scribe the form of the election: "Under the bill, the seller's nonrecognition election is made by filing (as prescribed by the Secretary) an election no later than the due date of the seller's income tax return for the taxable year in which the sale occurs." S. Rept. 98-169 (Vol. I), at 333 (1984).

With regard to the form of the election, section 1.1042-1T, Temporary Income Tax Regs., supra, is a legislative regulation expressly authorized by the statute. Sec. 1042(a). A legislative regulation is given controlling weight unless it is arbitrary, capricious, or manifestly contrary to the statute. Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., supra at 844. We do not find the regulation to be arbitrary, capricious, or manifestly contrary to section 1042 because the regulation is consistent with the statute's prescription; i.e., to prescribe the form of the election. All items required by the regulation to be included in the election serve the purpose of carrying out the statute.

The regulation provides the information required in the statement of election, which includes a notarized statement of purchase of qualified replacement property, in order to elect treatment under section 1042. Sec. 1.1042-1T, Q&A3(b), Temporary Income Tax Regs., 51 Fed. Reg. 4334 (Feb. 4, 1986). In relevant part, the regulation provides:

A-2: (a) Under section 1042(b), a sale of qualified securities is one under which all of the following requirements are met:

(4) The taxpayer files with the Secretary (as part of the required election described in Q&A-3 of this section) a verified written statement of the domestic corporation (or corporations) whose employees are covered by the plan acquiring the qualified securities or of any authorized officer of the eligible worker-owned cooperative, consenting to the application of section 4978(a) with respect to such corporation or cooperative.

Q-3: What is the time and manner for making the election under section 1042(a)?

A-3: (a) The election not to recognize the gain realized upon the sale of qualified securities to the extent provided under section 1042(a) shall be made in a "statement of election" attached to the taxpayer's income tax return filed on or before the due date (including extensions of time) for the taxable year in which the sale occurs. If a taxpayer does not make a timely election under this section to obtain section 1042(a) nonrecognition treatment with respect to the sale of qualified securities, it may not subse

quently make an election on an amended return or otherwise. Also, an election once made is irrevocable.

(b) The statement of election shall provide that the taxpayer elects to treat the sale of securities as a sale of qualified securities under section 1042(a), and shall contain the following information:

(1) A description of the qualified securities sold, including the type and number of shares;

(2) The date of the sale of the qualified securities;

(3) The adjusted basis of the qualified securities;

(4) The amount realized upon the sale of the qualified securities;

(5) The identity of the employee stock ownership plan or eligible workerowned cooperative to which the qualified securities were sold; and

(6) If the sale was part of a single, interrelated transaction under a prearranged agreement between taxpayers involving other sales of qualified securities, the names and taxpayer identification numbers of the other taxpayers under the agreement and the number of shares sold by the other taxpayers. See Q&A-2 of this section.

If the taxpayer has purchased qualified replacement property at the time of the election, the taxpayer must attach as part of the statement of election a "statement of purchase" describing the qualified replacement property, the date of the purchase, and the cost of the property, and declaring such property to be the qualified replacement property with respect to the sale of qualified securities. Such statement of purchase must be notarized by the later of thirty days after the purchase or March 6, 1986. In addition, the statement of election must be accompanied by the verified written statement of consent required under Q&A-2 of this section with respect to the qualified securities sold.

(c) If the taxpayer has not purchased qualified replacement property at the time of the filing of the statement of election, a timely election under this Q&A shall not be considered to have been made unless the taxpayer attaches the notarized statement of purchase described above to the taxpayer's income tax return filed for the taxable year following the year for which the election under section 1042(a) was made. Such notarized statement of purchase shall be filed with the district director or the director of the regional service center with whom such election was originally filed, if the return is not filed with such director.

[Sec. 1.1042-1T, A-2, Q&A-3, Temporary Income Tax Regs., 51 Fed. Reg. 4334 (Feb. 4, 1986).]

Having not literally complied with the election requirements in the statute and the regulation, petitioner argues that he substantially complied with the requirements of section 1042 and should, therefore, receive the benefits of the section because the failure to file the elections was "purely administrative in nature". We disagree.

Section 1042 requires that an election, in the form prescribed by the Secretary, be made by the due date (including

extensions) for filing the return for the year of the sale.3 According to the regulation, the election is to be made in the form of statements attached to the return. Not only did petitioner's return for the year of sale fail to include such statements, it reported none of the information required to be provided in such statements. Indeed, the return made no mention of the sale at all.

The Commissioner must be notified in some manner of a taxpayer's intentions to elect the benefit of section 1042 in order to facilitate the Commissioner's duty to ensure compliance with the tax laws and minimize disputes between taxpayers and the Internal Revenue Service. Knight-Ridder Newspapers, Inc. v. United States, 743 F.2d 781, 795 (11th Cir. 1984); Young v. Commissioner, 83 T.C. 831, 841 (1984), affd. 783 F.2d 1201 (5th Cir. 1986). As we stated in Dunavant v. Commissioner, 63 T.C. 316, 320 (1974): "We are not at liberty to infer that an election existed when the unequivocal proof required by Congress does not exist." Petitioner did not alert respondent to the intended "election" under section 1042 until respondent received the amended tax return on November 28, 2000, over 3 years after the due date of the original tax return.

There is no defense of substantial compliance for failure to comply with the essential requirements of the governing statute. See Tipps v. Commissioner, 74 T.C. 458, 468 (1980); Penn-Dixie Steel Corp. v. Commissioner, 69 T.C. 837, 846 (1978). As the plain language of section 1042 indicates, the "essence" of the statute is to demand evidence of a binding election to accept the tax consequences imposed by the section. See Dunavant v. Commissioner, supra at 320. Inasmuch as there was nothing on petitioner's return to inform the IRS that an election was made and nothing on the return indicating that the sale had even occurred, the essence of a valid

3 We note that, in certain circumstances, the Commissioner may grant an extension of time to make an election. If the taxpayer has not filed a request for an extension, an automatic extension of 6 months from the due date of the original tax return may be granted if the taxpayer has taken corrective action within the 6-month extension period. Sec. 301.9100-2T(b), Temporary Proced. & Admin. Regs., 61 Fed. Reg. 33368 (June 27, 1996). As relevant here, "corrective action" is defined as "filing an original or an amended return for the year the regulatory or statutory election should have been made and attaching the appropriate form or statement for making the election." Sec. 301.9100-2T(c), Temporary Proced. & Admin. Regs., 61 Fed. Reg. 33368 (June 27, 1996). Petitioner timely filed the original tax return on or before Apr. 15, 1997. Petitioner's first amended tax return was not received by respondent until Nov. 28, 2000. We conclude that petitioner did not take the appropriate corrective action in order to receive an automatic extension of time for filing the election under sec. 1042.

election was missing, and the use of the substantial compliance doctrine is insufficient to secure the benefits of section 1042. Knight-Ridder Newspapers, Inc. v. United States, supra.

Petitioner argues that we have held that a taxpayer substantially complied with the requirements for an election even though the taxpayer failed to meet the literal requirements for an election. See Bond v. Commissioner, 100 T.C. 32 (1993); Taylor v. Commissioner, 67 T.C. 1071, 1080 (1977); Hewlett-Packard Co. v. Commissioner, 67 T.C. 736, 748 (1977); Columbia Iron & Metal Co. v. Commissioner, 61 T.C. 5 (1973); Sperapani v. Commissioner, 42 T.C. 308 (1964); Cary v. Commissioner, 41 T.C. 214 (1963). The cases that petitioner cites are inapplicable because, as discussed above, the substantial compliance doctrine may not be used as a defense in the instant case. Even if we assume, arguendo, that the cases apply, in each of those cases the taxpayer's attempt to make the election was evident on the original tax return, the taxpayers had provided most of the information required, and the information missing was not significant. See Bond v. Commissioner, supra at 41-42; Taylor v. Commissioner, supra at 1080; Hewlett-Packard Co. V. Commissioner, supra at 747-750; Columbia Iron & Metal Co. v. Commissioner, supra at 9; Sperapani v. Commissioner, supra at 329-332; Cary v. Commissioner, supra at 218; cf. Hewitt v. Commissioner, 109 T.C. 258, 264 (1997) (holding that the taxpayers were not entitled to deduct amounts in excess of those allowed by the Commissioner for stock contributions because the taxpayers provided "practically none of the information required by either the statute or the regulations"), affd. without published opinion 166 F.3d 332 (4th Cir. 1998). In the instant case, petitioner provided none of the information required by either the statute or the regulation regarding the transaction with the ESOP on his original tax return. Respondent, therefore, had no indication from the original tax return that the sale had even occurred.

It is clear to the Court that petitioner relied upon Mr. Midcap's knowledge in filing his tax returns for 1996. While we are sympathetic to petitioner regarding Mr. Midcap's failure to file a proper election under section 1042 on petitioner's behalf, the general rule is that the duty of filing an accurate tax return cannot be avoided by placing responsibility on an

agent, and taxpayers bear responsibility for the failure of their agents. Pritchett v. Commissioner, 63 T.C. 149, 174 (1974); Am. Props. Inc. v. Commissioner, 28 T.C. 1100, 1116 (1957), affd. 262 F.2d 150 (9th Cir. 1958). Therefore, petitioner must bear responsibility for the failure to file a timely election pursuant to section 1042.

We hold that petitioner is not able to defer recognition of a gain that resulted from a sale of stock to the ESOP because he failed to elect such treatment as required by section 1042. We have considered all of petitioner's contentions, arguments, and requests that are not discussed herein, and we conclude that they are without merit or irrelevant. To reflect the foregoing,

Decision will be entered for respondent.

THOMAS E. JOHNSTON AND THOMAS E. JOHNSTON, SUCCESSOR IN INTEREST TO SHIRLEY L. JOHNSTON, DECEASED, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT*

THOMAS E. JOHNSTON, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 26005-96, 2266-97.

Filed February 11, 2004.

Ps made a qualified offer, pursuant to sec. 7430, I.R.C., to resolve Ps' tax liabilities for the 1989, 1991, and 1992 tax years. R accepted Ps' qualified offer, without negotiation. Thereafter, Ps sought to reduce the amounts stated in the qualified offer by the amount of net operating losses (NOLs) sustained in the 1988, 1990, 1993, and 1995 tax years. R refused to allow such a reduction, claiming that R's acceptance of Ps' qualified offer prevented Ps from reducing the agreed-upon amounts. Held, the parties entered into a contract to settle the docketed cases, as evidenced by Ps' qualified offer and R's acceptance of that offer. Held, further, Ps are not now allowed to reduce the amounts stated in the qualified offer for the years at issue by the amounts of NOLS sustained in the 1988, 1990, 1993, and 1995 tax years.

Lorraine G. Howell and Kenneth M. Barish, for petitioners. Nicholas J. Richards and Kevin W. Coy, for respondent.

*This Opinion supplements our Opinion in Johnston v. Commissioner, 119 T.C. 27 (2002).