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 POST-TRIAL REPLY BRIEF __________

In accordance with the Court's Order, defendant submits the following brief in reply to the plaintiffs' post-trial brief. A. A closing agreement was required to effectuate the settlement. 1. None of the terms contained in the IRS settlement proposal was a matter before the Tax Court. It is not disputed that the Tax Court only has jurisdiction over the matters set out in the FPAA. (Redding Tr. 942, l. 10-18.) Only matters pending before the Tax Court can be settled by an exchange of letters between counsel. A closing agreement is required to settle matters not pending before the Tax Court. Gingerich, et al. v. United States, 82 Fed.Appx. 35, 39 (2003 WL 22854662) (Fed. Cir. 2003). If the settlement proposed by the IRS did not contain matters

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pending before the Tax Court, as a matter of law, an exchange of letters could not be used to effectuate that settlement. The issue of whether any of the terms of the IRS proposal were matters before the Tax Court was not raised before or addressed by the Federal Circuit. Ibid. Defendant submits that, regardless of the intent of plaintiffs, or their counsel, a closing agreement was required to effectuate the settlement proposed by the IRS because none of those terms was a matter before the Tax Court. (Stoddard Tr. 448, l. 9-20; 478, l. 24 to 479, l. 2; 483, l. 13-24; Wilpon Tr. 640, l. 15 to 641, l. 14) The settlement proposed by the IRS was set forth in a letter from Stoddard to Redding dated January 23, 1991, and consisted of five terms. (Px. 18.) Plaintiffs admit that the five terms of the IRS proposal never changed from January 23, 1991, to the execution of the closing agreements on September 22, 1993. (P. Brief at 7.) Plaintiffs agree that four of those five terms were not matters pending before the Tax Court, and that those terms could only be settled by means of a closing agreement. (P. Brief at fn. 7-11.) The only part of the IRS settlement proposal that plaintiffs contend was a matter pending before the Tax Court was the provision that the settling partner would be allowed a deduction equal to 60% of their verified cash investment in the partnership. (P. Brief at fn 6.) Redding concedes that the Tax Court has jurisdiction only over matters set out in the FPAA issued to the partnership. (Redding Tr. 942, l. 10-18.) The FPAA issued to GIA proposed disallowing various deductions and credits claimed by the partnership and did not address individual partners' cash investments. (Px. 21.) Under the settlement proposed by the IRS, the partners would be allowed no portion of the partnership's deductions or credits. (Stoddard Tr. 471, l. 714.) Rather, each partner would be allowed a deduction equal to 60% of his or her verified cash

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investment in GIA. (Px. 18.) Since the partners were not being allowed any portion of the losses attributable to the deductions or credits claimed by GIA, which was the basis of the FPAA, that settlement term was not a matter pending before the Tax Court. (Stoddard, Tr. 448, l. 9-20; Wilpon Tr. 640, l. 15-24.) Therefore, a closing agreement was required to settle plaintiffs' cases, regardless of whether counsel intended that one be used or not. Gingerich. 2. There was no agreement to settle one term separately from the others. In the event the Court determines that the "60% of verified cash" term was a matter within the jurisdiction of the Tax Court, the question to be resolved is whether the IRS ever offered to settle that term separately from the other four terms in its settlement proposal. Since the acceptance must mirror the offer, in order for there to be a settlement by exchange of letters related to just the "60% of verified cash" term, there must have been an IRS offer to settle solely on that basis. Minneapolis and St. Louis Railway Co. v. Columbus Rolling-Mill, Co., 119 U.S. 149, 151 (1886). There is no evidence that the IRS, or any other party, ever submitted an offer to settle only the "60% of verified cash" term. Redding's draft closing agreement submitted to the IRS on July 5, 1991, Paine's draft closing agreement submitted to the IRS on November 12, 1992, Redding's draft acceptance form submitted to the IRS on November 13, 1992, Wilpon's proposed closing agreement submitted to Redding on November 17, 1992, and the closing agreements executed by plaintiffs and the IRS, all contain the same basic five terms, including the "60% of verified cash" term.. (Px. 8, 9, 12, 47; Dx. 1.) Those are the only proposed settlement documents in the record. There was no testimony at trial by Redding, or any other witness, that the IRS ever

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proposed, or agreed, that the "60% of verified cash" item would be separately settled by an exchange of letters (or any other means), leaving resolution of the remaining issues for a later date. Wilpon and Stoddard testified clearly that the parties never proposed such a bifurcated settlement, and that the IRS would never have agreed to it if had been proposed. (Wilpon Tr. 571, l. 1-13; Stoddard Tr. 453, l. 7-14; 493, l. 25 to 494, l. 19.) This is confirmed by Redding's testimony that all terms of the IRS settlement proposal remained the same from the initial offer on January 23, 1991, through the execution of the closing agreements on September 22, 1993. (Redding Tr. 998, l. 2-14.) Plaintiffs acknowledge that there was to be only one settlement, covering all five terms (including the "60% of verified cash" term). Plaintiffs acknowledge that the IRS offer "was a drop dead, take it or leave it offer." (P. Brief at 7.) Redding testified that in his 25 years of practice he had never seen a settlement of a TEFRA case where the partnership items were settled separately from the non-partnership items. (Redding Tr. 874, 15-25.) According to Redding, IRS regulations required that settlements be "comprehensive," and that the parties "put it all into one settlement." (Redding Tr. 875, l. 4-12.) Redding's testimony, that everything was to be put in one settlement, is consistent with that of Wilpon, Stoddard and Paine, that there was no discussion or consideration of bifurcating the IRS settlement proposal in this case. (Wilpon Tr. 571, l. 1-13; Stoddard Tr. 453, l. 7-14; 493, l. 25 to 494, l. 19; Paine, Tr. 428, l. 15 to 429, l. 19.) Since the IRS settlement proposal could not be accepted in its entirety by any means other than a closing agreement, it is clear that there was no settlement until the closing agreements were executed on September 22, 1993. Plaintiffs argue that the assessments at issue in this case were primarily related to the

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"60% of verified cash" term. (P. Brief at 13.) However, plaintiffs fail to note that no assessment related to the "60% of verified cash" term could be made until plaintiffs submitted the verification required by the offer, which in many cases did not occur until April 7, 1993. (Px. 38, 46, 143; Wilpon Tr. 669, l. 25 to 670, l. 21.) Plaintiffs acknowledge that a significant portion of the refunds at issue in this case are related to the additional tax motivated interest assessed pursuant to § 6621, but they contend that the IRS could have assessed that additional interest without the closing agreement. (P. Brief at 13.) Without the plaintiffs' concession in the closing agreement, however, any assessment of tax motivated interest could later have been contested by plaintiffs pursuant to § 6621(c)(4). Plaintiffs also argue that the assessments at issue here only involve the years before the Tax Court, 1983-1986. However, that does not mean that the IRS and plaintiffs were only concerned with those years when they settled their disputes regarding GIA. All parties wanted to resolve with finality all issues related to GIA, including those not before the Tax Court. (Wilpon, Tr. 573, l. 14-22; 669, l. 25 to 670, l. 21; Stoddard, Tr. 493, l. 25 to 494, l. 19; Paine Tr. 428, l. 15 to 429 , l. 12; Redding Tr. 872, l. 22 to 874, l. 25.) The only way to finally resolve those issues was through the execution of a closing agreement. (Wilpon, Tr. 573, l. 14-22; 669, l. 25 to 670, l. 21; Stoddard, Tr. 493, l. 25 to 494, l. 19.) In the FPAA the IRS proposed disallowing losses reported by GIA in 1983-1986 and did not address later years. Without the closing agreement, any disallowance of losses related to GIA that were claimed in years after 1986 could still be contested in the Tax Court. Similarly, without the closing agreement, the IRS would not be bound to issue refunds in later years in which partners reported gain related to GIA. This was an issue of paramount importance to both

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Redding and Paine. (Paine Tr. 428, l. 15 to 429 , l. 12; Redding Tr. 872, l. 22 to 874, l. 25.) It was clear from the testimony at trial that finality was an important consideration in the settlement of plaintiffs' cases. There is absolutely no basis to conclude that the IRS and the plaintiffs would agree to settle only one term of the settlement proposal and leave the other matters to be resolved at a later date. B. The parties intended to use a closing agreement to effectuate the settlement. Plaintiffs contend that the settlement was final on December 30, 1992, when the signed acceptance forms were submitted to the IRS. (P. Brief at 7.) The primary basis for plaintiffs' contention is the incorrect assertion that, "none of the IRS's correspondence regarding the offer even mentioned such a condition [a closing agreement] until after the plaintiffs had accepted the offer." (P. Brief at 8.) Redding admitted at trial that as of December 1, 1992, when he sent his acceptance form to plaintiffs, there was no settlement agreement between the parties. (Redding Tr. 1020, l. 1-8.) Redding's December 1, 1992, correspondence notified plaintiffs that they had the option to decline to enter into any settlement with the IRS. (Px. 162A at 11.) On November 17, 1992, Wilpon sent a fax to Redding which stated, "attached is our anticipated closing agreement language." (Px. 8.) Attached to that fax was draft language for a closing agreement, which language is the same (including the "60% of verified cash" term) as that in the closing agreements ultimately executed by plaintiffs. (Px. 8, 146; Wilpon Tr. 644, l. 12-14.) This was two weeks before Redding sent the acceptance form to the plaintiffs and six weeks before the signed acceptance forms were submitted to the IRS. (Px. 162A, 7.) Therefore, contrary to plaintiffs' assertion, the IRS had proposed, in writing, that a closing agreement was required

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before any part of the IRS settlement proposal was accepted by plaintiffs. Wilpon's November 17, 1992, fax was in response to Redding's letter of November 13, 1992. (Px. 9.) In his letter Redding asked the IRS to signify in writing that execution of the proposed acceptance form would constitute a settlement. (Px. 9.) The IRS never responded to that request. Wilpon's November 17, 1992, fax only stated that the IRS agreed with, "your outline of the settlement terms set out in the Draft Acceptance Form." (Px. 8.) Wilpon thus merely acknowledged that the acceptance form contained the same basic terms as the IRS settlement proposal (including the "60% of verified cash" term). The IRS never countersigned the acceptance forms submitted by Redding on December 30, 1992, even though Redding requested in his letter that it do so. (Px. 9; Wilpon Tr. 614, l. 15-21.) This is a further indication that the IRS did not consider the execution of the acceptance forms to be a valid acceptance of its settlement proposal and that Redding was aware of that fact. Wilpon's fax is consistent with the draft closing agreement submitted to the IRS by Paine on November 12, 1992. (Dx. 1.) In his November 13, 1992, letter Redding stated that he "considered and approved" Paine's proposed closing agreement. (Px. 9.) Paine's proposed closing agreement included all the terms of the IRS settlement proposal, including the "60% of verified cash" term. (Dx. 1.) Taken together, Paine's November 12, 1992, letter, Redding's November 13, 1992, letter, and Wilpon's November 17, 1992, fax clearly establish that a closing agreement was intended by both parties to be used to effectuate the settlement in issue. Even if the Court were to conclude that the correspondence between the parties was ambiguous as to whether a closing agreement was needed, defendant submits that the testimony presented at trial clearly established that the IRS intended to settle only by means of a closing

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agreement. Wilpon, Stoddard and Paine all testified that all along the parties understood that a closing agreement would be required to effectuate the settlement. (Wilpon Tr. 556, l. 14-22, Tr. 557, l. 20 to 558, l. 2; Stoddard, Tr. 493, l. 25 to 494, l; Paine Tr. 428, l. 15 to 429, l. 12.) Wilpon testified that his November 17, 1992, fax was a clear statement that "the settlement was going to be in the form of the closing agreement which was attached to that fax." (Wilpon Tr. 601, l. 17-19; Wilpon Tr. 681. L. 22 to 682, l. 7.) Plaintiffs' assertion to the contrary is not supported by any evidence presented at the trial.1 It was also the understanding of the Tax Court that there would be no settlement of plaintiffs' cases until the closing agreements were executed by the IRS. (Px. 166A, fn 1.) In its order of September 7, 1993, the Tax Court included plaintiffs' cases in a list of non-settling partners. (Px. 166A.) It defined non-settling partners as those who have not executed closing agreements. (Px. 166A fn.) If, as plaintiffs contend, all issues pending before the Tax Court were finally settled by the parties on December 30, 1992, the Tax Court would not have considered plaintiffs to be non-settling partners on September 7, 1993, over nine months later. That plaintiffs were included on the Tax Court's list of non-settling partners as of September 7, 1993, was no accident is borne out by the fact that Redding did not advise the Tax Court of the settlement until October 14, 1993, after the closing agreements were executed. (Px. 163.)

Plaintiffs' brief implies that Wilpon might have admitted in his deposition testimony that there was a settlement prior to the execution of the Closing Agreements, although they provide no citation to where in the deposition the language quoted appears. (P. Brief at 6.) Wilpon's deposition was not admitted as an exhibit at the trial. (Tr. 1048, l. 18 to 1049, l. 12.) Wilpon's trial testimony was consistent, and adamant, that there was no settlement until September 22, 1993, when the IRS executed the closing agreements. (Wilpon Tr. 573, l. 14-22; 612, l. 9-21; 678, l. 20-24; 681. L. 18 to 682, l. 7.) 8

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C. This case is factually distinguishable from Treaty Pines. The primary legal authority relied on by plaintiffs is the decision in Treaty Pines v. Commissioner, 967 F.2d 206 (5th Cir. 1992).2 (P. Brief at 9-11.) However the evidence presented at trial establishes that Treaty Pines does not apply here. First, the Treaty Pines court relied upon the fact that there was correspondence from the IRS which clearly acknowledged that a settlement had been reached before any closing agreement had been executed. Treaty Pines, 967 F.2d at 211. No such correspondence is present here. Wilpon's November 17, 1992, letter cannot be an acknowledgment of any settlement since plaintiffs' contend that the earliest there was a settlement agreement was six weeks later on December 30, 1992. On January 26, 1993, and again on February 18, 1993, the IRS wrote to Redding stating clearly that there was no settlement until the closing agreements were executed. (Px. 5, 6.) Second, the closing agreements ultimately executed by the parties were not in the record in Treaty Pines. 967 F.2d at 210. Unlike Treaty Pines, the record in this case includes closing agreements executed on September 22, 1993, which agreements included all the terms of the IRS

Plaintiffs also cite to Cinema `84 v. Commissioner, 294 F.3d 432 (2nd Cir. 2002). Plaintiffs incorrectly assert that the Second Circuit found that Redding's client settled with the IRS by an exchange of letters. (P. Brief at 9.) Rather, the Second Circuit vacated the decision of the Tax Court that no settlement had occurred and remanded the case for further proceedings to determine whether a closing agreement was required. Cinema `84, 294 F.3d at 444. There was evidence in the record in that case that the IRS and counsel for the partnership understood that a closing agreement would be necessary to effectuate settlement. However, there was no evidence of communications between the IRS or counsel for the partnership, and the taxpayer, or his counsel, Redding. Cinema `84, 294 F.3d at 443. The Second Circuit remanded the case for the Tax Court to determine whether the IRS, or counsel for the partnership, ever discussed with the taxpayer or Redding the necessity of a closing agreement. Cinema `84 did not address the issue of whether the terms of the IRS settlement offer in that case could be accepted by an exchange of letters or required a closing agreement. Unlike Cinema `84, the record before the Court here contains extensive evidence regarding the intention of the IRS that the settlement be effected by a closing agreement and its communication of that intention to Redding. 9

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settlement proposal, even the term plaintiffs claim had already been settled. Third, the settlement offer in Treaty Pines involved only partnership items. Treaty Pines, 967 F.2d at 209. Therefore, Treaty Pines did not involve the situation present here, where the IRS settlement proposal included terms that were not partnership items and could only be settled by means of a closing agreement. Fourth, the court in Treaty Pines noted that the taxpayer was not included on a list of non-settling partners. There, the IRS stated in writing that the taxpayer was not on the nonsettled partner list because the IRS considered the taxpayer to have already settled its case. Treaty Pines, 967 F.2d at 209. In fact, in that case the IRS filed a motion in the Tax Court to dismiss the taxpayer's case because it had been settled long before it was alleged any closing agreement was executed. Ibid. By contrast, in this case, plaintiffs' cases were included in the list of non-settling partners in the Tax Court order issued on September 7, 1993. (Px. 166A.) Finally, the court in Treaty Pines noted that "on the whole, the record is sparse." 967 F.2d at 211. By contrast, in this case the record included extensive documentation and testimony, clearly establishing that the IRS never intended to settle any portion of plaintiffs' cases by an exchange of letters, nor agreed to settle one term of its settlement proposal separately from the other four terms. For these reasons, the decision in Treaty Pines is clearly distinguishable from the instant case. CONCLUSION For the reasons set forth above, and in defendant's opening brief, defendant respectfully submits that the claims of plaintiffs should be dismissed with prejudice.

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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 EILEEN J. O'CONNOR Assistant Attorney General DAVID GUSTAFSON Chief, Court of Federal Claims Section MARY M. ABATE Assistant Chief

s/Mary M. Abate Of Counsel

April 2, 2007

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