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

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS FENTON GINGERICH, et. al. Plaintiffs, V. UNITED STATES OF AMERICA, Defendant. § § § § § § § § §

DOCKET NO. 98-533 T JUDGE LETTOW

PLAINTIFFS' RESPONSE IN OPPOSITION TO DEFENDANT'S POST-TRIAL BRIEF

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TABLE OF CONTENTS Table of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii Plaintiffs' Response in Opposition to Defendant's Post-Trial Brief . . . . . . . . . . . . . . . . . . . . . . . . 1 I. II. III. The Parties Agree the Settlement Terms Never Changed . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Facts Established by the Federal Circuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 There is No Credible Evidence That the Parties Required a Closing Agreement to Effectuate the Settlement of Partnership Items Before the Tax Court . . . . 7 A. B. C. D. IV. V. The Intent of the Parties is Determined by Objective Manifestations . . . . . . . . . . 7 The Documents Establish that the IRS Never Required a Closing Agreement to Effectuate Settlement of the Items Before the Tax Court . 9 The Government Erroneously Relies on Redding's Inquiries Concerning a Closing Agreement for Items Not Before the Tax Court as Proof of IRS Intent 15 The Government Erroneously Relies on Paine's Inquiries as Proof of IRS Intent and to Impute Redding's Intent . . . . . . . . . . . . . . . . . . . . 17

The Government is Bound by the Law of the Case and May Not Exceed the Scope of Remand as Established by the Federal Circuit . . . . . . . . . . . . . . . . 18 The Government's Assertion That the Settlement Only Addressed Nonpartnership and Other Items Not Before the Tax Court Is Erroneous . . . . . . . . . . . . 22 A. B. C. Stoddard Testified that The Partnership Items Were Settled . . . . . . . . . . . . . . . . 22 If True, the Assessments Were Pre-Mature and Are Void . . . . . . . . . . . . . . . . . . 23 There is No Corroborating Evidence to Support Either Stoddard's or the Government's Assertion . . . . . . . . . . . . . . . . . . . . . . . . 24

VI. VII. VIII.

The IRS's Prior Use of Forms 870-L(AD) and 870-P(AD) are Relevant . . . . . . . . . . . . 30 The Government Creates Confusion by Conflating "Partnership Items" and "Tax Assessments" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

ii

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TABLE OF AUTHORITIES Cases Abbott Labs. v. Alpha Therapeutic Corp., 164 F.3d 385 (7th Cir.1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Cinema '84 v. Commissioner, 294 F.3d 432 (2nd Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-19 Cooper Realty Co. v. United States, 36 Fed.Cl. 284 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Dalco Micro-Fab Partners, Ltd. v. Commissioner, T.C. Memo. 1993-100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Dana Corp. v. United States, 200 Ct.Cl. 200, 470 F.2d 1032 (1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 David Nassif Assocs. v. United States, 214 Ct.Cl. 407, 557 F.2d 249 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Forman v. United States, 329 F.3d 837 (Fed.Cir.2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Gingerich v. United States, 82 Fed.Appx. 35, 2003 WL 22854662 (Fed. Cir. 2003) . . . . . . . 1-7, 10-12, 17-20, 27-29 Globe Sav. Bank, F.S.B. v. United States, 74 Fed.Cl. 736 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Haiduk v. Commissioner, 60 T.C.M. (CCH) 864 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Himmelwright v. Commissioner, T.C. Memo. 1988-114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Innovair Aviation, Ltd. v. United States, 72 Fed.Cl. 415 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Linear Technology Corp. v. Micrel, Inc., 275 F.3d 1040 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Maxwell v. Commissioner, 87 T.C. 783 (1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 McAbee Constr. Inc. v. United States, 97 F.3d 1431 (Fed.Cir.1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Montgomery Coca-Cola Bottling Co. v. United States, 222 Ct.Cl. 356, 615 F.2d 1318 (1980) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Pacific Gas & Elec. Co. v. United States, 73 Fed.Cl. 333 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 15 Padilla v. United States, 58 Fed.Cl. 585 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Slovacek v. United States, 36 Fed.Cl. 250 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Treaty Pines Investments Part., et al. v. Commissioner, 967 F.2d 206 (5th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 12, 19, 20 Urbanizadora Santa Clara, S. A. v. United States, iii
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207 Ct.Cl. 297, 518 F.2d 574 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Veit & Co., Inc., v. United States, 56 Fed.Cl. 30 (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Statutes 26 U.S.C. §6224(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 26 U.S.C. §6225(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 26 U.S.C. §6229 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 26 U.S.C. §6229(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 26 U.S.C. §6229(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 26 U.S.C. §6231(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 26 U.S.C. §6231(b)(1)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 32 Other Authorities Tax Court Rule 248(b)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

iv

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS FENTON GINGERICH, et. al. Plaintiffs, V. UNITED STATES OF AMERICA, Defendant. § § § § § § § § §

DOCKET NO. 98-533 T JUDGE LETTOW

PLAINTIFFS' RESPONSE IN OPPOSITION TO DEFENDANT'S POST-TRIAL BRIEF The Federal Circuit expressly remanded this case for two fact determinations: (i) "whether or not the parties required a closing agreement to effectuate the settlement of issues before the Tax Court," and (ii) whether the terms of the settlement changed.1 I. The Parties Agree the Settlement Terms Never Changed The unanimous testimony at trial was that the terms did not change. On page 6 of its brief, the government agrees with the Plaintiffs that any variation in language between the original settlement offer and the Redding Acceptance Form was irrelevant because the settlement "terms never changed from the time they were proposed by the IRS, until they were incorporated in Closing Agreements." The IRS Offer and the Redding Acceptance Form varied only because the Redding Acceptance Form contained a sixth term. But the government expressly concedes that "[t]his term was only a restatement of the fifth term set out in the IRS proposal. Therefore, Redding's Acceptance

Gingerich v. United States, 82 Fed.Appx. 35, 39, 2003 WL 22854662, *4 (Fed. Cir. 2003) ("We therefore vacate the decision of the Court of Federal Claims and remand for further proceedings and specific findings concerning whether or not the parties required a closing agreement to effectuate the settlement of issues before the Tax Court. If the Court of Federal Claims concludes that a closing agreement was not required, the court should then determine if the Redding Acceptance Form constituted a valid acceptance of the IRS Offer despite the variations in terms between the two documents."). 1
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Form mirrored the earlier IRS proposal for settling plaintiffs' cases." [GB:7] Also, the government expressly states that "the terms in the IRS's settlement proposal, [are] the same terms as in Redding's Acceptance Form, . . . ." [GB:9] II. The Facts Established by the Federal Circuit On remand this Court must determine whether, prior to December 31, 1992, the parties objectively intended to settle the partnership items then before the Tax Court by means of a Form 906 Closing Agreement. To make that determination this Court must review the documents and testimony presented at trial within the Federal Circuit's factual framework set out immediately below. In 1990, the IRS issued a Notice of Final Partnership Administrative Adjustment ("FPAA") disallowing losses and deductions on GIA's 1983-1986 partnership returns. A TEFRA partnershiplevel case was filed in the Tax Court challenging those adjustments.2 The plaintiffs here were parties to that case and represented by attorney Thomas Redding.3 Gingerich at *36, **1. Attorneys Linda Paine ("Paine") and Babcock MacLean ("MacLean") each represented GIA partners other than the plaintiffs. Gingerich at *37, **2. The IRS was represented by attorneys William Stoddard ("Stoddard") and Bruce Wilpon ("Wilpon"). Gingerich at *36, **1. The Federal Circuit held that "[a]s contracts, tax settlements are governed by general principles of contract law." Gingerich at *39, **4 citing Treaty Pines Inv. P'ship v. Commissioner, 967 F.2d 206, 211 (5th Cir.1992). The Federal Circuit further held that settlement of an issue before

2

General Information Associates Partnership, Raymond & Irma Ziff, Partners Other Than the Tax Matters Partner v. Commissioner, Tax Court Docket No. 18405-90. At trial the plaintiffs established that they relied on Redding to handle all relevant negotiations regarding their GIA partnership tax controversy. The government does not dispute this reliance or that it was valid as to all plaintiffs. 2
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the Tax Court does not require any particular method or form and can be accomplished by letters of offer and acceptance between counsel. Gingerich at *39, **4. The Federal Circuit also held that settlement of items not before the Tax Court require of a closing agreement. Gingerich at *39, **4. In January 1991, Redding wrote to Stoddard and Wilpon asking about the possibility of settlement and requesting a Form 906 Closing Agreement to settle items not before the Tax Court, such as penalties (non-partnership items outside the Tax Court's jurisdiction) and "phantom income" (partnership items for tax years not before the Tax Court). Gingerich at *36, **1. In response Wilpon offered to settle with plaintiffs on the following terms (the "IRS Offer"): 1. For the first open year of each partners' investment, the investor is allowed, to the extent of losses claimed that year, sixty (60) percent of his or her verified out of pocket cash investment in the partnership less the amount of any partnership losses previously allowed. The balance of the 60%, if any, is allowed in the immediately succeeding open taxable years until exhausted. For these purposes, the investors' cash investment consists of his or her initial payment made by check plus the principal paid on any recourse notes in favor of the partnership. Interest paid on any notes in favor of the partnership is not a partnership item and not part of the investors' cash investment. This interest may be deductible subject to the applicable limitations contained in §163. 2. The Government concedes the applicability of the additions to tax under §§6653, 6659 and 6661, if any. 3. The investors are required to concede the applicability of the increased rate of interest established under §6621(c), formerly §6621(d). 4. No other losses, investment interest expense or other deductions attributable to this partnership shall be allowed in any other year. 5. No income attributable to this partnership shall be reported in any other year except to the extent that an investor receives cash or other property with respect to his or her investment in this partnership.4 Gingerich at *36-37, **1. [PE:18]

4

It is undisputed that the items in paragraphs 2-5 were not before the Tax Court because they were either non-partnership items or partnership items for years not before the Tax Court, and, therefore, for purposes of this case would have been settled only by a Form 906 Closing Agreement. The government now disputes whether the terms of paragraph 1 covered partnership items before the Tax Court. See discussion below. 3
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Redding made counteroffers which the IRS rejected. Gingerich at *37, **2. In an October 17, 1992 letter, the IRS confirmed the terms of the original offer, adding, "the current settlement offer includes the reversal of any gain reported in the later years of this investment."5 [PE:11] On October 22, 1992, the IRS demanded that Redding's clients accept or reject the IRS Offer before December 1, 1992. [PE:10] Gingerich at *37, **2. On November 12, 1992, Linda Paine wrote to Wilpon and Stoddard, allegedly on behalf of herself, Redding, and MacLean. [DE:1] She informed the IRS that the attorneys would recommend acceptance of the IRS Offer on the express condition that a closing agreement be entered into regarding the reporting of partnership items not before the Tax Court. Paine enclosed a draft closing agreement. [DE:1] Gingerich at *37, **2. Redding wrote to Wilpon and Stoddard on November 13, 1992, requesting an extension of time to respond to the IRS's settlement offer. [PE:9] Like Paine, Redding also addressed the need for a closing agreement in his November 13, 1992 correspondence, but only as to "all issues that are not partnership item issues and therefore are not before the Court in this proceeding." [PE:9] Redding clarified that he would ask his clients to accept the IRS Offer "[n]otwithstanding this request." [PE:9] Along with his letter, Redding attached a model acceptance form for his clients to sign in acceptance of the IRS Offer (the "Redding Acceptance Form"). [PE:9] He asked the IRS to approve the form, stating: "Will you please confirm by fax that a letter in this form received in your office within the time specified would constitute a valid acceptance of the settlement?" (Emphasis added by the Federal Circuit). Gingerich at *37, **2. [PE:9]

I.e., "phantom income" in later tax years not before the Tax Court. The government concedes that the terms of the settlement offered by the IRS and accepted by the plaintiffs never changed or varied. See discussion below. 4
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On November 17, 1992, Wilpon responded to Redding's letter stating: We have reviewed your letter dated November 13, 1992 and agree with your outline of the settlement terms set out in the Draft Acceptance Form. In addition, we agree to your request for an additional 30 days to solicit acceptance of the settlement. Attached is our anticipated closing agreement language. If you have any questions, please call me. [PE:8] Gingerich at *37, **2. Wilpon included a closing agreement with his fax.6 [PE:8] Gingerich at *37, **2. Based on Wilpon's reply, Redding urged the plaintiffs to settle by submitting a Redding Acceptance Form. Redding also told Plaintiffs that a separate closing agreement would be needed in the future to bind the IRS on items not before the Tax Court, such as penalties or phantom income. Gingerich at *37-38, **2. On December 18, 1992, Wilpon wrote to MacLean to inform him that the IRS could not process "settlements (e.g. closing agreements)" until a new tax matters partner was chosen for GIA. But the Federal Circuit expressly noted that Redding and Paine were not copied on this correspondence. Gingerich at *38, **2. [PE:4] On December 30, 1992, Redding mailed a series of the Redding Acceptance Forms signed by the Plaintiffs. Plaintiff Rosol sent his Redding Acceptance Form directly to the IRS. Gingerich at *38, **3. [PE:7] On January 26, 1993, less than a month after the submission of the Redding Acceptance Forms, Wilpon wrote to Redding and stated "[i]t should be understood that this settlement is subject to review and acceptance on behalf of the respondent." (Emphasis added by the Federal Circuit). Gingerich at *38, **3. [PE:6]

6

The IRS's "closing agreement" was incomplete, containing blank spaces, and lacking both the IRS's boilerplate recitations and a signature block. [PE:8] 5
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On February 18, 1993, Wilpon again wrote to Redding and expressed a reservation to the settlement, writing in bold type that "no settlement occurs until closing agreements are signed by your clients and countersigned by the appropriate Service representative." (Emphasis in original). Gingerich at *38, **3. [PE:5] Redding challenged Wilpon's subsequent reservations in a telephone conversation and by letter, considering Wilpon's letter to be a repudiation of the IRS Offer.7 [PE:3] Wilpon dropped the challenge to the settlement, admitting in deposition testimony that he decided that the "fight will be for a later day" on the issue of when the settlement was effectuated. [PE:7] Gingerich at *38, **3. On September 10, 1993, Redding submitted signed closing agreements to Wilpon on behalf of the plaintiffs, which were countersigned by the appropriate IRS representative on September 22, 1993. [PE:1,2] Plaintiff Rosol signed his closing agreement on February 10, 1993, and submitted it to the IRS, which countersigned on March 16, 1993. Gingerich at *38, **3.

7

Redding's letter unambiguously stated: Last, in a highlighted insert to your letter of February 18, 1993, you state that "no settlement occurs until closing agreements are signed by my clients and countersigned by the appropriate Service representative." If this is an attempt to repudiate the settlement that you offered and my clients accepted, I must disagree. I will in good faith make every effort to cooperate with you in implementing closing agreements which, as I indicated many times, I believe are essential to carry out the agreement entered into by my clients because of the effect of that agreement on years subsequent to the docketed Tax Court case. However, the terms of that settlement have been firmly and adequately discussed previously and should not now be subject to renegotiation, and I believe your offer of settlement and my clients' acceptances are sufficient to bind you to those terms. If you believe otherwise, please let me know immediately, and we will seek a determination by the Court as to whether or not you are obligated to honor the settlement entered into upon your offer and my clients' acceptance. [PE:3, emphasis added.] 6
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Between January 3, 1994 and August 8, 1994, the IRS assessed deficiencies against the Taxpayers as individuals. Gingerich at *38, **3. Under 26 U.S.C. § 6229(f), the IRS may assess a tax related to a partnership item as long as such assessment occurs within one "year after the date on which the items become nonpartnership items." A partnership item converts to a nonpartnership item on the date that the IRS enters into a settlement agreement with the partner with respect to such items." 26 U.S.C. §6231(b)(1)(C). Gingerich at *38, **3. III. There is No Credible Evidence That the Parties Required a Closing Agreement to Effectuate the Settlement of Partnership Items Before the Tax Court There is absolutely no objective evidence in this case that the parties required a closing agreement to effectuate a binding settlement of partnership items pending before the Tax Court. The Federal Circuit specifically found that any assertion the IRS contemplated the need to execute a closing agreement to finalize the settlement "does not find conclusive support in the record." Gingerich, at *39, **4. To support its erroneous assertion that all parties intended to effectuate the settlement by using a closing agreement, the government mischaracterized the documents and erroneously imputed Redding and Paine's settlement intent regarding items not before the Tax Court to the IRS regarding partnership items before the Tax Court A. The Intent of the Parties is Determined by Objective Manifestations In construing a contract, this Court seeks to ascertain the objective intent of the parties8 by reference to objective manifestations of intent,9 rather than the parties' subjective and unexpressed

8

Cooper Realty Co. v. United States, 36 Fed.Cl. 284, 289 (1996); Montgomery Coca-Cola Bottling Co. v. United States, 222 Ct.Cl. 356, 615 F.2d 1318, 1332 (1980) (finding trial judge erred in relying on testimony as to plaintiff's intent rather than on objective documentary evidence of plaintiff's business operations).
9

David Nassif Assocs. v. United States, 214 Ct.Cl. 407, 421-22, 557 F.2d 249, 257 (1977) 7
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understandings.10 "Since contractual obligations are to be ascertained from objective manifestations of intent, [a party's] mental reservations are legally irrelevant.... "11 "When interpreting the terms of a contract, the Court will give meaning to the objective intent of the parties as demonstrated by the text of the contract."12 When interpreting disputed provisions, the primary objective for the Court is to determine the intent of the parties at the time they contracted.13 "This intent is determined by an objective reading of the contract language, not by a party's statements in subsequent litigation."14 The Court "begin[s] with the plain language" of the contract.15 If the contract provisions are clear and unambiguous, the Court's inquiry is at an end, and the plain and ordinary meaning of the contract controls,16 regardless of either parties' subjective, unexpressed intent.17 This Court may not, by its own construction, "import words into a written contract which materially change its meaning as

10

Dana Corp. v. United States, 200 Ct.Cl. 200, 214, 470 F.2d 1032, 1041 (1972); Linear Technology Corp. v. Micrel, Inc., 275 F.3d 1040, 1053 (Fed. Cir. 2001), citing Abbott Labs. v. Alpha Therapeutic Corp., 164 F.3d 385, 387 (7th Cir.1999) (general principle of contract law holds that the parties' objective, expressed intent--not their secret, subjective intent-- controls whether a bargain has been struck.).
11

Pacific Gas & Elec. Co. v. United States, 73 Fed.Cl. 333, 382 (2006)

12

Innovair Aviation, Ltd. v. United States, 72 Fed.Cl. 415, 421 (2006), citing Giove v. Dep't of Transp., 230 F.3d 1333, 1340 (Fed.Cir.2000).
13

Veit & Co., Inc., v. United States, 56 Fed.Cl. 30, 34 (2003); PCL Constr. Serv., Inc. v. United States, 47 Fed.Cl. 745, 785 (2000). Padilla v. United States, 58 Fed.Cl. 585, 591 (2003), citing Varilease Tech. Group, Inc. v. United States, 289 F.3d 795, 799 (Fed.Cir.2002). McAbee Constr. Inc. v. United States, 97 F.3d 1431, 1435 (Fed.Cir.1996); see also Lee Lewis Constr., Inc. v. United States, 54 Fed.Cl. 88, 90-91 (2003).
16 15 14

Forman v. United States, 329 F.3d 837, 842 (Fed.Cir.2003) (citing McAbee, 97 F.3d at 1435). PCL Constr. Serv., Inc., 47 Fed.Cl. at 785. 8
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expressed by the parties."18 If a party intends to rely on a provision of a contract after the contract is entered it is incumbent on that party to manifest that intention in a clearly recognizable manner.19 B. The Documents Establish that the IRS Never Required a Closing Agreement to Effectuate Settlement of the Items Before the Tax Court The Federal Circuit established and limited the documents from which this Court must ascertain the objective intent of the parties as of December 31, 1992, the time they contracted with regard to the partnership items before the Tax Court. [PE:4, 7-11, 18]. Plaintiffs' Exhibit 18 ­ the original January 31, 1991 settlement offer from Wilpon to Redding ­ unambiguously (i) states that "the Government is prepared to settle this [Tax Court] case in the following manner," (ii) lists the five terms, (iii) states that if all participating partners accept the IRS will move for a Tax Court Rule 248(b)(1)(A) decision (i.e., informing the court that all participating partners have settled their partnership items before the court), and (iv) states that if any participating partners do not accept the IRS will prepare for trial. Plaintiffs' Exhibit 11 ­ the October 17, 1991 letter from Stoddard and Wilpon to Redding ­ states that the plaintiffs "may, of course accept the current settlement offer any time prior to any hearing or trial," but if they choose not to accept the settlement offer then, as to the Tax Court case, they must decide to either litigate or default the FPAA.

Padilla v. United States, 58 Fed.Cl. 585, 591 (2003); citing Hongkong & Whampoa Dock Co., Ltd. v. United States, 50 Ct.Cl. 213, 223, 1915 WL 1085 (1915).
19

18

Urbanizadora Santa Clara, S. A. v. United States, 207 Ct.Cl. 297, 518 F.2d 574, 578 (1975), citing United States v. Wm. Cramp & Sons Co., 206 U.S. 118, 128, 27 S.Ct. 676, 678, 51 L.Ed. 983 (1907). 9
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Plaintiffs' Exhibit 10 ­ the October 22, 1992 letter from Stoddard and Wilpon to Redding ­ references the Tax Court case and states "[p]lease inform us in writing of your decision to accept or reject the settlement offer previously extended in this case on or before December 1, 1992." Emphasis added. Plaintiffs' Exhibit 9 ­ Redding's November 13, 1992 letter to Stoddard and Wilpon ­ requests 30 more days to accept the settlement, includes a draft acceptance form, states "Will you please confirm by fax that a letter in this form received in your office within the time specified would constitute a valid acceptance of the settlement," and states "I reiterate my request that you immediately confirm that [the draft acceptance form] will be a sufficient acceptance if received by you timely." Redding referenced the need for a closing agreement, but only to "resolve[] the penalty issue and subsequent 'phantom' income issue with finality, rather than relying on the government's representation which are not binding unless we have a closing agreement to that effect." Plaintiffs' Exhibit 8 ­ Wilpon's November 17, 1992 fax to Redding ­ grants Redding 30 more days (until December 31, 1992) to accept the IRS Offer, states that the IRS "agrees with your outline of the settlement terms set out in the Draft Acceptance Form," and attached the IRS's "anticipated closing agreement language." That language was incomplete and not a document that could be executed by the Plaintiffs in order to accept the IRS Offer. The language was submitted in direct response to Redding's request for a closing agreement [PE:9], which the Federal Circuit established was only requested and effective as to "all issues that are not partnership item issues and therefore are not before the [Tax] Court in this proceeding [the Tax Court case]." Emphasis added. Gingerich, at *37, **2. Plaintiffs' Exhibit 4 - Wilpon's December 18, 1992, letter to MacLean ­ informed MacLean that the IRS could not process "settlements (e.g. closing agreements)" until a new tax matters partner 10
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was chosen for GIA.20 The IRS plainly states that a closing agreement was just one method by which partners could accept the IRS Offer. Nonetheless, it is irrelevant here because the Federal Circuit expressly noted that Redding was not copied on this correspondence. Gingerich at *38, **2. Plaintiffs' Exhibit 7 ­ Redding's December 30, 1992 letter to Wilpon accepting the IRS Offer ­ plainly states that the enclosed Redding Acceptance Forms are "settlement acceptances." There is no mention whatsoever of any closing agreement. The plain language of Plaintiffs' Exhibit 7 is an objective manifestation that Redding understood he could accept the IRS Offer by submitting the signed Redding Acceptance Forms. Not one of these documents contains an objective manifestation by the IRS to settle the partnership items before the Tax Court with a closing agreement. [PE:18, 17, 11, 10, 8, 7] But their plain language does manifest the IRS's objective intent (i) to offer the plaintiffs a settlement they could accept, [PE:18, 17, 11, 10] (ii) that the settlement, if accepted, would convert the Plaintiffs' partnership items before the Tax Court to non-partnership items thereby removing them from the Tax Court's jurisdiction [PE:18, 11], (iii) that the Plaintiffs must accept the IRS Offer by the deadline (December 31, 1992), and (iv) that the method of acceptance was restricted only in that it must be "in writing" [PE:10]. The plain language of these documents runs contrary to almost all of Wilpon and Stoddard's trial testimony. For example, contrary to Wilpon's trial testimony that the December 1st and December 31st deadlines were merely opportunities for the IRS to get a "head-count" of who was proceeding with the litigation and who intended to accept the settlement at some future date, the actual documentary evidence equivocally instructs Redding, in no uncertain terms, to "[p]lease

There is no legal requirement that a tax matters partner exist in order for a settlement to be effectuated between the IRS and an individual partner. 11
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inform us of your decision to accept or reject the settlement offer previously extended in this case on or before December 1, 1992." [PE:10]. On November 17th, Wilpon wrote Redding, "In addition, we agree to your request for an additional 30 days to solicit acceptance of the settlement." [PE:8]. Plaintiffs' Exhibit 9 objectively manifests Redding's understanding of the existing law21 that Stoddard and Wilpon had authority to settle that portion of the IRS Offer covering partnership items before the Tax Court by means other than a closing agreement but that the other terms would not bind the IRS, except by estoppel, without some other settlement mechanism, e.g. a closing agreement. The Federal Circuit established that Redding's reference to a possible closing agreement was not in regard to settling the partnership items before the Tax Court. Gingerich, at *37, **2. These documents were accepted and relied on by the Federal Circuit in making its determinations above and prove that at the time the contract was effectuated, the IRS's December 31, 1992 deadline for acceptance, neither the IRS nor Redding had ever manifested an objective intent to settle the partnership items before the Tax Court only by means of a closing agreement. The only reference in these documents by Redding to a closing agreement was expressly in reference to items not before the Tax Court. [PE:9] The IRS's only reference to a closing agreement communicated to Redding was in response to Redding's request as to items not before the Tax Court. [PE:8] Not once did the IRS state or imply to Redding that the Plaintiffs must use a closing agreement to accept the IRS Offer by the December 31, 1992 deadline. Nor did the IRS ever communicate to Redding that a closing agreement was required to settle the partnership items before

Treaty Pines Investments Part., et al. v. Commissioner, 967 F.2d 206 (5th Cir., August 5, 1992) ("[A] tax settlement agreement is binding even if it consists only of letters of offer and acceptance; no formal stipulation of settlement, filed decision document, or closing agreement is necessary."); Himmelwright v. Commissioner, T.C. Memo. 1988-114. Haiduk v. Commissioner, 60 T.C.M. (CCH) 864, 865-66 (1990) (Once a tax case is docketed in the Tax Court, there is no requirement that a settlement of that case be concluded by way of a section 7121 closing agreement.). 12
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the Tax Court nor communicate to Redding that it was not acting in a manner consistent with existing law (i.e. that Stoddard and Wilpon had authority to bind the IRS by exchange of letters to settlement terms as to partnership items before the Tax Court). The IRS's only other reference to a closing agreement prior to its December 31, 1992 deadline was in a letter it never sent Redding that plainly stated closing agreements are one method by which a partner could accept the IRS Offer. [PE:4] A review of all of the correspondence between the parties proves that the IRS, the master of the offer, never specified the means for acceptance or the mechanism for settlement. The IRS never required that the parties execute a closing agreement to accept the settlement and never conditioned effectuation of the settlement on a closing agreement, not for partnership items and not for nonpartnership items. The IRS's only instructions were to accept the offer "in writing" by the specified deadline. [PE:10]. It was Redding and Paine who requested closing agreements to protect their clients because they knew that under existing law Stoddard and Wilpon could not bind the IRS to terms regarding penalties and interest in a settlement effectuated by exchange of letters. [PE:9; DE:1] The IRS's first mention of a closing agreement was in Wilpon's November 17, 1992 fax response to Redding's proposed acceptance form. [PE:8] Nothing in Wilpon's correspondence states that a closing agreement was required to effectuate the settlement of any items. That draft closing agreement language could not be constructed as a required condition for settlement of partnership items before the Tax Court. It was an incomplete template, not specific to any partner, and missing key portions that kept it from being capable of being executed and returned. The recitals identifying the partner were missing. The partnership item terms in paragraph 1 were missing. The final three paragraphs regarding the final and conclusive nature of the agreement, which are included in every closing agreement, were missing. There were no signature lines. While Wilpon 13
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did agree to Redding's request for an extension of time to submit his client's acceptances, even that additional thirty days would not have been sufficient for the IRS to use this draft to prepare final closing agreements for each of the partners, send them to Redding, Redding to send them to his clients, and the clients to return the executed closing agreements to Redding or the IRS, all by the December 31, 1992 deadline for acceptance. The language at paragraph 1 of the final closing agreement makes it particularly clear that, with respect to partnership items before the Tax Court, the final closing agreement was a memorialization of a prior settlement and could not have been a requirement to accept the IRS's offer by December 1, 1992, or December 31, 1992, as enlarged. [PE:2] The partnership item settlement term allowed each partner to "keep" previously reported deductions for partnership losses up to 60% of the amount of cash each partner had invested in GIA. (Conversely, any previously reported deductions for partnership losses in excess of the 60% of cash invested were disallowed.) The IRS had instructed the partners who wished to settle to submit their proof of cash invested and the IRS would "apply" the settlement. [Tr: 956; PE: 18]. The final closing agreement does not simply re-state the previously agreed language for paragraph 1, which would have been consistent with requiring the partners to accept by executing the closing agreement within the IRS's deadline. Instead, several weeks after the deadline for acceptance and submission of proof of cash invested, the closing agreements the IRS sent for Redding to distribute to his client's for their signatures specifically identify the actual computed dollar amount of allowed partnership losses, which is consistent with application of a previous partnership item settlement. [PE:2] A contract to pay a certain percentage of an amount is an enforceable contract at the time of the agreement. Without more, the parties cannot assert that the agreement was not enforceable until the sum certain could be computed. There was "nothing more" in this case. The IRS instructed the 14
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partners to accept "in writing" by a certain date and to send proof of cash invested so that the IRS could apply the settlement. And as Redding testified, and argument below illustrates, ultimately the IRS did not need for the partners to provide this proof because the information was disclosed on each partner's Schedule K-1 attached to GIA's 1983 partnership return filed with the IRS. The intent of the parties is determined as of the time they contracted. Here the IRS's deadline for acceptance was December 31, 1992. The determination before this Court must be based on objective manifestations of intent, including the plain language of the contract, not on any parties' subjective, unexpressed understanding or statements in subsequent litigation. Such "mental reservations are legally irrelevant.... "22 C. The Government Erroneously Relies on Redding's Inquiries Concerning a Closing Agreement for Items Not Before the Tax Court as Proof of IRS Intent Undeterred by the IRS's lack of reliance on or even reference to using a closing agreement, the government has based its case on the documentary evidence of Redding's written inquiries. Not only can Redding's intent not be imputed to the IRS, but Redding's intent does not support the government's argument. Redding asked the IRS for a closing agreement to settle the non-partnership items and partnership items that were not before the Tax Court and over which Wilpon and Stoddard lacked authority to bind the IRS, other that estoppel. The Federal Circuit recognized the limited scope of Redding's request in its fact statement. Redding never asked the IRS for a closing agreement to settle the partnership items before the Tax Court ­ the issue on remand before this Court. And as Redding testified, he purposefully did not condition acceptance of the IRS Offer on a closing agreement because he did not want to leave his clients in the position of having made a counteroffer and losing the opportunity to accept the IRS offer.

22

Pacific Gas & Elec. Co., at 382. 15
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It is curious that, if the IRS always intended to settle by using a closing agreement, Wilpon and Stoddard did not acknowledge Redding's closing agreement inquiries in any of their correspondence, did not challenge Redding's specific requests for a closing agreement for the limited purpose of settling the non-partnership and other items, did not propose a closing agreement until after approving Redding's Acceptance Form, and did not prepare an executable closing agreement until after the Plaintiffs returned their signed acceptance letters. Wilpon and Stoddard's testimony that there were or must have been conversations and discussions regarding the use of a Closing Agreement to settle is also belied by the documents that prove Redding made repeated closing agreement inquiries for almost two years, all of which the IRS ignored and failed to acknowledge. [PE:9] Other issues and agreements between the parties were memorialized and discussed in their correspondence, e.g., references to establishing McLean as the discovery and briefing liaison and Redding's independent requests for information. [PE: 11-15]. But there is no documentary record supporting Wilpon and Stoddard's alleged pre-acceptance discussions regarding closing agreements. Redding's testimony was that there were absolutely no discussions as to using a closing agreement to settle until after the acceptances had been approved and returned. Q A But at this point, were you having discussions with the government about you accept by means of a closing agreement? No. No. There had never been discussion of you accept by means of a closing agreement. There never was such a discussion. It never happened until after the settlements had been accepted. And then they come back and say, oh, we're not going to treat that as -- no. I was furious when I got that letter. That was sometime in '93 I think. [Tr: 970-1].

16

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Redding's testimony is consistent with the complete lack of any references to such discussions in the documentary evidence. D. The Government Erroneously Relies on Paine's Inquiries as Proof of IRS Intent and to Impute Redding's Intent With respect to the government's attempt to adopt Paine's intent as its own and to impute Paine's intent with respect to the mechanism for effectuating a settlement to Redding and his clients, in Cinema '84 the Second Circuit made it clear that such a conflation was neither legally correct nor was it correct on the facts of that case.23 The Second Circuit overturned the Tax Court's fact findings and entered judgment in favor of the taxpayers who believed that their exchange of letters with the IRS effectuated settlement of their partnership items before the Tax Court. The Second Circuit was not persuaded that the understanding or intent of other taxpayer's counsel in the same case could be attributed to Redding, who, there as here, had made his differing position with respect to settlement clear, and did not find the IRS attorney's testimony to be on point. The Federal Circuit specifically cited to this portion of Cinema '84 when it set out the governing authority for this case. Gingerich at *39, **4 citing Cinema '84 at 442. Moreover, Paine's testimony does not support the government's assertions. Her testimony squares with Redding. She testified that she did not represent the Plaintiffs here before the Tax Court and she did not have authority to negotiate or settle on behalf of Redding's clients. [Tr: 423-4, 425-6, and 427]. She testified that her representations regarding Redding and McLean reflected their general agreement as to the terms of the settlement, not necessarily the mechanism for acceptance. She testified that the IRS had not specified a closing agreement as the mechanism for acceptance. She testified that her client's special circumstances meant that he needed a closing agreement to bind the

23

Cinema '84 v. Commissioner, 294 F.3d 432 (2nd Cir. 2002). 17
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IRS to the non-partnership and other items that were not before the Tax Court. [Tr: 429-32, 433]. She indicated that Redding's understanding with regard to the mechanism for settlement should be considered in the context of his communications with the IRS ­ not her communications. [Tr: 432]. This is the approach correctly adopted by the Second Circuit in Cinema '84. Redding's testimony makes it abundantly clear that he did not agree, authorize, or represent that either of the other two taxpayers' counsel, MacLean or Paine, were authorized to speak on his behalf or represent his clients. [Tr: 960]. His actions buttress that testimony. On November 13, 1992, the day after Paine sent her letter and draft closing agreement to the IRS, Redding wrote his own letter to the IRS that " addressed the need for a closing agreement ..., but only as to "all issues that are not partnership item issues and therefore are not before the Court in this proceeding." Redding clarified that he would ask his clients to accept the IRS Offer "[n]otwithstanding this request." Gingerich, *37, **2. IV. The Government is Bound by the Law of the Case and May Not Exceed the Scope of Remand as Established by the Federal Circuit The government acknowledges that "[a]n exchange of letters between counsel is effective ... to settle issues pending before the Tax Court." [GB:3]. But in its brief the government asserts issues at odds with the Federal Circuit's decision, which expressly adopted that premise. Particularly the government asserts that there could be no settlement by exchange of letters because the IRS Offer contained terms as to partnership items, non-partnership items, and items for years not before the Tax Court, i.e., that it is not possible settle the partnership items before the Tax Court in a "mixed" settlement offer by exchange of letters and it is not possible to bifurcate the mechanisms for settling the partnership items before the Tax Court and the mechanisms for settling the other items.

18

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As its basis for that assumption the government stated, "[t]he Federal Circuit never examined the question of whether the terms set out by the IRS as a basis for settling plaintiffs' cases could be accepted by means of an exchange of letters." As support, the government asserted the Fifth Circuit had never reached the issue of a mixed partnership/non-partnership item settlement in Treaty Pines. [GB:3, and n.3, emphasis added]. The government is mistaken. In Treaty Pines the Garritys conceded that they contemplated signing, and did sign, a Form 906 closing agreement that settled non-partnership affected items and interest. The Garritys urged that this non-partnership item settlement had nothing to do with their acceptance of the partnership item settlement offer. The Fifth Circuit agreed, holding that partnership items before the Tax Court could be settled by exchange of letters. Specifically the Fifth Circuit held: The Garritys' partnership items were the sole subject matter of the Tax Court proceeding, and the Garritys could settle their case with respect to these partnership items without a closing agreement, and without regard to whether a closing agreement was contemplated or completed as to affected items and interest [nonpartnership items]."24 The Federal Circuit established Treaty Pines (and Cinema '84) as the law of this case: Settlement of an issue before the Tax Court does not require any particular method or form and can be accomplished by letters of offer and acceptance between the IRS attorneys assigned to the case and the taxpayers. Treaty Pines, 967 F.2d at 212; Cinema '84 v. Commissioner, 294 F.3d 432, 442 (2nd Cir. 2002). In contrast, settlement of items not before the Tax Court requires the execution of a Form 906 Closing Agreement signed by an appropriate senior IRS employee. 26 U.S.C. §§ 7121-22; Treaty Pines, 967 F.2d at 212.25 Not only did the Federal Circuit base its decision on Treaty Pines, the Federal Circuit's background statement indicates it was aware of and took the non-partnership items and items for

24

Treaty Pines v. C.I.R., 967 F.2d 206, 212 (5th Cir. 1992). [Emphasis added]. Gingerich v. United States, 82 Fed.Appx. 35, 39, 2003 WL 22854662, *4 (Fed. Cir. 2003). 19
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other years into account in making its decision. Specifically, the Federal Circuit recognized that the IRS Offer contained terms to settle (i) items before the Tax Court, and (ii) "items not before the Tax Court, such as penalties [nonpartnership items] and 'phantom income' [partnership items for years not before the Tax Court]." Gingerich at *36, **1. The Federal Circuit's adoption of Treaty Pines' analysis that it was possible to settle partnership items by an exchange of letters, notwithstanding the disposition of nonpartnership items, was made clear when it found that "the correspondence between Redding and the IRS attorneys, especially Redding's November 13, 1992 letter [PE:9] and Wilpon's November 17, 1992 response [PE:8], suggest that the Redding Acceptance Form could have been sufficient to accept the IRS Offer without further documentation." Gingerich at *39, **4. The specific issue on remand here ­ "whether or not the parties required a closing agreement to effectuate the settlement of issues before the Tax Court" ­ further demonstrates that the Federal Circuit was aware that this was a "mixed" settlement offer and that it, nonetheless, adopted the Treaty Pines approach that the Plaintiffs could settle their partnership items before the Tax Court by exchange of letters, without a closing agreement, and without regard to whether a closing agreement was contemplated or completed as to non-partnership and other items. It is well settled that "[T]he mandate rule and the law of the case doctrine preclude reconsideration by this court of a claim previously rejected and affirmed on appeal. '[A] lower court is bound to respect the mandate of an appellate tribunal and cannot reconsider questions which the mandate has laid to rest.' " Northern Helex Co. v. U.S., 225 Ct.Cl. 194, 634 F.2d 557, 560 (1980) (quoting Federal Commc'n Comm'n v. Pottsville Broad. Co., 309 U.S. 134, 140, 60 S.Ct. 437, 84 L.Ed. 656 (1940)). " 'An inferior court has no power or authority to deviate from the mandate issued by an appellate court.' " Northern Helex, 634 F.2d at 560 (quoting Briggs v. Pennsylvania R.R., 334 U.S. 304, 306, 68 S.Ct. 1039, 92 L.Ed. 1403 (1948)). "After an appellate court has decided a case and remanded to a lower court, the latter court 'is bound by the decree as the law of the case; and must carry it into execution.... That court cannot vary 20
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it, or examine it for any other purpose than execution; .... or review it, even for apparent error, upon any matter decided on appeal.' " Northern Helex, 634 F.2d at 560 (quoting In re Sanford Fork & Tool Co., 160 U.S. 247, 255, 16 S.Ct. 291, 40 L.Ed. 414 (1895)). See also In re Roberts, 846 F.2d 1360, 1363 (Fed.Cir.1988) ( "Unlike the authority to reconsider its own rulings, a district court is without choice in obeying the mandate of the appellate court."); Exxon Corp. v. U.S., 931 F.2d 874, 877 n. 7 (Fed.Cir.1991) (mandate constitutes law of the case on issues that were either explicitly or implicitly decided by the appellate tribunal). In short, a trial court acting on a remand order, may not reexamine any issues that were addressed either explicitly or implicitly by the appellate court. "[N]o litigant deserves an opportunity to go over the same ground twice." Gindes v. U.S., 740 F.2d 947, 949 (Fed.Cir.1984).26 The government's assertion that the parties did not intend to bifurcate the settlement is subject to the same law of the case and mandate rule. The parties did not have to intend to bifurcate the settlement. Bifurcation is the legal effect of offering to settle both partnership and nonpartnership items in the same offer without specifying a mechanism for effectuating the settlement other than "in writing." Wilpon and Stoddard cannot now profess shock that a written acceptance in response would create a binding agreement with respect to the items over which they had settlement authority. The legal context for settlement of partnership items by exchange of letters was well established by the time the IRS made its offer in this case. Wilpon was well aware of Treaty Pines, the appellate precedent that recognized partnership and nonpartnership item settlements could be bifurcated as an operation of law by an exchange of letters that settled the docketed partnership

Globe Sav. Bank, F.S.B. v. United States, 74 Fed.Cl. 736, 740 (2006), Lettow, J., emphasis added. There are exceptions to the law of the case doctrine, but none that apply here. American Federal Bank, FSB v. United States, 74 Fed.Cl. 208, 213 (2006), Lettow, J. ("The law of the case doctrine 'protect[s] the settled expectations of the parties and promote[s] orderly development of the case.' Suel v. Sec'y of Health & Human Servs., 192 F.3d 981, 984 (Fed.Cir.1999). 'Reasons that may warrant departure from the law of the case ... include the discovery of new and different material evidence that was not presented in the prior action, or an intervening change of controlling legal authority, or when the prior decision is clearly incorrect and its preservation would work a manifest injustice.' Intergraph Corp. v. Intel Corp., 253 F.3d 695, 698 (Fed.Cir.2001) (citing Smith Int'l Inc. v. Hughes Tool Co., 759 F.2d 1572, 1576 (Fed.Cir.1985)).") 21
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items. The determination to be made by this Court is limited in this remand to whether the parties required a closing agreement to settle the issues before the Tax Court not whether the partnership items then before the Tax Court could have been settled by exchange of letters. Any attempt to exceed the limited scope of remand in this case is improper and must be rejected. V. The Government's Assertion That the Settlement Only Addressed Nonpartnership and Other Items Not Before the Tax Court Is Erroneous In its post trial brief, the government has largely built its case on the erroneous assertion that none of the terms of the settlement addressed the partnership items before the Tax Court and that, consequently, a closing agreement was required. In support, the government asserts (i) the settlement did not address partnership items, and (ii) all of the settlement terms in the letters and the closing agreement are nonpartnership items and items not before the Tax Court. A. Stoddard Testified that The Partnership Items Were Settled The government's own witnesses contradict this assertion. Stoddard testified that the settlement did address the partnership items before the Tax Court ­ albeit by totally disallowing all partnership items and allowing zero partnership item losses, including depreciation and other expenses. Q: ... There was no allowance or the partnership items at issue in this FPAA are in no way, according to you, addressed in the settlement terms that were offered to the GIA partners? They are addressed. They are addressed as zero, and in exchange for that, a person would get a 165 or 162 deduction to the extent they could verify their cash investment.

A:

[Tr: 471]

22

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Stoddard further testified that the very purpose of the settlement was to totally disallow all partnership items. A: I'm struggling to understand the question, but my testimony is, the purpose of the settlement was to remove all partnership items from an individual investor's return. There was a zero allowance of partnership items. In exchange for that, on their individual return they would get a deduction, either a 165 loss or a 162 other deduction to the extent of 60 percent of their substantiated cash.

[Tr: 472] B. If True, the Assessments Were Pre-Mature and Are Void Moreover, the consequence of the government's assertion that none of the partnership items before the Tax Court were addressed or settled, either in the exchange of letters or in the final closing agreements, would mean that the there was absolutely no authority to make the assessments at issue in this case prior to the entry of the Tax Court's February 23, 1994 order. In that order the Tax Court dismissed the Plaintiffs from the partnership proceeding for lack of jurisdiction on the grounds that they had settled. [PE: 163 at 2721, see document No. 0047, order granting taxpayer's motion to dismiss for "LOJ"].27 However, the IRS began making the assessments at issue in early January, 1994, six weeks pre-maturely. As it applies here, §6225(a) expressly prohibits the IRS from making any "assessment of a [tax] deficiency attributable to any partnership item" until after "the decision of the [Tax C]ourt ... has become final." Premature assessments are void as a matter of law.28

27

(not lack of prosecution).

28

Maxwell v. Commissioner, 87 T.C. 783, 787-88 (1986) ("Respondent has no authority to assess a deficiency attributable to a partnership item until after the close of a partnership proceeding, §6225(a), and may be enjoined from making premature assessments. §6225(b). Special rules apply to settlement agreements. §6224(c). Special statutes of limitations apply to assessment of deficiencies attributable to partnership items. §6229."). 23
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C.

There is No Corroborating Evidence to Support Either Stoddard's or the Government's Assertion Contrary to Stoddard's testimony, there is no settlement term that totally disallows or allows

zero of the partnership items before the Tax Court. There is no such term in the letters exchanged between the parties, and no term can even be read to implicitly make such an assertion. Instead, the only reference to partnership losses in the letter agreement is in the first sentence of the first paragraph, which states: 1. For the first open year of the investment, each investor will be allowed to the extent of losses claimed that year, sixty per cent (60%) of verified out-ofpocket cash investment in the partnership less any partnership losses previously allowed.

Stoddard and Wilpon testified that this sentence is not a partial allowance of partnership losses for the first open year, but an allowance of a deduction pursuant to §165, §162, or possibly §212, for a percentage of the cash each partner invested in GIA, which is a non-partnership item. However, Stoddard was unable to explain why that term did not more plainly state that it was an allowance of cash invested distinct from an allowance of partnership items, or whether it was a §165, §162, or a §212 deduction. In response to questions from the Court, Stoddard was even less able to articulate what type of deduction was allowed or the legal theory behind the deduction. THE WITNESS: THE COURT: THE WITNESS: 162 typically deals with ordinary and necessary business expenses incurred in connection with a trade or business. Right. And what does 165 deal with, in your view? 165 just deals with ordinary losses. It deals with a lot of things, but in this context, it would deal with a loss on an investment. An ordinary loss? I would have given them ordinary loss treatment as part of the settlement. Whether that's technically correct, again, I'm not 24
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THE COURT: THE WITNESS:

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sure. .... THE COURT: THE WITNESS: All right. And now we come to 212. Why did you cite 212? The reason I just cited 212 was because I'm not sure whether or not these investors could be considered engaged in a trade or business of being partnership investors. Right. So it was just an investment loss.

THE COURT: THE WITNESS: [Tr: 474-475].

Stoddard's credibility is strained even further by his representation that this investment loss would have been an ordinary loss. Except in a few narrow circumstances, investment losses are capital losses, not ordinary. Stoddard's ordinary loss alchemy is innovative, if nothing. In contrast, Redding asserted the first sentence is a settlement of partnership items and, in contrast to the zero allowance asserted by the IRS attorneys, allows partners to recognize partnership losses claimed in the first year of the partner's investment in an amount up to 60% of the amount of cash the partner invested. Q: Okay. Can you go through those numbered paragraphs and kind of briefly tell us which ones are partnership items and which ones are nonpartnership items? The first one has a mix in it. You can't say it's one or the other entirely. The first part of the first paragraph is clearly a partnership item. It's talking about the distributive share of partnership income, gain or loss that will be allowed, and it's stated I'm going to say generically so that it applies to all of the Madison Equipment partnerships. .... What it is saying is that a percentage of the losses will be allowed up to 60 percent of that reported by the partnership or up to 60 percent of the cash invested, but it is the distributive share of partnership losses will be allowed up to that amount, and if there's not that much of a distributive share in the first year, then a portion of the second year distributive share will be applied. [Tr: 948-9]. 25
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A:

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Redding's understanding of this first settlement term squares with the adjustments in the closing agreement and the ultimate adjustments made by the IRS. Under Redding's approach, each partner would be allowed their distributive share of partnership item losses/deductions reported on their personal tax return for the first year of their investment in an amount up to 60% of their cash invested. If the partner's cash invested exceeded the losses/deductions claimed in the first year, then the partner could take deductions for the remainder of the 60% allowance in the immediately succeeding years until the entire 60% allowance was exhausted. This contingency did not occur in these cases. Each of the Plaintiff's GIA losses exceeded their cash invested. As a consequence, the portion of their partnership item losses/deductions that exceeded 60% of their cash investment for the first open year, and all partnership item losses/deductions for all other years, were disallowed. Stoddard was emphatic that the settlement did not allow the partners any part of the partnership losses, depreciation, etc. A They were not allowed a portion of their partnership item losses. They were allowed a portion of their substantiated cash as another deduction, either a 165 or a 162. No portion of that was treated as depreciation, legal or accounting, guaranteed payments to partner, guaranteed fee, general administrative costs, or a bank charge. None. None whatsoever.

[Tr: 471]. But the plain language of the final closing agreement reflects Redding's approach and explicitly refers and applies the first term of the settlement to the partner's distributive share of partnership losses, in direct contradiction to Stoddard's assertion that no portion whatsoever of the adjustments were treated as partnership item losses.29 [PE:2] The first term of the final closing

29

Note however, that the second settlement term of the closing agreement does state that the taxpayer's distributive share of the partnership's investment interest expense is zero for all taxable 26
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Case 1:98-cv-00533-CFL

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agreement, which was drafted by the same IRS attorneys who were so emphatic in their testimony before this Court, provides that: 1. The taxpayer's distributive shares of the Partnership's income/(losses) are as follows: Distributive Share Tax Year income/(losses) 1983 $ (----------------) 1984 -01985 -01986 -01987 -01988 -01989 -0-

Each partner's final closing agreement applied the settlement by adjusting their respective distributive share of partner