126 T.C. No. 9

UNITED STATES TAX COURT

BERNHARD F. AND CYNTHIA G. MANKO, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24124-04L. Filed April 20, 2006. 

Ps and R executed a closing agreement covering specific

matters relating to the treatment of certain partnership 

items on Ps’ returns. R assessed Ps’ taxes without issuing 

Ps a deficiency notice. R then commenced collection action 

against Ps. Ps argue that R may not proceed with the 

proposed collection action because R failed to issue a 

statutory deficiency notice before R assessed Ps’ taxes. 

Held: R may not proceed with collection because R

failed to issue a deficiency notice before assessing

Ps’ taxes. The requirement to issue a deficiency

notice before assessment is not altered by the closing

agreement covering the treatment of certain items on

Ps’ returns for the years at issue. Accordingly, R may

not proceed with collection of Ps’ liabilities. 
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1All section references are to the Internal Revenue Code in

effect at all relevant times, and all Rule references are to the

Tax Court Rules of Practice and Procedure, unless otherwise

indicated.

Irwin S. Meyer, for petitioner Bernhard F. Manko.

Hugh Janow, for petitioner Cynthia G. Manko.

Gerard Mackey, for respondent.

OPINION

KROUPA, Judge: Petitioners seek review under section

6330(d)1 of respondent’s determination to proceed with a proposed

levy to collect petitioners’ Federal income tax liabilities for

1988 and 1989 (the years at issue). We are asked to decide

whether respondent may proceed with collection of these

liabilities, which respondent assessed without first issuing

petitioners a notice of deficiency (deficiency notice). We hold

that respondent may not proceed with collection.

This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found. The stipulation of facts and

the accompanying exhibits are incorporated by this reference. 

Petitioners resided in Lighthouse Point, Florida, at the time

they filed the petition. 

Background

Petitioner Bernhard F. Manko (Mr. Manko) was a 99-percent

partner in Comco, a partnership not subject to TEFRA proceedings. 
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See sec. 6221. Respondent examined certain items relating to

Comco for the taxable years 1987 through 1991 and reached

agreement with Mr. Manko and Comco’s other partner on these

items.

The changes to the Comco items required changes to

petitioners’ joint Federal income tax returns for the years at

issue. To facilitate this process, petitioners agreed to extend

the time indefinitely for respondent to assess income taxes for

the years at issue. Petitioners and respondent agreed on the

treatment of the Comco items on petitioners’ returns for the

years at issue and memorialized their agreement on Form 906,

Closing Agreement on Final Determination Covering Specific

Matters (the closing agreement). 

The preamble to the closing agreement explains that the

parties wish to determine with finality petitioners’ distributive

share of income, gains, losses, deductions, and credits with

respect to Comco for the years at issue. The final paragraph of

the closing agreement provides that the agreement does not affect

or preclude later adjustments of any item (other than those

relating to Comco) for the years at issue. 

When the parties executed the closing agreement, respondent

was also examining petitioners’ returns for the years at issue

for issues unrelated to Comco (the non-Comco items). After the

parties executed the closing agreement, respondent prepared an
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Income Tax Examination Changes, marked it “Copy—Information Only”

and sent it to petitioners. This document, prepared 2 years

after the closing agreement and almost 7 years after the end of

the last year at issue, reflected respondent’s computation of

petitioners’ tax liabilities after the agreed treatment of the

Comco items was taken into account.

Respondent then assessed the deficiencies shown in

respondent’s Income Tax Examination Changes against petitioners

for the years at issue without issuing petitioners a deficiency

notice. Specifically, respondent assessed a $10,763,212

deficiency for 1988 and a $2,644,240 deficiency for 1989. These

assessments did not meet the statutory exceptions to the

requirement that a deficiency notice must first be issued before

assessment. See sec. 6213(b). Specifically, the assessments did

not arise out of mathematical or clerical errors, were not the

result of a determination that a tentative carryback or refund

adjustment was excessive, and were not based on the receipt of

any payment of tax. 

After these assessments, respondent continued to alter the

amounts petitioners owed for the years at issue. Respondent sent

petitioners five subsequent Income Tax Examination Changes from

1996 through 2001. Respondent sent the latest report to

petitioners in October 2001, 12 years after the end of the last

year at issue and 7 years after the parties executed the closing
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agreement. In January 2003, petitioners terminated their special

consent to extend the time for respondent to assess tax for the

years at issue. Respondent has never issued petitioners a

deficiency notice for the years at issue, and petitioners never

executed a formal waiver of the restrictions on assessment.

Respondent sent petitioners a Final Notice of Intent to Levy

and Your Right to a Hearing with respect to the years at issue,

and petitioners timely requested a hearing. Petitioners asserted

in their request for a hearing that the proposed levy should not

proceed for a variety of reasons. These reasons included that

petitioners had never received a deficiency notice, that

petitioners had made payments toward the liabilities for the

years at issue, and that petitioners had an increased net

operating loss for a prior year that would decrease their

liability for the years at issue. The parties then held a

hearing. Respondent issued petitioners a notice of determination

on December 1, 2004 (the determination notice), which sustained

the proposed levy for the years at issue. The determination

notice stated that petitioners had not raised challenges to the

existence or amount of the underlying tax liability. The

determination notice concluded that the assessments for the years

at issue should not be abated, briefly citing legal opinions in

the case file. 

Petitioners timely filed a petition with this Court.
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Discussion

We are asked to decide for the first time whether the

Commissioner is required to issue a deficiency notice before

assessing taxes for years subject to a closing agreement that

covers the treatment of only certain items. Petitioners argue

that respondent may not proceed with collection because

respondent did not issue them a deficiency notice before

respondent assessed their taxes. This failure, petitioners

argue, precluded them from challenging their income tax

liabilities before the assessment and before this levy

proceeding. Respondent, on the other hand, argues that a

deficiency notice is not required before assessment in all

situations. Rather, respondent argues no deficiency notice is

required if the changes to a taxpayer’s return arise solely from

computational adjustments made by applying a closing agreement

covering specific matters to the taxpayer’s return. We find for

petitioners. 

We first address our jurisdiction in this case as well as

the standard of review.

I. Jurisdiction and Standard of Review

We have jurisdiction to review a hearing officer’s

determination in a collection action where the underlying tax

liability is of a type over which this Court normally has

jurisdiction. Sec. 6330(d)(1)(B); Katz v. Commissioner, 115 T.C.
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329, 338-339 (2000). Respondent has assessed and proposes to

collect Federal income taxes for 1988 and 1989 attributable to

adjusting the Comco items reported on petitioners’ returns. We

generally have jurisdiction to redetermine deficiencies in income

taxes and related additions to tax. See secs. 6211, 6213(a),

6214(a); see also Goza v. Commissioner, 114 T.C. 176, 182 (2000). 

We therefore have jurisdiction to review the determination notice

in this case. See Katz v. Commissioner, supra at 339.

Where the underlying tax liability is at issue in a

collection action, we review the determination de novo. Sego v.

Commissioner, 114 T.C. 604, 610 (2000). Where the underlying

liability is not at issue, we review the determination for an

abuse of discretion. Goza v. Commissioner, supra at 181-183. 

The key facts are fully stipulated and described in the

determination notice. Where, as here, we are faced with a

question of law (e.g., whether the Commissioner must issue a

deficiency notice before assessing taxes when a closing agreement

covers the treatment of certain items on a return for that year),

our holding does not depend on the standard of review we apply. 

We must reject erroneous views of the law. See Kendricks v.

Commissioner, 124 T.C. 69, 75 (2005) (and the cases cited

therein); McCorkle v. Commissioner, 124 T.C. 56, 63 (2005).
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2A deficiency notice is not required to assess taxes where

there is no deficiency. For example, the Secretary may assess

without a deficiency notice the amount of tax shown due on a

return. Sec. 6201(a)(1).

II. Deficiency and Assessment Procedures

Petitioners contend that respondent may not proceed with

collection of their tax liabilities because respondent failed to

issue a deficiency notice before assessing their taxes.

A. A Deficiency Notice Is Generally Required Before

the Commissioner May Assess a Deficiency

An assessment is an administrative recording of a taxpayer’s

liability and sets the collection process in motion. 

Philadelphia & Reading Corp. v. United States, 944 F.2d 1063,

1064 n.1 (3d Cir. 1991). An assessment is made by recording the

liability of the taxpayer in the office of the Secretary. Sec.

6203. The purpose of requiring the assessment to be so recorded

is to insure both that the Secretary is maintaining proper

records and that taxpayers receive a summary of records of their

tax liability. Gentry v. United States, 962 F.2d 555, 556 (6th

Cir. 1992).

The Secretary generally may not assess a deficiency in tax

unless the Secretary has first mailed a deficiency notice to the

taxpayer and allowed the taxpayer to petition the Tax Court for a

redetermination.2 Sec. 6213(a). There are certain exceptions to

the requirement that a deficiency notice must be issued, however. 

For example, a deficiency notice is generally not required where
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3A taxpayer may generally dispute his or her liability in

collection proceedings only if the taxpayer has not previously

had the opportunity to dispute it. Sec. 6330(c)(2)(B); Sego v.

Commissioner, 114 T.C. 604, 609 (2000); Goza v. Commissioner, 114

T.C. 176, 180-181 (2000).

the assessment arises from mathematical or clerical errors,

arises from tentative carryback or refund adjustments, or is

based on the receipt of a payment of tax. See sec. 6213(b). The

Commissioner may also assess a deficiency without issuing a

deficiency notice if a taxpayer waives the restrictions on

assessment. Sec. 6213(d).

A deficiency notice provides taxpayers certain procedural

safeguards. See Commissioner v. Shapiro, 424 U.S. 614, 616-617

(1976). A deficiency notice entitles a taxpayer to litigate his

or her tax liability without first paying the tax the

Commissioner has determined is owing. Bourekis v. Commissioner,

110 T.C. 20, 27 (1998); McKay v. Commissioner, 89 T.C. 1063, 1067

(1987), affd. 886 F.2d 1237 (9th Cir. 1989); Mulvania v.

Commissioner, 81 T.C. 65, 67 (1983). Deficiency notices have

been characterized as “tickets to the Tax Court” affording

taxpayers the opportunity to litigate in this forum. Bourekis v.

Commissioner, supra; McKay v. Commissioner, supra; Mulvania v.

Commissioner, supra. A deficiency notice also allows a taxpayer

to litigate his or her tax liability before the Commissioner

makes an assessment and collection proceedings begin.3

Commissioner v. Shapiro, supra.
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The parties agree that respondent did not issue petitioners

a deficiency notice, that no statutory exception to the

restrictions on assessment applies, and that petitioners have not

waived the restrictions on assessment. Accordingly, respondent

may not proceed with collection unless, as respondent argues, the

closing agreement obviates the need for a deficiency notice.

B. The Closing Agreement Covering Specific Matters Does

Not Render Deficiency Notice Unnecessary

1. Types of Closing Agreements

We now address closing agreements. The Commissioner may

enter into an agreement with any person regarding his or her

liability for any taxable period. Sec. 7121(a). These

agreements are final and conclusive and bind the parties as to

matters agreed upon. Sec. 7121(b); Urbano v. Commissioner, 122

T.C. 384, 394 (2004). They may be reopened only in exceptional

circumstances such as fraud, malfeasance, or misrepresentation of

a material fact. Urbano v. Commissioner, supra. All closing

agreements shall be executed on forms prescribed by the Internal

Revenue Service. Id.; sec. 301.7121-1(d), Proced. & Admin. Regs.

The Commissioner has prescribed two forms of closing

agreements, each used in different circumstances. One type of

closing agreement is a final determination of a taxpayer’s

liability for a past taxable year or years. Zaentz v.

Commissioner, 90 T.C. 753, 760-761 (1988); Rev. Proc. 68-16,

1968-1 C.B. 770. This type of closing agreement is completed on
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4A requesting spouse is not entitled to innocent spouse

relief when the requesting spouse has entered into a closing

agreement that disposes of the same liability. See sec. 1.6015-

1(c)(1), Income Tax Regs. A closing agreement entered into

before the effective date of sec. 6015, however, does not cut off

a claim for innocent spouse relief under that section. Hopkins

v. Commissioner, 120 T.C. 451 (2003). Under the former innocent

spouse relief statute, sec. 6013(e), a closing agreement, even

one that determined liability only with regard to specific

issues, precluded a taxpayer’s later claim for innocent spouse

relief where the defense was not preserved in the text of the

closing agreement. See Hopkins v. United States, 146 F.3d 729

(9th Cir. 1998). 

Form 866, Agreement as to Final Determination of Tax Liability. 

Urbano v. Commissioner, supra; Zaentz v. Commissioner, supra. A

second type of closing agreement finally determines one or more

separate items affecting the taxpayer’s liability and is executed

on Form 906. Urbano v. Commissioner, supra; Zaentz v.

Commissioner, supra; see sec. 601.202, Statement of Procedural

Rules.

A closing agreement on Form 906, covering specific matters,

binds the parties as to the matters agreed upon. Zaentz v.

Commissioner, supra. This type of closing agreement does not,

however, conclusively determine the taxpayer’s tax liability for

that year. For example, this type of closing agreement does not

bar the Commissioner from subsequently determining that a

taxpayer is liable for additions to tax.4 Estate of Magarian v.

Commissioner, 97 T.C. 1 (1991). 
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5Respondent was examining petitioners’ returns when the

parties executed the closing agreement and, over several years,

adjusted the amounts petitioners owed several times. Subsequent

adjustments were not only contemplated in the parties’ closing

agreement. They actually occurred.

6In cases where the parties agree to the amount of the

taxpayer’s liability, such as those involving Form 866, the

taxpayer has already agreed to the deficiency amount and that the

deficiency is proper. Thus, a deficiency notice would provide no

additional safeguards and is not required. Marathon Oil Co. v.

United States, 42 Fed. Cl. 267, 280 (1998), affd. 215 F.3d 1343

(Fed. Cir. 1999). Moreover, a closing agreement may not be

reconsidered in the absence of fraud, malfeasance, or

misrepresentation of a material fact. Sec. 7121(b). Absent

these exceptional circumstances, the closing agreement remains

binding and could not be reopened in an action to redetermine a

(continued...)

Petitioners and respondent executed a closing agreement

covering specific matters on Form 906. The specific matters

included the treatment of Comco items on petitioners’ returns for

the years at issue. The agreement did not cover all items

affecting petitioners’ tax liability. In their closing

agreement, the parties did not agree to the amount petitioners

owed for the years at issue, and, in fact, the closing agreement

specifically states that it does not affect or preclude later

adjustments of non-Comco items for the years at issue.5 

2. Effect of Closing Agreement on Deficiency

Notice Requirement

We agree that a deficiency notice is not required before

assessment if a taxpayer and the Secretary execute a closing

agreement on Form 866, finally determining the taxpayer’s

liability for the year.6 Marathon Oil Co. v. United States, 42
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6(...continued)

deficiency. Id. Accordingly, there would be nothing the

taxpayer could challenge. Marathon Oil Co. v. United States,

supra at 280.

Fed. Cl. 267 (1998), affd. 215 F.3d 1343 (Fed. Cir. 1999); Rev.

Proc. 68-16, 1968-1 C.B. 770. Unlike a Form 866, however, the

parties here executed a closing agreement on Form 906. The Form

906 executed here covered only specific matters (i.e., the

treatment of the Comco items). The parties did not agree to the

total amount of petitioners’ liabilities for the years at issue. 

Respondent argues that he merely computed the effect of the

Comco items agreed in the closing agreement on the amounts

petitioners reported on their returns. Respondent maintains that

in this circumstance, he is not required to issue a deficiency

notice before assessing the resulting liability. We disagree. 

Respondent may not dispense with a deficiency notice in this

situation where petitioners were never allowed to challenge

respondent’s computations. See Commissioner v. Shapiro, 424 U.S.

at 616-617. By failing to issue petitioners a deficiency notice,

respondent deprived petitioners of the opportunity of filing a

deficiency suit to dispute these computations and to argue that

other adjustments should be made to their liabilities for the

years at issue. See sec. 6213(a); Commissioner v. Shapiro, supra

at 616-617. Respondent unilaterally implemented the closing

agreement by applying the terms of the agreement to the amounts
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reported on petitioners’ returns and then assessed the resulting

liabilities. Because respondent did not issue a deficiency

notice, petitioners were never afforded the opportunity to

litigate the amount of their tax liabilities before the

collection process began. See Commissioner v. Shapiro, supra at

616-617; cf. Marathon Oil Co. v. United States, supra at 280. 

3. Our Holding Would Not Permit Petitioners To

Challenge the Terms of the Closing Agreement

Respondent also argues that he was not required to issue a

deficiency notice to petitioners because petitioners are not

allowed to challenge the terms of the closing agreement. 

Respondent reasons that issuing petitioners a deficiency notice

and allowing them to file a petition with this Court would

frustrate the purpose of the closing agreement as a binding,

conclusive agreement that may be reopened only in exceptional

circumstances. We disagree. 

The closing agreement remains binding on both parties. 

There has been no fraud, malfeasance, or misrepresentation of a

material fact. See sec. 7121(b). A deficiency notice would have

allowed petitioners to challenge respondent’s determination of

petitioners’ tax liabilities for the years at issue, but it would

not have allowed petitioners to reopen or contest the treatment

of the Comco items. The parties agreed to the treatment of the

Comco items in the closing agreement. The parties did not agree,
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however, to settle all issues related to petitioners’ tax

liabilities for the years at issue.

We conclude that the closing agreement here, which covers

specific matters only, does not absolve respondent from issuing a

deficiency notice before assessing petitioners’ liabilities. 

Accordingly, we hold that respondent may not proceed with

collection. See sec. 6213(a).

C. Our Holding Does Not Violate Section 7121(b)(2)

Respondent argues that section 7121(b) requires us to give

full effect to the closing agreement in this proceeding. Section

7121(b) provides that a closing agreement (or any assessment in

accordance with a closing agreement) shall not be annulled,

modified, set aside, or disregarded in any subsequent suit,

action or proceeding. 

We hold that collection may not proceed because respondent

failed to follow the law regarding assessments, not because we

are disregarding the parties’ closing agreement. See secs. 6212

and 6213. We are not constrained to hold that respondent may

proceed with collection simply because the collection proceeding

is for a year in which there was a closing agreement between the

parties. 

III. Conclusion

Respondent assessed petitioners’ tax liabilities without

first issuing petitioners the statutorily required deficiency
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notice. The existence of a closing agreement covering specific

matters for the years at issue does not abrogate respondent’s

duty to issue petitioners a deficiency notice before assessment. 

Accordingly, we hold that respondent may not proceed with

collection of petitioners’ liabilities.

To reflect the foregoing, 

Decision will be entered

for petitioners.