t c memo united_states tax_court taylor miller petitioner v commissioner of internal revenue respondent docket no filed date patrick w martin for petitioner timothy f salel for respondent memorandum opinion beghe judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax the deficiency is primarily attributable to respondent’s determination that the proceeds of petitioner’s settlement of a sex discrimination class action lawsuit kraszewski v state farm gen ins co fair empl prac cas bna n d cal affd in part revd in part and remanded 912_f2d_1182 9th cir the state farm class action lawsuit are included in her gross_income petitioner concedes that the gross_proceeds of her settlement of the state farm class action law suit---dollar_figure--are not excluded from her gross_income under sec_104 a but she attacks the validity of respondent’s notice_of_deficiency on multiple grounds that respondent violated his reopening procedures that respondent performed a second inspection of petitioner’s books of account in violation of sec_7605 and that respondent is equitably estopped from issuing the notice_of_deficiency petitioner also claims if the validity of the notice should be sustained that she is entitled to deduct as sec_162 business_expenses two items she did not claim on her income_tax return her contribution to a private pension_plan and her attorney’s fees and costs in the state farm class action lawsuit we sustain the validity of respondent’s notice and reject petitioner’s claims to the private pension_plan contribution ' for a description of the state farm class action lawsuit in the context of the claimants’ income_tax treatment see brewer v commissioner tcmemo_1997_542 affd without published opinion 172_f3d_875 9th cir unless otherwise noted all section references are to the internal_revenue_code in effect during the year in issue and all rule references are to the tax_court rules_of_practice and procedure deduction and above-the-line treatment of the deduction for her attorney’s fees and costs which respondent allowed in the notice_of_deficiency as an itemized_deduction subject_to the 2-percent limitation of sec_67 some of the facts have been stipulated and are so found the stipulations of fact and accompanying exhibits are incorporated by this reference for clarity and convenience findings_of_fact and discussion with respect to the validity of respondent’s notice and petitioner’s deduction claims are combined under two separate headings monetary amounts have been rounded to the nearest whole dollar petitioner resided in poway california when the petition in this case was filed issue validity of statutory notice during petitioner sold insurance products as an employee of fidelity union life_insurance_company fidelity during and petitioner operated as a sole owner and paid for the costs of operating her business as an independent insurance salesperson with fidelity petitioner reported her and earnings from the sale of fidelity insurance products on schedule c of her and federal_income_tax returns after petitioner never again sold insurance but worked off and on sometimes as an employee and sometimes as an independent_contractor in various selling jobs in among other things the financial products mortgage brokerage and real_estate businesses in fall or date petitioner applied to become a state farm trainee agent as part of her job application petitioner had a series of interviews and took a test with state farm petitioner was never hired by state farm nor did she ever provide services for state farm in petitioner applied to become a class member of the state farm class action lawsuit and thereafter became a class member on date petitioner executed a settlement agreement and general release settlement agreement regarding her claim in the state farm class action lawsuit in the settlement agreement petitioner and state farm characterized the settlement as the compromise of a claim for agent earnings by entering into the settlement agreement petitioner waived any and all right she might have respecting instatement petitioner received a dollar_figure check from the law firm of saperstein mayeda larkin and goldstein as the net_proceeds of settlement of her claim in the state farm class action lawsuit petitioner has stipulated that she received dollar_figure as the gross_proceeds of the settlement not reduced by attorney’s fees and costs during the tax_year of that amount state farm reported dollar_figure on form 1099-misc and the remaining dollar_figure on form_w-2 state farm negotiated and reported the dollar_figure of settlement proceeds on form 1099-misc as the amount it would have paid petitioner if she had become its independent insurance agent state farm negotiated and reported the dollar_figure of settlement proceeds on form_w-2 with payroll_taxes properly withheld as the amount it would have paid petitioner if it had initially hired her as a trainee agent petitioner timely filed her federal_income_tax return form_1040 for the tax_year with the internal_revenue_service center in fresno california petitioner attached to her return a schedule c and a form_8275 disclosure statement reporting her receipt of settlement proceeds of dollar_figure from state farm companies in on account of personal injuries or sickness from a very serious auto accident and an intentional personal discrimination claim which were excludable from gross_income under sec_104 of this total amount petitioner received approximately dollar_figure from state farm mutual auto insurance_company in settlement of a claim for personal injuries suffered in an auto accident these personal injury settlement proceeds are not at issue in this case on date respondent’s district_director mailed petitioner a letter and information_document_request form informing her that her income_tax return had been selected for examination on date petitioner’s counsel mailed respondent a 16-page memorandum arguing that the state farm class action lawsuit settlement proceeds received by petitioner are excluded from gross_income under sec_104 on date respondent mailed petitioner a no change form letter letter do rev stating we examined your tax_return for the above period and made no changes to the tax_year reported respondent’s form letter goes on to advert to the possibility of a later change in the taxpayer’s tax if the taxpayer is a shareholder of an s_corporation a beneficiary of a_trust or a partner in a partnership whose return is changed on examination respondent and petitioner never executed a closing_agreement pursuant to sec_7121 for petitioner’s tax_year on date respondent’s fresno service_center mailed petitioner a 30-day_letter regarding her alleged failure to report bartering proceeds of dollar_figure on her income_tax return for the tax_year the 30-day_letter regarding the bartering proceeds was unrelated to the examination regarding the state farm class action lawsuit settlement proceeds on date petitioner’s representative david w stevenson c p a stevenson in response to this 30-day_letter mailed a letter to respondent’s fresno service_center attaching thereto copies of the schedule d of petitioner’s income_tax return and the front page of the 30-day_letter after receiving stevenson’s letter respondent agreed that petitioner had properly reported dollar_figure in bartering proceeds on schedule d of her income_tax return on date respondent’s district_director mailed petitioner a 30-day_letter for the tax_year regarding the state farm class action lawsuit settlement proceeds the statement of examination changes accompanying this 30-day_letter proposed to treat petitioner’s state farm class action lawsuit settlement proceeds in the amount of dollar_figure as income from self-employment for the tax_year and to allow legal fees of dollar_figure paid to obtain the settlement as an above-the-line schedule c deduction this 30-day_letter proposed no adjustment related to bartering proceeds in date petitioner and her counsel signed a consent to extend the time to assess tax form_872 that extended the period of limitations on assessment for the tax_year until date on date a tax technician in respondent’s district director’s office mailed petitioner’s counsel a letter enclosing a revised examination_report not included in the record deleting self-employment_tax on the settlement proceeds and downgrading petitioner’s legal fees from an above-the-line schedule c deduction to a below-the-line itemized_deduction the letter also asserted that two criteria applied in respondent’s decision to reopen ms miller’s case for re-examination first there had been a substantial error both in amount and in relation to total_tax liability and second other circumstances exist indicating that failure to reopen the case would be a serious administrative omission on date petitioner signed another consent to extend the time to assess tax form_872 which extended the period of limitations on assessment for the tax_year until date on date petitioner’s counsel mailed respondent’s riverside california appeals_office a 9-page memorandum arguing two grounds on which the no_change_letter should stand the first ground was that there was no justifiable basis for reopening the case under revproc_94_68 1994_2_cb_803 and section of the internal_revenue_manual the manual which in his view were binding on the internal_revenue_service the second ground was that respondent had conducted a second investigation of petitioner’s return without notifying her of the need thereof in violation of sec_7605 b on date the chief examination_division laguna niguel california mailed petitioner a letter stating with regard to the tax_year we are required_by_law to notify taxpayers in writing if we need to reexamine their books_and_records after previously examining them because information that may affect your tax_liability has been developed since we last examined your books_and_records please make them available to us for reexamination thank you for your cooperation on date petitioner signed another consent to extend the time to assess tax form_872 which extended the period of limitations for assessment for the tax_year until date on date respondent issued the notice_of_deficiency for the tax_year to petitioner when respondent issued the notice the period of limitations for assessment for the tax_year had not expired petitioner claims she relied on respondent’s date no_change_letter for a sense of security but she did nothing in detrimental reliance thereon for some years petitioner has been her mother’s primary source of support petitioner’s income_tax returns for the years through claim her mother as a dependent commencing early in the calendar_year petitioner became the primary source of support for one of her nephews to provide the context for respondent’s change_of the position evidenced by the no_change_letter we make some -- - preliminary observations in when respondent notified petitioner that her return had been selected for examination continuing through when respondent mailed petitioner the no_change_letter it was respondent’s stated position that a payment in satisfaction of a sex discrimination claim under title vii of the civil rights act of as amended in to provide for compensatory and punitive_damages and for jury trials was excluded from gross_income as damages for tort-- like personal injury under sec_104 see revrul_93_ 1993_2_cb_61 see also priv ltr rul date in taking this position respondent relied on language in 504_us_229 which held that back-pay damages under the pre-1991 version of title vii of the civil rights act of were taxable because that version of the act which provided neither for damages other than backpay nor for a jury trial did not redress a tort-like injury petitioner’s counsel’s legal memorandum of date argued that petitioner’s settlement proceeds from the state farm class action lawsuit remedied a tort-like injury and were excluded from gross_income under sec_104 pursuant to revrul_93_88 and priv ltr rul in issuing the no_change_letter respondent apparently accepted petitioner’s argument that petitioner’s claim in the state farm class action lawsuit was governed by the amendments to the civil rights act any uncertainty about the significance in discrimination cases of the amendments to the civil rights act was laid to rest by the supreme court’s opinion in 515_us_323 published date schleier held that awards under the age discrimination in employment act adea were taxable not only because the adea like the pre-1991 version of the civil rights act does not satisfy the requirement of tort- like injury but also because the claim must be on account of personal injuries or sickness and that termination on account of age could not fairly be described as a ‘personal injury’ or ‘ sickness ’ id pincite thus the second ground of schleier if respondent accepted petitioner’s argument to this effect relying on the holding of the court_of_appeals for the ninth circuit in 976_f2d_1536 9th cir cited by petitioner’s counsel in his memo of date that the provisions of the civil rights act of publaw_90_202 81_stat_602 governing expert witness fees applied retroactively it turned out that respondent was mistaken the amendments made by the civil rights act of which provided for additional relief of compensatory and punitive_damages as well as back pay and for a jury trial were subsequently held not to apply retroactively see 511_us_244 thus respondent should have considered petitioner’s claim in the light of the pre-1991 version of the act under which she made claim which arose in see clark v commissioner tcmemo_1997_ since 504_us_229 held that sec_104 did not apply to a settlement award under title vii of the act burke was governing authority for inclusion of petitioner’s settlement in gross_income supports the proposition that back wages for what might be regarded as a tort-like injury eg discrimination on account of age race disability or sex are taxable unless it can be shown that a the discrimination caused physical or psychological injury and b the loss of pay was due to a physical or psychological injury not just the discriminatory action of the employer ’ schleier became the law of the land applicable to all pending cases when the u s supreme court announces a rule_of law and applies it to the litigants in the case announcing the rule that rule applies retroactively to all other pending cases unless barred by the statute_of_limitations or res_judicata see 509_us_86 501_us_529 consistently with this view the tax_court has applied schleier to taxable years antedating the supreme court’s opinion therein see eg 105_tc_396 affd 121_f3d_393 8th cir green v commissioner tcmemo_1998_274 goeden v commissioner tcmemo_1998_18 wise v commissioner tcmemo_1998_4 kroposki it is noteworthy that the supreme court in schleier v 515_us_323 n cast doubt on the commissioner’s reading of united_states v burke supra in revrul_93_88 1993_2_cb_61 in notice_95_45 1995_2_cb_330 the commissioner suspended revrul_93_88 in revrul_96_65 1996_2_cb_6 the commissioner obsoleted revrul_93_88 v commissioner tcmemo_1997_563 moran v commissioner tcmemo_1997_412 fredrickson v commissioner tcmemo_1997_125 the tax_court has also invariably held that recipients of settlement proceeds from the state farm class action lawsuit are required to include the proceeds in gross_income see eg westmiller v commissioner tcmemo_1998_140 reiher v commissioner tcmemo_1998_75 haster v commissioner tcmemo_1998_8 brewer v commissioner tcmemo_1997_542 affd without published opinion 172_f3d_875 9th cir gillette v commissioner tcmemo_1997_301 hayes v commissioner tcmemo_1997_213 hardin v commissioner tcmemo_1997_202 raney v commissioner tcmemo_1997_200 clark v commissioner tcmemo_1997_156 berst v commissioner tcmemo_1997_137 martinez v commissioner tcmemo_1997_126 affd without published opinion aftr 2d ustc par big_number 9th cir fredrickson v commissioner supra approximately months after the supreme court’sss opinion in schleier respondent mailed petitioner the 30-day_letter of date which proposed that the proceeds of her settlement of the state farm class action lawsuit be included in her gross_income thereafter petitioner signed a series of consents extending the period of limitations on assessment for the tax_year in due course in respondent issued the notice which embodies respondent’s determination to give effect to the proposal in respondent’s 30-day_letter of date before turning to petitioner’s three arguments that respondent’s statutory notice is invalid we recite some events in the administrative history of the case noted by the parties in making their arguments before mailing the 30-day_letter of date in which respondent first proposed after mailing petitioner the no_change_letter that the state farm class action lawsuit settlement proceeds should be included in her gross_income respondent issued a 30-day_letter on date to the effect that she had failed to include dollar_figure of bartering proceeds in her return petitioner’s representative resolved that issue simply by sending respondent a copy of the schedule d on which the bartering proceeds were reported petitioner now claims that respondent’s raising of the bartering proceeds issue was a prohibited second_examination without petitioner’s consent in violation of sec_7605 on date after the 30-day_letter of date and the parties’ execution of the first consent extending the period of limitations a tax technician in respondent’s district director’s office mailed petitioner’s attorney a letter that on balance was more unfavorable to petitioner than the day letter although the new letter said the recovery was not -- - subject_to self-employment_tax it downgraded her attorney’s fees from an above-the-line schedule c deduction to a below-the-line itemized_deduction which increased her adjusted_gross_income and limited her available exemptions the letter also recited the two criteria justifying respondent’s change_of the position evidenced by the no_change_letter in response to petitioner’s counsel’s second memo of date arguing that neither of those criteria had been satisfied and that petitioner had not been notified of the need for a second_examination respondent’s chief examination_division on date mailed petitioner a letter belatedly acknowledging that we are required_by_law to notify taxpayers in writing if we need to reexamine their books_and_records after previously examining them and asking petitioner to please make them available to us for examination there is no evidence in the record that respondent ever actually reexamined petitioner’s records or requested any additional documentation from petitioner regarding the state farm class action lawsuit settlement proceeds although there may be some interrelationships among petitioner’s arguments that the notice should be invalidated on account of respondent’s asserted failure to follow his reopening procedures respondent’s asserted violation of sec_7605 and petitioner’s claim of equitable_estoppel see saltzman irs -- - practice and procedure 2d ed we follow the lead of the parties and address these arguments under separate subheadings a respondent’s asserted failure to follow reopening procedures respondent’s procedural rules for reopening cases closed after examination to make an adjustment unfavorable to the taxpayer are set forth in the latest of a long line of revenue procedures revproc_94_68 1994_2_cb_803 and in section of the manual the service’s policy is not to reopen a closed_case to make an adjustment unfavorable to the taxpayer unless there is evidence of fraud malfeasance collusion concealment or misrepresentation of a material fact the prior closing involved a clearly defined substantial error based on an established service position existing at the time of the previous examination or other circumstances exist that indicate failure to reopen would be a serious administrative omission audit internal_revenue_manual cch sec reopening requirements pincite4 the revenue_procedure and the manual clarify the reopening procedures the closing of a case by the service is evidenced among other things by issuance of a no_change_letter to the taxpayer see revproc_94_68 sec_4 1994_2_cb_803 revproc_94_68 sec dollar_figure policy c b pincite is virtually identical audit internal_revenue_manual cch sec pincite5 a no_change_letter is not a closing_agreement under sec_7121 see sec_301_7121-1 proced admin regs violation of respondent’s reopening procedures does not invalidate a notice_of_deficiency in the face of hornbook law that respondent’s procedural rules including the reopening procedures under revproc_94_68 and section of the manual supra are merely directory not mandatory see 61_tc_693 and that compliance with directory procedural rules is not essential to the validity of a statutory notice so that an alleged violation of these rules provides no basis for invalidating a statutory_notice_of_deficiency id petitioner cites 441_us_281 for the proposition that respondent’s reopening procedures in revproc_94_68 1994_2_cb_803 should have the force and effect of law chrysler corp v brown u s pincite quoting 415_us_199 establishes that a regulation or procedure has the force and effect of law when it is promulgated by an agency as a ‘ substantive rule’ ora ‘legislative-type rule’ pursuant to a mandate or delegation by congress ‘affecting individual rights or obligations ’ conversely interpretive rules general statements of policy or -- - rules of agency organization procedure or practice are not binding upon the agency id pincite courts have long recognized the distinction between mandatory procedures which are binding on the agency and directory procedures which are not see 421_f2d_475 6th cir 354_f2d_629 7th cir 304_f2d_560 4th cir collins v commissioner supra notaro v united_states aftr 2d ustc par big_number n d ill first fed sav loan association v goldman aftr 2d ustc par w d pa we are satisfied under the weight of authority that we need not reexamine the well-established law to this effect however for purposes of completeness we do address petitioner’s argument that respondent violated respondent’s own reopening procedures so as to demonstrate the inapplicability of any isolated cases in which the commissioner’s notice was arguably held invalid for failure to follow his own reopening procedures see eg 173_f3d_503 4th cir we conclude that in the case at hand respondent satisfied at least one of the criteria under his procedures for reopening a closed_case ii respondent did not violate his reopening procedures in reopening petitioner’s tax_year whether respondent was justified under revproc_94_68 and section of the manual supra in reopening petitioner’s closed_case would depend upon whether respondent’s original position was attributable to taxpayer or service misconduct constituted substantial error or whether respondent’s failure to change the position would have constituted a serious administrative omission satisfaction of any of these three tests would justify reopening under the service’s own policy pronouncements see supra p we focus on the third test whether failure to reopen would have been a serious administrative omission reopening because of a serious administrative omission covers situations in which a failure to reopen could result in serious criticism of the service’s administration of the tax laws establish a precedent that would seriously hamper subsequent attempts by the service to take corrective action result in inconsistent treatment of similarly situated taxpayers who have relatively free access to knowledge as to how the service treated items on other taxpayers’ returns audit internal_revenue_manual cch sec pincite with regard to serious administrative omission we conclude that respondent is on firm ground whatever doubt there might have been about the clarity of respondent’s established position in those doubts were laid to rest and the position - - clarified in mid-1995 by the supreme court’s opinion in 515_us_323 petitioner acknowledges that the state farm class action lawsuit settlement proceeds constitute gross_income and we are satisfied that respondent was authorized to pursue all recipients of such proceeds including petitioner for all open years for respondent not to have done so might well have resulted in serious criticism of the service’s administration of the tax laws and would have resulted in inconsistent treatment of similarly situated taxpayers thereby satisfying the first and third criteria for application of the serious administrative omission test petitioner’s anecdotal testimony that some members of the class got away with noninclusion of their settlement proceeds because respondent failed to pursue them does not change our conclusion that the third test was satisfied section of the manual in its definition of reopening criteria contains neither the conjunction and nor the disjunctive connector or between the second and third criteria audit internal_revenue_manual cch sec pincite we are satisfied that the three criteria are to be interpreted and applied as setting forth their requirements in the disjunctive what this means is that the satisfying of any one of the three criteria suffices to satisfy respondent’s serious administrative omission reopening test inasmuch as at least one of the criteria for a serious administrative omission was satisfied respondent’s self-imposed stated conditions for reopening petitioner’s tax case were satisfied b second inspection sec_7605 provides no taxpayer shall be subjected to unnecessary examination or investigations and only one inspection of a taxpayer’s books of account shall be made for each taxable_year unless the taxpayer requests otherwise or unless the secretary or_his_delegate after investigation notifies the taxpayer in writing that an additional inspection is necessary the purpose of sec_7605 is not to limit the number of examinations but to shift the discretion for a reexamination of the taxpayer’s books to higher management personnel from the field agent this serves to emphasize the responsibility of agents to exercise prudent judgment in wielding the extensive powers granted to them by the internal_revenue_code 379_us_48 sec_7605 was not meant to restrict the scope of respondent’s legitimate power to protect the revenue see id sec_7605 is not to be read so broadly as to defeat the powers granted to respondent to examine the correctness of a taxpayer’s return see 313_f2d_79 9th cir there is no evidence in the record of a second inspection as contemplated by sec_7605 irrespective of whether petitioner is arguing that respondent’s reopening of the treatment of the state farm class action lawsuit settlement proceeds or the raising of the bartering proceeds issue was a prohibited second inspection a second inspection would require at a minimum that respondent have access to and physically view petitioner’s books_and_records for the tax_year see 66_tc_1084 affd on other grounds 592_f2d_1259 5th cir petitioner argued in her counsel’s memo of date that respondent had failed to notify her in writing of the need for a second inspection respondent through the chief examination_division belatedly responded in respondent’s letter of date reciting the sec_7605 requirements and asking petitioner to please make her books_and_records available to us for examination respondent’s response was wholly unnecessary there is no evidence in the record that respondent actually reexamined petitioner’s records or requested or received any additional documentation from petitioner regarding the state farm class action lawsuit settlement proceeds after issuance of the no_change_letter apparently recognizing the weakness of her original position on the issue petitioner on the day of trial chose to rely on respondent’s inquiry raising the bartering proceeds issue as the prohibited second_examination on this score petitioner fares no better in resolving the bartering proceeds issue respondent - - merely reviewed schedule d of petitioner’s income_tax return and the letter from petitioner’s representative respondent’s review of a taxpayer’s income_tax return and accompanying schedules does not constitute a second inspection of the taxpayer’s books of account under sec_7605 see 84_tc_1349 64_tc_510 affd per curiam 578_f2d_827 9th cir since there was no second inspection or examination respondent’s inquiry following the no_change_letter into the bartering proceeds issue without a prior written justification did not violate sec_7605 see 103_tc_441 even if respondent should be deemed to have performed a second inspection in raising the bartering proceeds issue it was done with the knowledge of petitioner who raised no objection thereto prior to the morning of trial consequently petitioner waived the requirement of written notice prior to a second inspection see 41_tc_732 affd on this issue 356_f2d_883 5th cir rice v commissioner tcmemo_1994_204 moreover even if respondent should be deemed to have performed a second inspection on the bartering proceeds issue without prior notification that petitioner did not waive invalidation of the notice_of_deficiency would not be the proper remedy no remedy would be warranted there was no adjustment in the deficiency_notice related to the bartering proceeds issue petitioner suffered no injury as a result of the alleged violation of sec_7605 see rice v commissioner supra at note and cases cited therein c respondent is not egquitably estopped from issuing the notice_of_deficiency eguitable estoppel is a judicial doctrine that ‘precludes a party from denying his own acts or representations which induced another to act to his detriment ’ 98_tc_695 quoting 74_tc_743 affd 673_f2d_784 5th cir the traditional elements of equitable estoppel----all of which must be satisfied to invoke the doctrine--are a false representation or misleading silence by the party against whom the doctrine is to be invoked an error ina statement of fact and not an opinion or statement of law ignorance of the fact by the representee reasonable reliance on the act or statement by the representee and detriment to the representee see 104_tc_13 affd 140_f3d_240 4th cir equitable_estoppel may not be asserted against the government ‘on the same terms as any other litigant’ 922_f2d_1402 9th cir quoting - - 467_us_51 the doctrine_of equitable_estoppel is applied against respondent with utmost caution and restraint 312_f2d_311 9th cir affg 32_tc_998 affg in part and revg in part 32_tc_1017 estoppel may be successfully invoked against the commissioner only where a taxpayer would otherwise sustain such a profound and unconscionable injury in reliance on the commissioner’s action as to require in accordance with any sense of justice and fair play that the commissioner not be allowed to inflict the injury id this rarely happens the policy in favor of the efficient collection of public revenue usually outweighs the customary policy considerations that justify invocation of equitable_estoppel as between private litigants see id in addition to the traditional elements of equitable_estoppel the court_of_appeals for the ninth circuit requires the party seeking to apply the doctrine against the government to prove affirmative misconduct see 1_f3d_932 9th cir and cases cited the aggrieved party must prove ‘affirmative misconduct going beyond mere negligence’ and even then ‘ estoppel will only apply where the government’s wrongful act will cause a serious injustice and the public’s interest will not suffer undue damage by imposition of - - the liability ’ 872_f2d_277 9th cir quoting 847_f2d_515 9th cir affirmative misconduct requires ongoing active misrepresentations ora pervasive pattern of false promises as opposed to an isolated act of providing misinformation 875_f2d_699 9th cir affirmative misconduct is a threshold issue to be decided before determining whether the traditional elements of equitable_estoppel are present see purcell v united_states supra pincite before beginning the inquiry into whether the no_change_letter satisfied the conditions for invoking equitable_estoppel against respondent we must isolate and characterize the representation if any made by the no_change_letter the letter says two things we examined your return and made no changes to the tax_year reported and it alerts the taxpayer to the possibility of a later change if the service makes a change on examination of an s_corporation trust or partnership of which the taxpayer is a shareholder beneficiary or partner the letter thereby creates an impression that the return will not be changed in any other circumstances but this is more a possible inference from silence than an affirmative representation in this respect the letter is different from the estate_tax closing letters that were considered in 173_f3d_503 4th cir 885_f2d_561 9th cir estate of brocato v commissioner tcmemo_1999_424 law v united_states aftr 2d ustc par big_number n d cal the format of the estate_tax closing letter as described or guoted in these cases is to state that the estate_tax_return has either been accepted as filed or after adjustment to which the taxpayer agreed to recite that the letter is not a closing_agreement under sec_7121 and to state that we will not reopen this case unless the three-prong test set forth in the revenue_procedure currently in effect is satisfied either by quoting the test or citing the revenue_procedure petitioner fails to satisfy the strict standard for equitable_estoppel against the government for at least three reasons first as a threshold matter there is no evidence of ongoing active misrepresentations a pervasive pattern of false promises or any affirmative misconduct by respondent see purer v united_states supra pincite second however the statements in the no_change_letter might be characterized petitioner has not demonstrated reliance on the no_change_letter in changing her behavior to her detriment in order to satisfy the requirement of reliance petitioner must show that she changed her behavior as a result of the alleged - - misrepresentation see 467_us_51 while petitioner claims that she relied on the no_change_letter for a sense of security there is no evidence that she changed her behavior or did anything in reliance on the no_change_letter much less that she did anything to her detriment see keaton v commissioner tcmemo_1993_ nadler v commissioner tcmemo_1992_383 petitioner’s claims that she relied on the no_change_letter in continuing to save her investments and in continuing to care for her mother do not hold water petitioner continued to save her investments and care for her mother after she received the no_change_letter in the same ways she did before she received it petitioner’s continued behavior does not establish the change in position that petitioner must establish in order to prove reliance see heckler v community health servs supra pincite petitioner also claims that petitioner relied on the no_change_letter in deciding to take custody of her nephew shortly before date however before petitioner took custody of her nephew she had signed consents extending the period of limitations on assessment on date on date and on date petitioner took custody of her nephew shortly after respondent issued the notice_of_deficiency for this case on date since petitioner was aware of the pending examination of her income_tax return for and - - had already received the notice when she accepted custody of her nephew petitioner’s claim of reliance on the no_change_letter is not credible see levin v commissioner tcmemo_1990_226 taxpayer who executed two extensions of the period of limitations did not establish reliance on a closing document third any reliance on the no_change_letter was not reasonable a no_change_letter as distinguished from a closing_agreement under sec_7121 does not resolve a tax controversy with finality see 64_tc_700 affd without published opinion 552_f2d_368 5th cir kiourtsis v commissioner tcmemo_1996_534 fitzpatrick v commissioner tcmemo_1995_548 even after she received the no_change_letter petitioner was aware that the tax_year remained open petitioner signed three consents to extend the time to assess tax form_872 the period of limitations on assessment for the tax_year had not expired at the time respondent issued the notice_of_deficiency in this case accordingly even if petitioner did rely on the no_change_letter her reliance was not reasonable we deny petitioner’s claim for the application of equitable_estoppel against respondent to invalidate the statutory notice issue amount and character of allowable deductions the validity of respondent’s statutory notice having been upheld the conclusion follows as petitioner concedes that the -- - proceeds of settlement of her claim in the state farm class action lawsuit must be included in her gross_income we are therefore faced with petitioner’s alternative arguments that she is entitled to a substantial deduction in arriving at her taxable_income for her contributions to the tjm pension_plan and that her attorney’s fees are an above-the-line schedule c deduction rather than an itemized_deduction subject_to the percent floor of sec_67 these two arguments have a common thread that petitioner should be allowed to treat her settlement recovery as if it were earnings from rendering services as an independent_contractor insurance agent for state farm a deduction disallowed for private pension_plan contributions on date petitioner adopted the taylor j miller defined benefit pension_plan tjm pension_plan according to the adoption_agreement petitioner adopted and sponsored the tjm pension_plan as a sole_proprietorship in her own name petitioner did not operate a sole_proprietorship during or the adoption_agreement for the tjm pension_plan selected date as the effective date and defined the term plan_year as the fiscal period ending on october of each calendar_year --- - the tjm pension_plan was a volume-submitter plan known as the harrigan ruff ryder sbardellati master defined benefit pension_plan and trust agreement on date respondent issued an opinion letter that the harrigan ruff ryder sbardellati master defined benefit pension_plan and trust agreement documents satisfied the requirements of the internal_revenue_code without opining on the qualified status of individual plans using the document in petitioner applied for a determination_letter for the tjm pension_plan on date respondent mailed petitioner a favorable determination_letter that the tjm pension_plan was qualified under sec_401 petitioner retained an enrolled_actuary stephen l hawkins to prepare the actuarial information schedule b form for the tjm pension_plan for the plan years ending date and date the first plan_year for the tjm pension_plan ended date petitioner submitted tjm pension plan's annual return of fiduciary of employee_benefit_trust schedule p form the return report of employee_benefit_plan form 5500-c r the actuarial information schedule b form and the application_for extension of time to file certain employee plan returns for the plan fiscal_year ending date on the return report of employee_benefit_plan form 5500-c r - - petitioner used business code no meaning other services not classified the second plan_year for the tjm pension_plan ended date at trial petitioner submitted the tjm pension plan's annual return of fiduciary of employee_benefit_trust schedule p form the return report of employee_benefit_plan form 5500-c r the actuarial information schedule b form and the application_for extension of time to file certain employee plan returns for the plan fiscal_year ending date petitioner made the following deposits into a_trust bank account at wells fargo bank titled in the name of taylor j miller trustee taylor j miller defined benefit pension_plan tim pension_plan account date amount date s big_number date big_number big_number on date petitioner transferred dollar_figure from the tjm pension_plan account to jack white company schedule b for the plan_year ending date showed that petitioner made the following contributions to the tjm pension_plan date amount date s big_number date big_number big_number based on the plan provisions and assumptions used by the actuary for the tjm pension_plan plan_year ending october - - the full funding limitation under sec_412 and sec_404 was dollar_figure for purposes of this case under sec_404 a the full funding limitation would result ina maximum deductible contribution of dollar_figure for the plan_year ending date schedule b for the plan_year ending date showed that petitioner made the following contribution to the tjm pension_plan date amount date dollar_figure based on the plan provisions and assumptions used by the actuary for the tjm pension_plan plan_year ending date the full funding limitation under sec_412 and sec_404 was dollar_figure for purposes of this case under sec_404 a a and sec_1_404_a_-14 income_tax regs the full funding limitation would result in a maximum deductible contribution of dollar_figure for the plan_year ending date during petitioner earned dollar_figure in wages from fidelity petitioner earned no self-employment_income during and respectively petitioner earned dollar_figure and dollar_figure in net self-employment_income from sales of fidelity insurance products petitioner had no self-employment_income for the tax_year for the and tax years petitioner reported - -- net losses from self-employment on schedule c of dollar_figure and dollar_figure respectively the only receipts that petitioner reported on schedule c of her income_tax return were the settlement proceeds of her auto accident personal injury claim and the settlement proceeds of the state farm class action lawsuit she lumped these together and reported the sum as subject_to exclusion under sec_104 see on her income_tax return petitioner reported her occupation as investor petitioner earned no income from self-employment for the and tax years on her income_tax returns for these years petitioner reported her occupation as investor on the schedule c to her income_tax return petitioner reported a dollar_figure net_loss from self-employment she reported her occupation as investor at no time did petitioner perform services for state farm petitioner did not work in the inssurance industry after petitioner did not claim any deduction for contributions to a pension_plan on her income_tax return for the tax_year in her petition filed with this court on date petitioner raised the issue of the deductibility of her pension_plan contributions for the first time in her petition petitioner claimed a deduction for her tax_year for dollar_figure in total contributions to the tjm pension_plan the dollar_figure in -- - total contributions consists of dollar_figure in contributions for the plan_year ending date and a dollar_figure contribution for the plan_year ending date petitioner concedes if we should hold that she had earned_income in in respect of which she could make a deductible contribution to the tjm pension_plan that the contribution deduction would be limited to a lesser amount as calculated under sec_1_404_a_-14 income_tax regs the tjm pension_plan was not in effect for the tax_year because petitioner did not have a written plan and trust in existence in the tjm pension_plan continues to remain in effect although petitioner has not made any subsequent contributions to the trust under the plan a self-employed taxpayer may be entitled to deduct from income her contributions to a qualified_plan provided that the deduction does not exceed the earned_income derived from the taxpayer’s trade_or_business with respect to which the plan is established see sec_401 sec_404 and a rarned income is defined in sec_401 c a which states in relevant part the term ‘earned income’ means the net_earnings_from_self-employment as defined in sec_1402 but such net_earnings shall be determined only with respect to a trade_or_business in which personal services of the taxpayer are - - a material_income-producing_factor sec_401 c a emphasis added petitioner seeks to deduct her contributions to the tjm pension_plan on the ground that the settlement proceeds of the state farm class action lawsuit should be characterized as earned_income from self-employment petitioner argues that the definition of net_earnings_from_self-employment should be broadly construed citing 110_tc_431 particularly with regard to insurance agents citing 108_tc_130 and 130_f3d_1388 10th cir affg tcmemo_1996_269 although wuebker and jackson did not hold in favor of inclusion schelble did and there are other cases that lend support to the traditional justification for a broad approach to promote the inclusion of self-employed individuals in the social_security system and to finance social_security_benefits to be paid to them see eg 38_f3d_1094 9th cir in support of the application of the origin_of_the_claim_test to hold that the settlement proceeds qualify as earnings from self-employment petitioner also cites 121_f3d_1399 10th cir which quoted the district_court as follows -- - the object of the origin_of_the_claim_test is to find the transaction or activity from which the taxable_event proximately resulted 372_us_39 or the event that led to the tax dispute keller st dev co v commissioner 688_f2d_681 9th cir the origin is determined by analyzing the facts and determining what the nature of the transaction is keller f 2d pincite although petitioner in the agreement settling her claim in the state farm class action lawsuit waived all rights to be hired by state farm the agreement characterized the settlement as the compromise of a claim for agent earnings petitioner cites 102_tc_465 vacated and remanded in an unpublished opinion 84_f3d_433 5th cir 88_tc_834 affd without published opinion 845_f2d_1013 3d cir and 58_tc_961 for the propositions that this court in making its facts and circumstances analysis of the origin of a claim not only gives great deference to the terms of a settlement negotiated at arm’s length but that in these cases this court determined that the parties sic specific allocation of the settlement proceeds should be respected as it accurately reflected the origin of the claim and the settlement of those proceeds we have here some tensions between the initial positions of congress and the commissioner restricting the availability of gualified plans for the self-employed because of the tax_shelter -- - they can provide for highly compensated individuals such as physicians and lawyers with petitioner’s reminder that the court has more recently recognized that highly compensated self- employed individuals are entitled to use such plans including properly structured defined benefit plans to shelter their earned_income and provide for retirement within the limits established by congress see 99_tc_9 petitioner couples her reminder with the argument that as a victim of invidious discrimination that prevented her from achieving an independent_contractor relationship in the insurance industry she should be allowed to treat her compensatory recovery as self-employment_income and thereby shelter a portion of the recovery by making deductible contributions to her gualified plan cf sager cohen how the see staff of the joint comm on taxation general explanation of the revenue provisions of the tax equity and fiscal responsibility act of pincite j comm print setting forth the various restrictions in prior statutory law on qualified_plans for the self-employed see also bittker lokken federal taxation of income kstates and gifts s90-4-s90-5 cum supp no for a brief summary with citations to relevant authorities of the commissioner’s efforts to limit the use by the erstwhile self-employed of professional corporations as vehicles to obtain the tax benefits of qualified_pension and profit-sharing_plans -- -- income_tax undermines civil rights law tax notes date unfortunately for petitioner the governing statutory language does not allow us to disregard its plain meaning the problem with petitioner’s arguments and authorities is that they derive no support from and indeed are contradicted by the statutory and regulatory language as construed by the tax_court sec_1_401-10 income_tax regs interprets earned_income as used in sec_401 c a quoted supra p and sec_1402 the regulation provides that an individual who renders no personal services has no earned_income even though such an individual may have net_earnings_from_self-employment from a trade_or_business earned_income includes professional fees and other_amounts received as compensation_for_personal_services actually rendered by the individual id accordingly if a self-employed taxpayer has not rendered personal services in the trade_or_business for which a plan is established then the taxpayer has no earned_income and is not entitled to deduct contributions to the plan see s rept 87th cong 1st sess 1962_3_cb_303 the measuring rod for deductible contributions for self-employed x taxpayers is ‘earned income’ this means that contributions by or for a proprietor or partner may be made under -- - a qualified_retirement_plan only if he performs personal services we have found no case in which a person’s desire willingness or intent to render personal services satisfied the earned_income requirement instead we have upheld the requirement that personal services be actually performed in order to yield earned_income that will support a deduction under sec_404 in 80_tc_768 jack kramer a former u s tennis champion received royalty payments from wilson sporting goods a tennis racquet manufacturer which were attributed to the use of his name and reputation and for services actually rendered in promoting wilson’s premier tennis racquet which bore his name we made an allocation between the royalties paid for_the_use_of kramer’s name and reputation which were not earned_income and royalties paid for promotional services actually rendered on wilson’s behalf which were earned_income we held that to the extent the royalties did not qualify as earned_income kramer was not entitled to take them into account in computing his deductible contributions to his keogh_plan similarly in frick v commissioner tcmemo_1983_733 affd without published opinion 774_f2d_1168 7th cir the court denied mr frick’s claimed keogh_plan contribution deduction to the extent his contributions were from investment_income this was because the investment_income was not derived from personal services in so ruling we quoted the legislative_history of sec_401 which states since the objective of x a qualified_plan for the self-employed is to provide retirement benefits based on personal services inactive owners who derive their income entirely from investments would not be allowed to participate s rept 87th cong lst sess 1962_3_cb_303 see also frick v commissioner tcmemo_1985_542 affd without published opinion 808_f2d_837 7th cir frick v commissioner tcmemo_1989_86 affd without published opinion 916_f2d_715 7th cir in the case at hand petitioner applied to become a state farm trainee agent in fall or date however petitioner never performed any services for state farm either as employee or as independent_contractor after she never worked in the insurance industry although from time to time thereafter she worked in various selling jobs sometimes as employee and sometimes as independent_contractor as in the kramer and frick cases the income paid_by state farm to petitioner in the case at hand cannot be earned_income because it was not paid as compensation_for_personal_services actually rendered ’ the settlement proceeds received by petitioner do not meet the personal service requirements for earned_income set forth in sec_401 sec_1_401-10 income_tax regs and the relevant case law inasmuch as the state farm settlement proceeds do not constitute income from self-employment within the meaning of sec_401 or sec_1402 petitioner is not entitled to deduct the contributions to her defined_benefit_plan the tjm pension_plan we therefore need not address the question briefed by the parties regarding the limitations on the contribution deduction b character of deduction for legal fee petitioner presented no evidence and requested no findings_of_fact on this issue and pays scant attention to it in her briefs in her briefs petitioner concludes by doing no more than asserting petitioner should be entitled to a deduction of dollar_figure for attorneys’ fees and costs without regard to the limitation under sec_67 ’ because the state farm settlement proceeds were not the result of personal services actually rendered by petitioner we need not determine the precise nature of the settlement proceeds or specifically characterize the settlement proceeds as a particular type of income see 86_f3d_1126 fed cir -- - in so asserting petitioner has conceded that she is not entitled to exclude her share of the attorney’s fees in the state farm class action lawsuit in computing her gross_income from the settlement petitioner’s concession is well taken both the court_of_appeals for the ninth circuit and this court have consistently held that contingent fees paid to recover a claim to income are not excluded in computing the gross_income from the recovery not even ina class action such as in the case at hand where the claimant retains even less control_over the prosecution and settlement of the claim than she would in ordinary one-on-one litigation compare 202_f3d_854 6th cir and 263_f2d_119 5th cir with 219_f3d_941 9th cir affg tcmemo_1998_395 213_f3d_1187 9th cir affg tcmemo_1998_291 114_tc_399 brewer v commissioner tcmemo_1997_542 affd without published opinion 172_f3d_875 9th cir martinez v commissioner tcmemo_1997_126 affd without published opinion aftr 2d ustc par big_number 9th cir see also banks v commissioner tcmemo_2001_48 although the legal expenses of an independent_contractor in prosecuting a claim arising from the conduct of his schedule c trade_or_business are entitled to above-the-line treatment as business_expenses see 112_tc_325 we have denied petitioner’s pension contribution deduction on the ground that the recovery in her settlement of the state farm class action lawsuit did not constitute earned_income from services actually rendered by her in conducting a schedule c business there was no nexus between the recovery and the rendering of any personal services by petitioner to the payor the nexus was different the recovery was connected to had its origin in and arose out of state farm’s invidious discrimination which deprived her of the opportunity to perform any such services our denial of petitioner’s claim to a pension_plan contribution deduction on that ground forecloses her claim that she is entitled to an above-the-line schedule c deduction for legal fees rather than the itemized_deduction subject_to the percent limitation of sec_67 that respondent allowed in the statutory notice to give effect to all the foregoing decision will be entered for respondent