Nelson Brothers, Inc. v. Commissioner
| Decision Date | 11 February 1991 |
| Docket Number | Docket No. 34540-87.,Docket No. 20207-89. |
| Citation | 61 T.C.M. 1865 |
| Parties | Nelson Brothers, Inc. v. Commissioner. |
| Court | U.S. Tax Court |
F. Gerald Burnett, 1700 AmSouth-Sonat Tower, Birmingham, Ala., for the petitioner. Linda J. Wise, for the respondent.
These consolidated cases are before the Court on petitioner's lotions to Compel Compliance with Settlement Agreement, separately filed by petitioner in docket No. 34540-87 on August 29, 1988, involving the fiscal years ended June 30, 1982, and June 30, 1983, and in docket No. 20207-89 on October 11, 1989, involving fiscal years ended June 30, 1984, and June 30, 1985.
Petitioner, Nelson Brothers, Inc., is a Delaware corporation with its principal place of business in Parrish, Alabama. William H. Nelson, Jr., was the founder of petitioner. Petitioner is an accrual-basis taxpayer. For the years 1978 and 1979, petitioner reported income on a calendar-year basis. From 1980 through 1985, petitioner reported income on a fiscal-year basis ending June 30. For any references to the years 1978 and 1979, it will be understood that we are referring to the calendar year. For any references to the years 1980 through 1985, it will be understood that we are referring to the fiscal year.
In 1980, petitioner entered into a consignment commission arrangement with Nelson & Sons, a partnership owned and controlled by petitioner's stockholders, in which petitioner paid consignment commissions to Nelson & Sons. This arrangement continued through 1984 at which time the arrangement was terminated.
Petitioner entered into a Spousal Income Benefit Plan and Agreement (hereinafter referred to as the Spousal Plan) with Mr. Nelson to provide payments to his widow upon his death. The Spousal Plan, instituted as of January 1, 1979, provided that one-half of Mr. Nelson's monthly salary in effect at the time of his death would be paid to his widow if certain conditions precedent were satisfied. Mr. Nelson was the chief executive officer of petitioner at the time the Spousal Plan was instituted and at the time of his death in November 1980. Payments to Mrs. Nelson began in December 1980. During 1981, Mrs. Nelson received $109,000. Mrs. Nelson received $180,000 per year in 1982, 1983, 1984, and 1985.
On June 28, 1985, petitioner entered into an agreement with Mrs. Nelson pursuant to which the Spousal Plan was canceled and a promissory note (hereinafter referred to as the Spousal Note) was issued in substitution. The principal amount of the note was $787,000.
Respondent issued a notice of deficiency on April 2, 1985, (hereinafter referred to as the First Case) in which respondent determined that deficiencies were due from petitioner for the years 1975 through 1980. Form 5278, Statement-Income Tax Changes, was attached to the notice of deficiency and showed adjustments to the year 1981.1 The notice of deficiency included adjustments to officers' compensation in the years 1978 and 1979 and disallowed deductions for consignment commissions for the year 1980. For the year 1981, the adjustments included adjustments to officers' compensation and the disallowance of deductions for consignment commission and spousal payment expenses. Deductions for consignment commissions and spousal payment expenses were disallowed because, according to respondent, petitioner had not "established that any of the amounts claimed was for an ordinary and necessary business expense, or was expended for the purpose designated." Respondent also determined that the requirements of section 4042 had not been met with respect to the spousal expense deduction. On June 28, 1985, petitioner filed a petition with this Court commencing the First Case which was assigned docket No. 21274-85.
Respondent issued a notice of deficiency for the years 1982 and 1983 on July 28, 1987. Respondent disallowed deductions for consignment commission and spousal payment expenses for both years.3 The deductions for consignment commissions were disallowed under section 482. The petition commencing docket No. 34540-87 was filed with this Court on October 23, 1987.
Petitioner was advised prior to calendar call of the First Case that respondent would commence an audit examination of petitioner's 1984 and 1985 income tax returns. In June 1987, Revenue Agent Duncan McLean, in the Examination Division, was assigned to do the examination of petitioner's 1984 income tax return. In July 1987, Mr. McLean contacted petitioner's controller to schedule the initial appointment. A delay was requested by the controller since petitioner was in the process of doing the year-end audit. Subsequently, Richard Powell, petitioner's accountant, requested that the examination be postponed until after the trial of the First Case. During this time, Mr. McLean input information in his computer, discussed the case with the agent who handled the preceding examinations, and researched the files from the prior examinations.
Sometime prior to calendar call, Bill Cooper, a technical advisor assisting respondent on the accounting issues, was informed of the buy out of the Spousal Plan. Mr. Cooper could not remember the circumstances in which he was informed of the Spousal Note. On September 17, 1987, Robert C. Walthall, petitioner's counsel, Mr. Powell, Robert W. West, respondent's counsel, and Mr. Cooper met to discuss the case.4 However, prior to calendar call, the parties did not enter into any serious settlement discussions.
The First Case was set for calendar call before Judge Korner in Birmingham, Alabama, on Monday, October 26, 1987. On Monday, Mr. Walthall requested a pretrial conference. In the pretrial conference, Judge Korner suggested that the parties try to work out further stipulations. On that afternoon, Mr. West received a telephone call from Mr. Walthall inquiring about the possibility of settlement.
Settlement negotiations were conducted almost exclusively by Mr. West and Mr. Walthall. Mr. Powell did not participate in the settlement discussions. During this time, Mr. West conferred with his supervisor, Birmingham District Counsel John Harper, Bill Cooper, and respondent's expert on the compensation issue. As Mr. West's supervisor, Mr. Harper had the duty of approving any settlement of the case.
Mr. Walthall made the first settlement offer. This offer addressed only the years in issue in the First Case and was comprised of specific amounts to be allowed on the three main issues. After consultations with Mr. Harper, Mr. Cooper, and respondent's expert, and with Mr. Harper's approval, Mr. West telephoned Mr. Walthall, rejected petitioner's offer, and made a counteroffer which covered only the years in issue in the First Case. The counteroffer provided that the compensation issue was to be settled by reducing the adjustments to specific amounts in each year; the spousal expense was to be settled by petitioner conceding 40 percent and respondent conceding 60 percent of the $109,000 adjustment in the year 1981, and the consignment commission expense was to be conceded totally by petitioner.
Mr. Walthall called back and made a counter counteroffer. After Mr. West discussed this proposal with Mr. Harper, Mr. West telephoned Mr. Walthall, rejected the proposal, and advised Mr. Walthall that respondent would not settle on any basis other than the one set forth in Mr. West's previous counteroffer and gave Mr. Walthall additional time to consider the counteroffer.
Mr. Walthall asked respondent's counsel if the same basis of settlement could be used for the issues in subsequent years. He advised Mr. west that the petition for such years had recently been filed with the Tax Court. Mr. West responded that he did not see why they would not be able to do this, but that he would have to get Mr. Harper's authorization. Mr. Walthall telephoned Mr. West and accepted respondent's counteroffer.
On October 28, 1987, Mr. Walthall provided Mr. West with a copy of the petition for the years 1982 and 1983. Mr. West received authorization from Mr. Harper to settle the recurring issues in the years 1982 and 1983 on the same basis as in the First Case.
Prior to the hearing of the First Case on October 28, 1987, Mr. Walthall met with respondent's counsel and further discussed the settlement of recurring issues for subsequent years. Mr. Harper advised Mr. Walthall that the office of District Counsel did not have authority to settle the issues in nondocketed years and could not compel the Examination Division to settle the issues for such years. However, Mr. Harper advised Mr. Walthall that the Government would have no incentive or purpose in relitigating recurring issues in nondocketed years. Mr. Harper also stated that both he and Mr. West could use their influence to have the Examination Division settle the recurring issues in the nondocketed years on the same basis as the proposed settlement in the First Case.
At the beginning of the hearing in the First Case, Mr. West advised the Court that the parties had reached a basis of settlement. The parties entered the terms of the settlement (hereinafter referred to as the Settlement) into the record as follows:
To continue reading
Request your trial