amount of the liability sought to be compromised. The taxpayer did not comply with this request. However, on May 8, 19 56, the taxpayer delivered to the Internal Revenue Service a cashier's check for $26,008.36, thereby satisfying his installment obligations under the main agreement. Certificates of Release of Federal Tax Lien were delivered to the taxpayer and were filed on May 9, 19 56, discharging the liens of record. There was no suggestion in any, of the correspondence exchanged with regard to the cashier's check that the obligations contained in the collateral agreement were to be affected in any way.

On May 29, 19 56, another letter was written to the taxpayer calling his attention to the earlier request of March 22, 19 56 that he furnish a sworn statement of annual income for 1955. In answer, the taxpayer's accountant replied that the audit for 1955 was incomplete and, therefore, that annual income could not be computed. On July 11, 19 56, about three months after the annual payment for 1955 was due to be paid and the sowrn statement of income due to be filed, the taxpayer wrote the District Director, claiming for the first time that he had terminated all liability to the Government with the cashier's check of May 8, 19 56. Further correspondence was exchanged and conferences were held, the taxpayer insisting at all times that he had no further liability and the Internal Revenue Service insisting to the contrary.

The taxpayer likewise refused to make an annual payment and file a sworn statement of income for 1956. As a result, the Commissioner, on November 5, 19 57, notified the taxpayer that the compromise agreement was terminated and that the balance of the original tax liability would be declared due, with credit to be applied in reduction of the balance for payments previously made. Shortly thereafter, tax liens covering uncomputed accrual and unsatisfied assessments were filed against the taxpayer.

On October 29, 19 58, the taxpayer filed a complaint against the United States, the District Director and the two other employees of the Internal Revenue Service, seeking to enjoin the collection of any taxes or interest based upon the reasserted liens. The Government filed an answer to the complaint and, on March 16, 19 59, the Government commenced its own action against the taxpayer seeking to recover the unpaid balance of the taxpayer's original tax liability plus interest. The amount claimed was $31,326.

The two cases were consolidated for trial. The taxpayer contended (1) that his tax liability was completely satisfied with the cashier's check of May 8, 19 56 and (2) that, if his liability was not completely satisfied by the payment on May 8, 19 56, his only remaining liability was for the annual payments due at the time of trial and not for the unpaid balance of the original tax liability.

The first issue was submitted to the jury, which found that the cashier's check did not terminate the taxpayer's liability under the collateral agreement. The taxpayer has not appealed this finding, and thus it is not at issue here. On the other hand, the District Court agreed with the taxpayer that the Government's recovery was limited to the total amount of annual payments due and owing at the time of trial and that the Government was not entitled to recover the unpaid balance of the original tax liability. The jury then determined that the total amount due the Government under the District Court's ruling was $6,554.90. The Court entered judgment for that amount in favor of the Government but directed the Government to discharge the liens which had been reasserted against the taxpayer.

The District Court reasoned as follows in holding that the Government could not recover the unpaid balance of the taxpayer's original liability:

"When a man settles with the government on the basis of a reduced amount, if he doesn't carry out this compromise settlement, he is merely liable for not carrying it out; and this is a breach of contract for the purpose in [sic] the measure of what damages would be.

"We are telling them now [i. e. the jurors] that this would be the difference between what he should have paid under his settlement agreement and what he didn't pay, to live up to that settlement agreement.

"I rule that the taxpayer can't be pushed back for years and years and after a settlement is made and have a forfeiture so to speak, of everything he paid in under that settlement agreement.

"Of course, while I know that we are not always dealing in equity in tax cases, still it is always fundamental with this Judge that he is trying to do justice among all the parties and under all the circumstances of the case. Whether he breached the contract or whether he didn't--if he did breach it, it is a difference as to what he should have paid under the settlement agreement and what he should have done and what he had actually done; so if I am wrong, the Court of Appeals or the Supreme Court can decide otherwise."

It has long been settled that an agreement compromising unpaid taxes is a contract and, consequently, that it is governed by the rules applicable to contracts generally. Walker v. Alamo Foods Co., 5 Cir., [1 USTC ¶207] 16 F. 2d 694. The cardinal rule of contract construction "is to ascertain the intention of the contracting parties and to give effect to that intention if it can be done consistently with legal principles." Jacksonville Terminal Co. v. Railway Express Agency, 5 Cir., 296 F. 2d 256, 259.

In the present case, the contracting parties expressed their mutual intention in clear and unmistakable terms. The collateral agreement specifically stated that the default provisions of the main agreement on Form 656-C were to be applicable should the taxpayer fail to perform his obligations with respect to the making of annual payments and filing of sworn statements of annual income. Form 656-C, in turn, expressly provided that the Commissioner, upon default by the taxpayer, could terminate the compromise agreement and proceed to collect the unpaid balance of the original tax liability. This language is so precise, and the intention which it manifests is so evident, as to leave no doubt that the course of action taken by the Government here was fully authorized by the compromise agreement.

There was nothing illegal, immoral or inequitable in the compromise agreement. It did not provide for any "forfeiture". By express provision, the amounts to be paid under the compromise agreement, including both the Form 656-C and the collateral agreement, could not exceed the aggregate amount which the taxpayer conceded that he owed the Government from the start. By allowing the Government to revive the taxpayer's original liability, the taxpayer will not forfeit the amounts he has already paid, for those amounts will be applied to reduce the original liability. The agreement was precise, it was fair, and it was freely consented to by the taxpayer. There is no reason why it should not be enforced as written.

Nor can we discern any sound reason for refusing to allow the Government to reinstate its tax liens against the taxpayer upon revival of the taxpayer's original liability. We think that the Commissioner's undoubted right to recover the unpaid balance of the original liability carried with it the right to secure payment of this amount by reasserting the tax liens. Section 6325(d) of the Internal Revenue Code of 1954 does not require a contrary conclusion. That section merely provides that a certificate of discharge of a tax lien is conclusive that the lien upon the property covered by the property is extinguished. The Government does not contend that the liens on the taxpayer's property were not extinguished when certificates of discharge were issued to the taxpayer in May, 1956. It claims merely that the liens could be revived upon revival of the obligation on which the liens were based. The Government's right to recover the unpaid balance of the original liability would be illusory indeed, if it was not also entitled to the security which the tax liens represented.

The judgment is REVERSED and the cause is REMANDED to the District Court for further proceedings not inconsistent with this opinion.

¹ Robert C. Lane will hereafter be referred to as the "taxpayer" although his wife, Dorothy C. Lane, joined with him in filing returns for certain of the taxable years in question.

[75-1 USTC ¶9333]Lawrence E. Bowling, Plaintiff-Appellant v. United States of America, Defendant-Appellee

(CA-5), United States Court of Appeals, 5th Circuit, No. 74-1413, 510 F2d 112, 3/21/75 , Affirming District Court, 73-2 USTC ¶9711

[Code Secs. 61, 6212, 7121 and 7122]

Compromises: Satisfaction and accord: Who is the taxpayer: Community property state: Part payment.--The district court's conclusion, that taxpayer-residents of a community property state were obligated to report one-half of the community income for Federal tax purposes, was sustained on appeal. The court rejected the taxpayer's argument that the government was estopped from asserting its deficiency claim since he had made a partial payment of the deficiency at a district conference. Because the law provides the exclusive method for compromising tax claims, no theory founded on general concepts of accord and satisfaction can be used to impute a compromise settlement. BACK REFERENCES: 75 FED ¶325.229, 75 FED ¶325.487, 75 FED ¶5319.09 and 75 FED ¶5697.168.

Lawrence E. Bowling, pro se. Frank D. McCown, United States Attorney, Ft. Worth, Tex., William W. Guild, Assistant United States Attorney, Dallas, Tex., Scott P. Crampton, Assistant Attorney General Meyer Rothwacks, Gary R. Allen, Libero Marinelli, Jr., Ernest J. Brown, Myron C. Baum, Department of Justice, Washington, D. C. 20530, for defendant-appellee.

Before BELL, THORNBERRY and GEE, Circuit Judges.

PER CURIAM:

This is an appeal from a judgment sustaining an Internal Revenue Service determination of appellant's tax liability for the years 1962 and 1964. The district court held that in a community property state each spouse must report and has federal income tax liability on one half of the community earnings. We affirm.

Appellant and his wife were residents of Texas during the period in question. They filed separate returns, each claiming his or her own income and tax credits. A mathematical deficiency was assessed because of this procedure. Also, certain deductions for travel expenses and dependence were disallowed and a separate statutory deficiency was assessed on these grounds. This statutory deficiency was discussed at a district office conference and payment was accepted for the amount agreed upon. Appellant contends that it is not mandatory that he and his wife each report one half of the community income. Further he argues that even if it were mandatory the government is now estopped from asserting that claim because of the acceptance of payment for the statutory deficiency for the same period. We reject both these arguments.

Under the laws of Texas each spouse has a vested interest in and is owner of half of the community property and is therefore liable for federal income taxes on such a share. Lange v. Phinney, 5 Cir., 1975, [75-1 USTC ¶9230] 507 F. 2d 1000. There is therefore the "obligation, not merely the right, to report half the community income." United States v. Mitchell, 1971, [71-1 USTC ¶9451] 403 U. S. 190, 196, 91 S. Ct. 1763, 1767, 29 L. Ed. 2d 406, 412.

As to appellant's estoppel argument, the provisions for compromising tax cases are found in §§ 7121 and 7122 of the Internal Revenue Code. These provisions are exclusive and strictly construed. See Botany Worsted Mills v. United States, 1928, [1 USTC ¶348] 278 U. S. 282, 49 S. Ct. 129, 73 L. Ed. 379. Because of this exclusive method, no theory founded upon general concepts of accord and satisfaction can be used to impute a compromise settlement, Moskowitz v. United States, [61-1 USTC ¶9204] 285 F. 2d 451, 453, 152 Ct. Cl. 412 (1961), and therefore none resulted from the government's acceptance and cashing of appellant's check. Hughson v. United States, 9 Cir., 1932, [1932 CCH ¶9298] 59 F. 2d 17, 19, cert. den., 1932, 287 U. S. 630, 53 S. Ct. 82, 77 L. Ed. 546.

The additional assignments of error have been considered and are without merit.

Affirmed.

 

[90-1 USTC ¶50,251] William Randolph Klein, Petitioner-Appellant v. Commissioner of Internal Revenue, Respondent-Appellee

(CA-11), U.S. Court of Appeals, 11th Circuit, 89-3189, 5/1/90, 899 F2d 1149, 899 F2d 1149. Affirming an unreported Tax Court decision

[Code Secs. 6404 and 7121 ]

Abatements: Jurisdiction: Closing agreements: Unauthorized.--The Tax Court lacked jurisdiction to adjudicate the taxpayer's premature abatement of interest claim where there had as yet been no IRS interest assessment. Furthermore, the IRS did not enter into a binding closing agreement to settle the taxpayer's tax liabilities. The IRS letter to the taxpayer, which incorporated an apparent conditional offer to settle, was sent by an unauthorized agent. In addition, the taxpayer never attempted to fulfill the prerequisite conditions. The taxpayer's two letters to the IRS did not constitute a settlement agreement either, because these letters were not signed by both parties.

[Tax Court Rules 40 and 104 ]

Tax Court: Motions: Sanctions.--The Tax Court properly converted the IRS 's motion to dismiss into one for partial summary judgment where the taxpayer had adequate notice that the court might recharacterize the motion and where the court possessed sufficient evidence to decide the issues on summary judgment grounds. Sanctions were correctly imposed where the taxpayer failed to comply with a court order to produce certain evidentiary documents. BACK REFERENCES: 90 FED ¶42,900.25 and 90 FED ¶42,964.20

William Randolph Klein, 1800 Second St., Sarasota, Fla. 34236, pro se. J. Michael Melvin, Assistant District Counsel, Jacksonville, Fla. 32202. Peter K. Scott, Internal Revenue Service, Washington, D.C. 20224, James I.K. Knapp, Acting Assistant Attorney General, Michael J. Paup, Deputy Assistant Attorney General, Gary R. Allen, Michael J. Roach, Department of Justice, Washington, D.C. 20530, for respondent-appellee.

Before KRAVITCH and CLARK, Circuit Judges, and ATKINS ^*, Senior District Judge.

ATKINS, Senior District Judge:

Appellant, William Randolph Klein, pro se, appeals from a decision by the United States Tax Court granting partial summary judgment in favor of the Commissioner of Internal Revenue. The Tax Court determined that there were deficiencies in the appellant's income in the taxable years 1979 and 1980 in connection with the appellant's participation in two tax shelters, Cowen Associates and Clay Properties. The Tax Court held that a binding agreement to settle was not present and the Court had no jurisdiction over the appellant's claim for an abatement, under Section 6404(e) of the Internal Revenue Code. We affirm and also find that the Tax Court correctly disposed of the motion as one of partial summary judgment and correctly imposed sanctions on the taxpayer under Rule 104 of the Tax Court Rules of Practice and Procedure.

I.

On December 13, 1985 , taxpayer/appellant, William Randolph Klein, filed a pro se petition in the United States Tax Court seeking redetermination of the deficiencies set forth in the Commissioner's notice of deficiency dated September 12, 1985 . Among the issues was the Commissioner's disallowance of losses generated by appellant's participation in two tax shelters, Cowen Associates and Clay Properties. On November 28, 1986 , counsel for the Commissioner sent the appellant a letter requesting the production of any and all proof of cash payments made by the appellant relating to his participation in the tax shelters. The appellant did not respond to this request or other informal requests made by the Commissioner's counsel. The Commissioner subsequently moved the Tax Court to compel production of documents concerning the tax shelters and on January 21, 1987 , the Tax Court granted the motion and directed the appellant to produce the documents. The appellant continually failed to make full production of the documents and on June 15, 1987 , the Tax Court granted the Commissioner's motion to impose sanctions pursuant to Rule 104 of the Tax Court Rules of Practice and Procedure. The Tax Court also imposed sanctions prohibiting the appellant from introducing into evidence at trial any document that would show the payment, either by cash or by check, of any amount that he had allegedly invested in Cowen Associates and/or Clay Properties.

On April 13, 1987 , by leave of court, the Commissioner filed an amended answer asserting that the notice of deficiency had inadvertently failed to disallow a loss in the amount of $36,668, which the appellant claimed in 1980 with respect to his investment in the Cowen Associates tax shelter. On September 13, 1988 , the appellant filed an amended petition by leave of court in which he asserted that the Commissioner's disallowance of the $36,668 loss claimed on his 1980 return, which resulted in the Commissioner's determination of an increased deficiency for 1980, breached a "settlement" that he had previously reached with the Commissioner with respect to the tax shelter issues. The appellant also argued in the amended petition, that in the alternative, if the increased deficiency were to be upheld, he was entitled to an abatement of interest under Section 6404(e) of the Internal Revenue Code.

On or about October 14, 1988 , the parties entered into a stipulation in which the appellant conceded the disallowance of the loss of $36,668, subject, however, to the appellant's reserving the right to litigate his contention that a "settlement" had occurred. The appellant also reserved the right to litigate his claim that, if the $36,668 loss were disallowed, he would be entitled under Section 6404(e) of the Internal Revenue Code to an abatement of interest that would otherwise accrue on that deficiency. ¹ Concurrently, the Commissioner filed a motion to dismiss those two remaining issues for failure to state a claim upon which relief could be granted. The appellant opposed the motion and the Tax Court scheduled the motion for oral argument on December 1, 1988 .

The Commissioner submitted a memorandum of law on November 28, 1988 asserting that the issues before the Tax Court can be decided as a matter of law. In opposition, appellant Klein submitted his memorandum of law on November 30, 1988 which included matters outside the pleadings.