Free Post Trial Brief - District Court of Federal Claims - federal

Case 1:98-cv-00533-CFL

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS No. 98-533 T, et al. (Judge Lettow) __________ FENTON GINGERICH, et al., Plaintiffs v. UNITED STATES, Defendant

__________ DEFENDANT'S SUPPLEMENTAL BRIEF __________

Pursuant to the Court's July 31, 2007, Order, the defendant submits the following supplemental brief regarding the legal basis for the judgment computations it submitted on July 26, 2007. This Court's June 22, 2007, Opinion, 2007 WL 1805164 at 16, held that the assessments of the tax deficiencies stemming from the settlement term providing that plaintiffs' deductions of partnership losses in the years in issue were limited to 60% of their verified-cash investment in the General Information Associates partnership were not valid because they were not timely. This determination was based on the Court's holding that that term of the overall settlement between the plaintiffs and the IRS was a partnership item before the Tax Court, and as such a settlement of that issue did not require a Closing Agreement executed by the appropriate

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IRS official. Thus, this Court held that this one term of the overall settlement between the parties was settled by means of an exchange of letters culminating on December 30, 1992. Plaintiffs assert that, pursuant to the Court's Opinion, they are entitled to refunds of all amounts assessed by the IRS related to the overall settlement concerning the General Information Associates partnership (i.e., even those amounts stemming from the settlement of the non-partnership or affected items the settlement of which did require a Closing Agreement (or a Form 870-AD) executed by the appropriate IRS official). Defendant contends that plaintiffs are not entitled to refunds of the amounts assessed pursuant to 26 U.S.C. § 6621(c)1 (and pursuant to ¶ 8 of the Closing Agreements), as tax motivated interest, because plaintiffs agreed that they owed tax motivated interest, and because those amounts were timely assessed. The tax motivated interest was not a partnership item that could be settled by an exchange of letters between counsel in a TEFRA partnership proceeding in the Tax Court. Weiner v. United States, 389, F.3d 152, 161-62 (5th Cir. 2004); see Testimony of Thomas E. Redding, Tr. 961, l. 6 - 962, l. 11. Rather, as plaintiffs concede, the tax motivated interest was a non-partnership affected item which could only be settled by execution of a Closing Agreement or a Form 870 AD: [Offer] Paragraph No. 3 [Closing Agreement ¶ 8] is either a non-partnership item or an affected item. And there's still some ambiguity in my mind as to whether it's an item within the technical meaning of the Code, but it is clearly not a partnership item.

Section 6221(c) was repealed for tax years ending after December 31, 1989. Omnibus Budget Reconciliation Act of 1989, P.L. 101-239, § 7721(b). 2
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(Redding Test., Tr. 950, ll. 16-20; see Tr. 950, ll. 8-13.) Therefore, the settlement of the 60%-ofverified-cash item that the Court determined occurred on December 30, 1992, did not, and could not, have constituted a settlement of the tax motivated interest issue. 2007 WL 1805164 at 12. The Closing Agreements at issue in this case were executed by the IRS on September 22, 1993. (2007 WL 1805164 at 7.) The notices of adjustment issued by the IRS to the plaintiffs pursuant to the Closing Agreements identified the tax motivated interest as a separate line item. (Px. 27 at 213; Px. 33 at373; Px. 49 at 579, 587: Px. 56 at 848; Px. 123 at 1932; Px. 127 at 2020; Px. 135 at 2149; Px. 141 at 2362: Px. 148 at 2475, 2483.) The tax motivated interest was assessed with respect to each of the plaintiffs at various times beginning on March 7, 1994, and concluding on August 8, 1994. 2007 WL 1805164 at 7-8. All those assessments were less than one year after September 22, 1993, the date the Closing Agreements were executed. Thus, they were timely under Code § 6229(f). This Court did not make any finding regarding the validity of the Closing Agreements executed by the plaintiffs. (2007 WL 1805164 at 16.) Nonetheless, plaintiffs' memorandum submitting their judgment computations on July 26, 2007, erroneously contends that the Court's Opinion rendered the assessments of the deficiencies "void and of no effect," and that thus the tax motivated interest could not be assessed. (P. Memo. at 11.) As the Tax Court observed in Manko v. Commissioner, 126 T.C. 195, 203-04 (2006) (a case on which plaintiffs rely), however, the invalidity of the deficiency assessments simply means that the IRS cannot collect the tax; it does not vitiate plaintiffs' agreement that the amounts of the deficiencies were correct and that they owed the additional tax, or their agreement, in ¶ 8 of the Closing Agreement, that they owe

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the tax motivated interest that was timely assessed.2 By executing the Closing Agreements, plaintiffs "in essence acknowledged that the deficiency [and the tax motivated interest] is legitimate ­ indeed, it is the very purpose for entering into the closing agreement in the first place." Marathon Oil Company v. United States, 42 Fed.Cl. 267, 280 (1998), aff'd., 215 F.3d 1341 (Fed.Cir. 1999). The holdings in Manko and Marathon are directly applicable to this case. Plaintiffs agreed they owed additional tax for the years in issue and agreed that they owed tax motivated interest related thereto. The untimeliness of the assessment of the additional tax did not invalidate plaintiffs' agreement that the additional tax was owed, and (as a separate term of the Closing Agreement) that tax motivated interest was owed with respect to that additional tax. The tax motivated interest was assessed timely, and plaintiffs have not disputed the correctness of the amounts determined by the IRS. Therefore, plaintiffs are not entitled to a refund of the amounts assessed as tax motivated interest pursuant to § 6621(c), as reflected on defendant's judgment computation submitted on July 26, 2007.3 In Manko, the Tax Court determined that an assessment of a deficiency agreed to in a Closing Agreement was not valid because the IRS did not issue a notice of deficiency prior to assessing the additional tax. 126 T.C. at 204. However, the Tax Court also held that the invalidity of the assessment did not invalidate the taxpayer's agreement that it owed the additional tax (126 T.C. at 204): The closing agreement remains binding on both parties. There has been no fraud, malfeasance, or misrepresentation of 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. Plaintiffs' contention based on Code § 6401 (Plt. Memo at 10) is beside the point. That section merely requires amounts of tax paid after an untimely assessment to be refunded. 4
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Plaintiffs' July 26, 2007, memorandum further argues (citing, inter alia, plaintiff's proposed findings of fact and defendant's responses thereto, submitted with the parties' crossmotions for summary judgment six years before the trial in this case) that the defendant agreed at that time that this was an "all or nothing" case and that plaintiffs are prejudiced by defendant's raising this issue "too late." (P. Memo. at 2, 9-10.) Plaintiffs are wrong on both points. First, at the summary judgment stage, plaintiffs never requested a finding (and thus defendant did not agree) that, if plaintiffs prevailed on the timeliness-of-the-tax-deficiencyassessment issue, they would be entitled to refunds of all of the amounts claimed (including the tax motivated interest). (Plt. PF 1-97; Def. SGI 1-97.) Second, at the trial, testimony was presented by both parties, without objection, on the question of which terms of the settlement were partnership items and which were not, and that testimony specifically addressed the tax motivated interest. (Redding Test., Tr. 950, l. 8-13, 951, l. 16-20; Testimony of William H. Stoddard, Tr. 444, ll. 5-8.) Further, at the trial, the IRS notices of adjustment, identifying the amount of tax motivated interest owed pursuant to the Closing Agreements, were introduced into evidence without objection. (Px. 27 at 213; Px. 33 at 373; Px. 49 at 579, 587: Px. 56 at 848; Px. 123 at 1932; Px. 127 at 2020; Px. 135 at 2149; Px. 141 at 2362: Px. 148 at 2475, 2483.) Moreover, the resolution of this issue does not require any additional factual evidence; and the Court's order of July 31, 2007, permits plaintiffs the opportunity to present argument on this issue. Thus, there is no potential prejudice to plaintiffs here. Cf. John r. Sand & Gravel v.

(Conversely, amounts of tax paid prior to the expiration of the assessment period are not refundable, even where the later-made assessment is untimely.) 5
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United States, 62 Fed. Cl. 556, 568 (2005), vacated & remanded on other grounds, 457 F.3d 1345 (Fed. Cir. 2006), cert. granted in part, 127 S. Ct.2877 (May 29, 2007). Respectfully submitted, s/Benjamin C. King, Jr. BENJAMIN C. KING, JR. Attorney of Record U.S. Department of Justice Tax Division Court of Federal Claims Section Post Office Box 26 Ben Franklin Post Office Washington, D.C. 20044 (202) 307-6506 RICHARD T. MORRISON Acting Assistant Attorney General DAVID GUSTAFSON Chief, Court of Federal Claims Section MARY M. ABATE Assistant Chief s/Mary M. Abate Of Counsel August 8, 2007

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