TAX COURT OPINION

Case: Charles Norman & Barbara Loretta Walters
Docket Number: 1170-06S
Judge: Colvin
Opinion Type: bench
Filed: 07/23/2008
Pages: 8

UNITED STATES TAX COURT Washington, D .C . 2021 7 CHARLES NORMAN AND BARBARA LORETTA WALTERS , Petitioners , V . Docket No . 1170-06 S COMMISSIONER OF INTERNAL REVENUE , Respondent . O R D E R Pursuant to Rule 152(b), Tax Court ';Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court', shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial of the above case before Special Trial Judge Lewis R . Carluzzo at Wichita, Kansas, on June 17, 2008, containing his oral findings of fact and opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, decision will be under Rule 155 . (Signed) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . July 23, 2008 SERVED JUL 2 ,5 2008 1 Bench Opinion by Special Trial Judge Lewis R . Carluzz o 3 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 June 17, 200 8 Walters v . Commissione r Docket No . 1170-06 S THE COURT : The Court has decided to render ora l findings of fact and opinion in this case, and the followin g represents the Court's oral findings of fact and opinion . The oral findings of fact and opinion shall not be relie d upon as precedent in any other case . This proceeding for the redetermination o f deficiencies is a Small Tax Case conducted pursuant to th e provisions of Section 7463 of the Internal Revenue Code o f 1986, as amended, and Rules 170 through 175 of the Tax Cour t Rules of Practice and Procedure . This bench opinion is made pursuant to th e authority granted by Section 7459(b) of the Internal Revenu e Code of 1986, as amended, and Rule 152 of the Tax Cour t Rules of Practice and Procedure . Hereinafter in this bench opinion, unles s otherwise noted, section references are to the Interna l Revenue Code of 1986, as amended, in effect for the relevan t period . Rule references are to the tax court rules o f practice and procedure . J . Patrick Walters appeared on behalf o f petitioners . Charles M . Berlau appeared on behalf o f res onden t p . Heritage Reporting Corporation (202) 628-4888 4 1 The Notice of Deficiency that forms the basis for 2 this case is dated November 30, 2005 (the notice) . In that 3 notice the Respondent determined deficiencies i n 4 Petitioner's 2001 and 2002 Federal income taxes . The issue 5 for decision is whether the notice is valid . 6 All of the facts have been stipulated and are so 7 found . At the time the petition was filed, Petitioner s 8 resided in Kansas . 9 Petitioners' 2001 and 2002 joint Federal income 10 tax returns were timely filed and each was selected fo r 11 examination by Respondent . As relevant here, on each return 12 there is a dependency exemption deduction claimed for the 13 parent of one of the Petitioners . For each year, a number 14 of adjustments were proposed during the examination , 15 including the disallowance of the dependency exemptio n 16 deduction . Apparently during the examination, Petitioners 17 were in agreement with all of the proposed adjustments for 18 each year with the exception of Respondent's propose d 19 disallowance of the above-referenced dependency exemption 20 deduction (the disputed disallowance) . 21 On March 3, 2005, during the course of the 22 examination, two Forms 4549A, Income Tax Examination 23 Changes, were issued by Respondent . They are identical 24 except for the fact that one includes the dispute d 25 disallowance and the other does not . Heritage Reporting Corporation (202) 628-4888 5 1 In a cover letter to Petitioners transmitting the 2 Forms 4549A, which letter is also dated March 3, 2005 , 3 Respondent explained why two Forms 4549A were issued . With 4 respect to the Form 4549A that includes the dispute d 5 disallowance, Respondent noted that the report "show s 6 agreement with all issues" . Respondent advised Petitioners 7 that if they signed that report, Respondent would "be able 8 to close the entire examination" . With respect to the Form 9 4549A that does not include the disputed adjustment , 10 Respondent explained, "{that report} shows only those issues 11 that are agreed ." Respondent further explained that i f 12 Petitioners signed that report, Respondent would "be able to 13 close this part of the examination and proceed with appeal 14 of the unagreed issue" . 15 Elsewhere in that letter, Respondent requested 16 that Petitioners sign and return the Form 4549A to which 17 they agreed . 18 In a Form 870, Waiver of Restrictions on 19 Assessment and Collection of Deficiency in Tax and 20 Acceptance of Overassessment, dated March 14, 2005 , 21 Petitioners agreed to the deficiency for each year shown on 22 the Form 4549A that did not include the disputed 23 disallowance . In the cover letter transmitting the Form 870 24 to Respondent, Petitioners indicated that they wanted t o 25 "appeal" the disputed disallowance . Heritage Reporting Corporation (202) 628-4888 6 1 In a letter dated April 4, 2005, Responden t 2 advised Petitioners that "no changes" would be made "to the 3 original report" (the no-change letter) . 4 After a delay not explained in the record, the 5 deficiency agreed to in the above-referenced Form 87 0 6 apparently was assessed, but communications between 7 Petitioners and Respondent appear to suffer at this point in 8 time . In any event, shortly thereafter, . in the notic e 9 Respondent determined a deficiency attributable entirely to 10 the disputed disallowance for each year in issue . 11 Petitioners now agree to the disputed disallowance 12 for each year . They argue, however, that the notice o f 13 deficiency is invalid for two reasons . 14 According to Petitioners, the notice was issued in 15 violation of a "closing agreement" . According t o 16 Respondent, no such agreement exists with respect to the 17 years in issue . 18 The Commissioner is authorized "to enter into an 19 agreement in writing with any person relating to th e 20 liability of such person in respect of any internal revenue 21 tax for any taxable period" . Sec . 7121(a) ; see Urbano v . 22 Commissioner , 122 T .C . 384 (2004) . With certain exceptions 23 that need not be listed here, an agreement entered int o 24 pursuant to Section 7121(a) "shall be final and conclusive" 25 with respect to the matters covered by the agreement . Sec . Heritage Reporting Corporatio n (202) 628-4888 7 1 7121(b) . Such agreements are generally referred to as 2 closing agreements . Section 7121 does not describe the form 3 that a closing agreement must take but the regulation s 4 provide that, "all closing agreements shall be executed on 5 forms prescribed by the Internal Revenue Service" . Sec . 6 301 .7121-1(d), Proced . & Admin . Regs . 7 The Commissioner has prescribed two forms fo r 8 closing agreements . As relevant here, one type is a fina l 9 determination of a taxpayer's liability for a particular tax 10 period or periods . See Zaentz v . Commissioner , 90 T .C . 753, 11 760-761 (1988) ; Rev . Proc . 68-16, 1968-1 C .B . 770 . Thi s 12 type of closing agreement is completed on a Form 866 , 13 Agreement as to Final Determination of Tax Liability . See 14 Urbano v . Commissioner , supra . 15 Nothing in the record suggests that Respondent and 16 Petitioners entered into an agreement on a Form 866 wit h 17 respect to either year in issue in this case . Be that as it 18 may, in support of their position that the notice was issued 19 in violation of a closing agreement, petitioners argue that 20 the no-change letter constitutes a closing agreement . 21 Simply put, and ignoring the ambiguity to the reference to 22 the "original report" made in the no-change letter, they are 23 mistaken on the point . In general, a no-change letter i s 24 not a closing agreement, see Freeland v . Commissioner , T .C . 25 Memo . 1966-23, and nothing before us suggests that the no- Heritage Reporting Corporatio n (202) 628-4888 8 1 change letter in this case should be treated inconsisten t 2 with the general rule . The no-change letter does not affect 3 the validity of the notice . Furthermore, and althoug h 4 Petitioners do not specifically argue otherwise, the same is 5 true for the Form 870 . Only closing agreements entered into 6 pursuant to Section 7121 are binding on the Commissioner as 7 to a determination of the taxpayer's final tax liability for 8 a period or periods covered by the agreement . See Bang v . 9 Commissioner , T .C . Memo . 2006-83 . (For what it's worth, we 10 note the Petitioners were not bound by the Form 870 either . 11 They could have paid the taxes shown on that form and made a 12 claim, and if necessary sued, for refunds independent o f 13 this case, or once commenced, claimed overpayments in this 14 proceeding . ) 15 Petitioners next argue that the notice is invalid 16 because it was issued in violation of Respondent's published 17 procedural guidelines with respect to second examinations . 18 Respondent takes the position that there was no secon d 19 examination with respect to either year, and we agree a s 20 there is no evidence in the record that Respondent actually 21 re-examined any of Petitioners' records in connection with 22 the disputed disallowance for those years . See Sec . 23 7605(b) . Nevertheless, even if the events that preceded the 24 issuance of the notice constituted a second examination, the 25 notice would not be rendered invalid . Assuming, withou t Heritage Reporting Corporation (202) 628-4888 9 1 finding that the published procedural guidelines relied upon 2 by Petitioners are applicable here and have been violated, 3 those guidelines are only directory, not mandatory an d 4 Respondent's failure to have complied with those guidelines 5 would have no effect on the notice. See Collins v . 6 Commissioner , 61 T .C . 693 (1974) . 7 Petitioners do not suggest that the notice in any 8 other way fails to meet the requirements of Section 6212 for 9 either year in issue, and nothing in the record indicate s 10 any such failure . It follows that the notice is valid . To 11 reflect the foregoing, and to ensure that previous 12 assessments for each year in issue have been properly taken 13 into account, decision will be entered under Rule 155 . 14 This concludes the Court's oral findings of fact 15 and opinion in this case . 16 (Whereupon, at 12 :04 p .m ., the bench opinion in 17 the above-entitled matter was concluded . ) 18 19 20 21 22 23 24 / / 25 Heritage Reporting Corporation (202) 628-4888