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' POST-TRIAL BRIEF

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TABLE OF CONTENTS

Table of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii Plaintiffs' Post-Trial Brief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. II. II. Statement of Background Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Terms of the Settlement Never Changed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A. B. Party Representative Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Individual Partners' Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. III. Fenton Gingerich and Eunice Gingerich . . . . . . . . . . . . . . . . . . . . . . . . . 21 Seung C. Karl and Young Ho Karl . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Choong H. Kim and Joung S. Kim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Lou-Bess, Inc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Albert A. Liebovich and Dorothy E. Liebovich . . . . . . . . . . . . . . . . . . . . 26 Carl V. Liebovich and Nellie D. Liebovich . . . . . . . . . . . . . . . . . . . . . . . 27 Gregory A. Liebovich and Gail Liebovich . . . . . . . . . . . . . . . . . . . . . . . . 28 Joe Liebovich and Belle Liebovich . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Larry J. Liebovich and Barbara J. Liebovich . . . . . . . . . . . . . . . . . . . . . . 30 Samuel D. Liebovich and Erna S. Liebovich . . . . . . . . . . . . . . . . . . . . . . 31 Eugene M. Rosol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Charles H. Scruggs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Dae-Sob Yoon and Moon K. Yoon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

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TABLE OF AUTHORITIES Cases Cinema '84 v. C.I.R., 294 F.3d 432 (2nd Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 16 Field v. United States, 381 F.3d 109 (6th Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Gingerich, et. al. v. United States, 82 Fed.Appx. 35, 2003 WL 22854662, 92 A.F.T.R.2d 2003-7224 (Fed. Cir. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 2 Himmelwright v. C.I.R., T.C. Memo 1988-114 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 N.C.F. Energy Partners v. C.I.R., 89 T.C. 741 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Treaty Pines v. C.I.R., 967 F.2d 206, 211 (5th Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . 9-11, 16, 17 Yoo Han & Co., Ltd. v. C.I.R., T.C. Memo. 1991-308 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Statutes 26 U.S.C. §163 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 26 U.S.C. §6229(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 26 U.S.C. §6231(b)(1)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 26 U.S.C. §6621(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 13 26 U.S.C. §6653 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 26 U.S.C. §6659 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 26 U.S.C. §6661 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 26 U.S.C. §7121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Other Authorities 1990 LGM TL-21, 1990 WL 1086208 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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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' POST-TRIAL BRIEF The Court of Appeals for the Federal Circuit remanded this matter for further proceedings and specific findings concerning two issues: (i) whether the parties required a closing agreement to effectuate the settlement of issues before the Tax Court, and (ii) whether the "Redding Acceptance Form" constituted a valid acceptance of the IRS Offer despite the Federal Circuit's perceived variation in the terms between the two documents.1 I. Statement of Background Facts Almost all of the facts in this case were established by the Court of Federal Claims in an extensive Background statement in its decision, which Plaintiffs adopt and incorporate, with footnoted additions, as follows: Plaintiffs in this action were direct and indirect partners of General Information Associates

Gingerich, et. al. v. United States, 82 Fed.Appx. 35, 2003 WL 22854662, **4, 92 A.F.T.R.2d 2003-7224 (Fed. Cir. 2003). 1
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Partnership ("GIA") during the tax years 1983-1986.2 In April 1990, the IRS disallowed items of loss and deductions concerning GIA's equipment leasing activities in a Notice of Final Partnership Administrative Adjustment ("FPAA").3 Attorney Thomas Redding represented some of the GIA taxpayer-partners who were parties to the Tax Court partnership-level petition for readjustment of the partnership items.4 In January 1991, Redding wrote to William Stoddard and Bruce Wilpon, the attorneys who represented the IRS in the GIA Tax Court action, to inquire about the possibility of settlement and to request a closing agreement to settle items not before the Tax Court, such as penalties and "phantom income." A closing agreement is used to cover items not before the Tax Court.5 In his responsive letter, Wilpon offered Plaintiffs a settlement (the "IRS Offer") on the

2

Not all plaintiffs were partners. Only Fenton Gingerich, Seung Karl, Choong Kim, Eugene Rosol, Charles Scruggs, and Moon Yoon were direct partners in GIA. Albert Liebovich, Carl Liebovich, Gregory Liebovich, Joe Liebovich, Larry Liebovich, and Samuel Liebovich were indirect partners by virtue of their investment in Loubess, which in turn held a partnership interest in GIA. The respective spouses of these plaintiffs were not partners in GIA and are parties to the settlement and this action only because they filed joint tax returns with their spouses. The FPAA proposed adjustments to certain GIA partnership items for tax years 1983 - 1986. A partner other than the tax matters partner filed a petition in the Tax Court for readjustment of the IRS's proposed adjustments to GIA's partnership items as set out in the FPAA. General Information Associates Partnership, Raymond & Irma Ziff, Partners Other Than the Tax Matters Partner v. Commissioner, Docket No. 18405-90.
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TEFRA establishes that all partners are deemed to be parties to partnership-level proceedings. §6226(c). Mr. Redding's clients in that proceeding are the Plaintiffs in this action. Other attorneys, including Linda Paine and Babcock MacLean, represented other GIA partners who were also parties to that Tax Court action but not this action. As the Federal Circuit specifically noted in Gingerich at **4, 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 counsel for the taxpayers and the IRS. The Federal Circuit also specifically noted that, in contrast, settlement of items not before the Tax Court require the execution of a Form 906 Closing Agreement. 2
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following terms: 1. For the first open year of each partners' investment, the investor will be 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 sixty percent, 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 §163.6 2. The Government will concede the applicability of the additions to tax under §§6653, 6659 and 6661, if any.7 3. The investors are required to concede the applicability of the increased rate of interest established under §6621(c), formerly §6621(d).8 4. No other losses, investment interest expense or other deductions attributable to this

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This partnership item issue was directly before the Tax Court and could be settled by an exchange of letters. A Form 906 Closing Agreement was not required to effectuate this term of the settlement. Plaintiffs' claims assert that the tax resulting from this particular adjustment was improperly assessed more than one year after the exchange of letters between Wilpon and the Plaintiffs and the amounts paid by Plaintiffs and identified in their Forms 1040X and Forms 843 claims for refund are overpayments that should be refunded. The penalties under 26 U.S.C. §§ 6653, 6659 and 6661 are non-partnership items that could not be addressed and were not before the Tax Court in that partnership-level TEFRA case. A Form 906 Closing Agreement was necessary to effectuate this term of the settlement.
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Section 6621(c) penalty interest is a non-partnership, affected item that could not be addressed and was not before the Tax Court in that partnership-level case. A Form 906 Closing Agreement was necessary to effectuate this term of the settlement. 3
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partnership shall be allowed in any other year.9 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.10 A series of counteroffers by Redding, and corresponding rejections by the IRS ensued. 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."11 On October 22, 1992, the IRS demanded that Redding's clients accept or reject the IRS Offer before December 1, 1992. On November 12, 1992, Linda Paine, an attorney who represented certain GIA partners other than Plaintiffs, wrote to Wilpon and Stoddard, allegedly on behalf of herself, Redding, and Babcock MacLean, an attorney for other GIA partners. In this letter, 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. Redding wrote separately to Wilpon and Stoddard on November 13, 1992, requesting an

Tax items for years not before the Tax Court could not be addressed and were not before the Tax Court in that partnership-level case. A Form 906 Closing Agreement was necessary to effectuate this term of the settlement. Income for tax years not before the Tax Court could not be addressed and was not before the Tax Court in that partnership-level case. A Form 906 Closing Agreement was necessary to effectuate this term of the settlement. The reversal of gains for later years not before the Tax Court could not be addressed and was not before the Tax Court in that partnership-level case. A Form 906 Closing Agreement was necessary to effectuate this term of the settlement. 4
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extension of time to respond to the IRS's settlement offer. 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." Redding clarified that he would ask his clients to accept the IRS Offer "[n]otwithstanding this request." 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"). 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). The Redding Acceptance Form included six items, the first five substantially corresponding to the language of the IRS Offer and the sixth incorporating the additional term offered in the IRS's October 17, 1992 letter: "[a]ny gains reported in years subsequent to the initial investment year shall be reversed and not included in income." On November 17, 1992, IRS attorney 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. Wilpon included a closing agreement with his fax (the "IRS Closing Agreement"). Based on Wilpon's reply, Redding wrote the Plaintiffs and urged them to settle via submission of the 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. 5

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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. Redding and Paine were not copied on this correspondence. 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. 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). On February 18, 1993, Wilpon again 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). 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. 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. 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. Plaintiff Rosol signed his closing agreement on February 10, 1993, and submitted it to the IRS, which countersigned on March 16, 1993. Between January 3, 1994 and August 8, 1994, the IRS assessed deficiencies against the Taxpayers as individuals. 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 6

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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). The parties dispute the date upon which the statute of limitations began to run. The Taxpayers allege that the one-year limitations period began on the day that the Redding Acceptance Forms were submitted, December 30, 1992. The United States contends that the operative date was September 22, 1993, the date that closing agreements were countersigned by the IRS. These facts were re-affirmed by the evidence presented at the trial regarding the parties intent with respect to the mechanism for accepting the IRS's settlement. II. The Terms of the Settlement Never Changed Redding testified that there were no on-going negotiations regarding the terms of the settlement. Redding was emphatic that the terms of the settlement did not change from the original January 31, 1991 settlement offer from the IRS through the acceptance forms and even through the final closing agreement. [Tr: 997-8]. As discussed below, the government's offer was a drop dead, take it or leave it offer and Redding's "addition" of a new term in the acceptance letters was a clarification, not a change in terms, which the IRS approved. After Redding received the IRS's final draft of the closing agreements, he did question one of the terms, but after discussions with IRS counsel and further review, agreed that the "new" term was a clarification of the effect of the original settlement terms and not a new or changed term. Redding withdrew his objection because, as he testified, "They were right." [Tr: 995-7]. Wilpon also consistently testified that the settlement terms never changed. [Tr: 620, 646].

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II.

Intent The overwhelming balance of the credible evidence and testimony presented at trial by the

key witnesses with knowledge of the history of the offer and terms of the settlement (Redding, Paine, Wilpon and Stoddard) proves that a closing agreement had never been made a part of or a condition to acceptance of the IRS's offer. None of the IRS's correspondence regarding the offer even mentioned such a condition until after the Plaintiffs had accepted the offer. And even then IRS counsel withdrew the belated condition. The overwhelming evidence proves that Redding repeatedly asked for a closing agreement to bind the IRS with respect to the nonpartnership items and other items over which the Tax Court lacked jurisdiction and Wilpon and Stoddard lacked authority to formally settle, but that Redding did not condition the settlement on obtaining a closing agreement and sent the Plaintiffs acceptance letters to IRS counsel within the deadline for acceptance. The Plaintiffs subsequently entered into a closing agreement that reflected the application of the previous partnership item settlement and the terms for settling the nonpartnership and other items not before the Tax Court. General contract law provides that a subsequent agreement that memorializes previous settlement terms is not itself a new agreement. Such is the case here. A. Party Representative Intent

At the time of the Plaintiffs' GIA settlements, Redding was much more experienced in TEFRA litigation than either of the IRS counsel, Stoddard and Wilpon. Wilpon joined the IRS in 1984 ( 22 years prior to testimony) but was in the letter ruling division for two years before joining the Manhattan trial attorney office. [Tr: 306]. While in that office Wilpon worked general tax controversy cases until he was assigned the Madison project cases. The GIA tax controversy was 8

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essentially one of his first TEFRA cases. [Tr: 306-308]. Stoddard had been an IRS trial attorney with the IRS since the fall of 1987 and had assisted with TEFRA cases. But GIA was his first TEFRA case as lead project attorney. [Tr: 438, 439-40]. In contrast, Redding was actively practicing in TEFRA partnership tax litigation by 1984, just a little over a year after TEFRA was enacted in September of 1982. [Tr: 857-8]. By 1988, he had handled over a dozen such cases on behalf of hundreds of partners. [Tr: 858-9]. TEFRA tax disputes have dominated Redding's practice from 1984 through the time of this trial. [Tr: 857]. He has an extensive number of published cases, the majority of which address various TEFRA issues. The two published decisions most relevant to this case are Treaty Pines v. C.I.R., 967 F.2d 206, 211 (5th Cir., August 5,1992) and Cinema '84 v. C.I.R., 294 F.3d 432, 442 (2nd Cir. 2002), particularly the Goodwin portion of Cinema '84 at 440-443, in which the Second Circuit distinguished Redding's settlement from that entered into by other attorneys who were representing other partners in the same proceeding. The Second Circuit found that Redding's client settled with the IRS by an exchange of letters that commenced the statute of limitations for assessing the resulting liability, unlike other attorneys who believed a closing agreement was necessary to conclude the settlement. By the time the settlements in this case were accepted in December of 1992, the Fifth Circuit had issued its opinion in Treaty Pines, a case based on a fact pattern almost identical to the one at issue in this case. There the taxpayer accepted an IRS settlement offer by return letter. The taxpayer and the IRS later entered into a closing agreement that included the same terms agreed to in the IRS offer and acceptance letter. The IRS failed to assess the resulting deficiency within one year of the taxpayer's acceptance letter and failed to notify the Tax Court that the taxpayer had settled. The Fifth 9

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Circuit held that the taxpayer settled with the IRS by return letter. [Tr: 877- 880]. In Treaty Pines, Redding based his case and the Fifth Circuit based its decision on wellestablished Tax Court precedent, such as Haiduk [Tr: 878]. Other well-accepted Tax Court precedent had also recognized that Tax Court controversies could be settled by exchange of letters. E.g., Himmelwright v. C.I.R., T.C. Memo 1988-114 (1988), cited as authority by the Tax Court in Yoo Han & Co., Ltd. v. C.I.R., T.C. Memo. 1991-308 (July 8, 1991) (Bruce Wilpon for IRS). Any testimony that the IRS representatives in this case were shocked by Treaty Pines and unaware of the precedential foundations upon which Treaty Pines was based [Tr: 316-8, ] is not credible and is also not consistent with Wilpon's prior deposition testimony and statements to Department of Justice counsel that the GIA settlement was prepared with an eye toward Treaty Pines. [Tr: 333]. An understanding of the differences between partnership items and nonpartnership items is crucial to this case. As Redding explained, partnership items and nonpartnership items are terms of art defined by statute and regulation. By definition a partnership item is an item under subtitle A of the Internal Revenue Code that has been identified as a partnership item by regulation. By regulation partnership items include items of income, gain, loss, credit or deduction shown on the Form 1065 filed by a partnership. [Tr: 933-4]. Nonpartnership items are items that are not partnership items and are made up of two categories, nonpartnership items and affected items. Affected items are nonpartnership items that are affected by or changed by partnership items, such as medical expenses deductions on the individual partner's return. [Tr: 934-6]. Redding was as familiar with these terms and categories of tax items in 1992 as he was at the time of this trial, with the acknowledged exception that some categories not at issue in this case have been more clearly defined by judicial interpretation over the years. [Tr: 936-7]. 10

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By the time the settlements in this case were accepted in 1992, Redding was also well acquainted with the various mechanisms for effectuating TEFRA related settlements, including letters of offer and acceptance for docketed cases. Redding also recognized that docketed cases could be settled by oral agreement, §7121 closing agreements, various Forms 870, including the Forms 870-L(AD) and 870-P(AD), and stipulations of settlement filed with the Tax Court. [Tr: 859-60, 865, 866]. Redding was aware that TEFRA settlements in docketed cases are conventionally reduced to some form of writing, which included all of the above means, including an exchange of letters between counsel. [Tr: 865]. Redding approached the settlements in this case with an eye towards Treaty Pines and with an understanding of tax settlements and TEFRA settlements in mind. He was aware that the IRS offer with respect to the partner's distributive share of partnership deductions was a partnership item that could be enforceably settled by a simple written acceptance of the IRS's written settlement offer by IRS counsel. Redding was also aware that the offer also included nonpartnership items such as penalties and interest that could only be enforced by estoppel unless the IRS appeals office signed off on the agreement. [Tr: 881-3]. Redding's experience and understanding was that closing agreements are frequently, but not always, used to resolve issues that are not before the Tax Court. Additional documentation is always a better option with respect to those other items because the Tax Court lacks jurisdiction to enforce settlement and counsel for the IRS lacks authority to accept and bind the IRS to a settlement of those issues. Redding explained to the Court in the context of the GIA controversy, the Tax Court only had jurisdiction and IRS counsel only had settlement authority over partnership items for the tax years before the Tax Court. The Tax Court lacked jurisdiction and IRS counsel lacked settlement authority 11

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over all nonpartnership items and all items for other tax years not before the Tax Court. Without a more formal settlement mechanism, such as a closing agreement or Form 870-L(AD) that addressed those extra-jurisdictional issues, the Plaintiffs would have been forced to rely on estoppel to enforce the nonpartnership items and other year settlement terms, which Redding believed to be a chancy thing to rely on. [Tr: 862-7]. Paine had the same understanding with respect to the necessity to more formally settle nonpartnership items and items for years not before the Tax Court. [Tr: 420]. As Redding explained in response to the Court's question regarding partial settlement of matters before the Tax Court, [Tr:871], in the event that there was a partial settlement of issues over which the court did have jurisdiction, there would be an exchange of letters as to those issues and litigation would continue with respect to the remaining issues, and the previous settlement would be documented in the final decision once it was issued. But as Redding further explained, this was a hypothetical explanation because, in his 25 years of experience (which would include this case), such a split had never occurred. [Tr: 871-5]. Moreover, Redding's opinion relied on the regulations governing TEFRA settlements that specifically state settlements shall be comprehensive. [Tr: 875]. The consequence of a comprehensive settlement is that all items not directly addressed by the settlement are left unchanged as reported. Here the settlement was comprehensive with respect to the partnership items before the Tax Court. Those partnership items were not split, with some partnership items being settled and others left unsettled. Essentially the terms of the settlement disallowed all partnership items before the Tax Court except the portion agreed upon in the settlement. Ultimately, the only liability assessed pursuant to this settlement arose from the first part of the first paragraph of the agreement that allowed partnership deductions equal to 60% of each 12

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partner's cash investment and conversely disallowed the remaining 40% of the deductions. The tax liability Plaintiffs assert was not timely assessed was the result of the 40% disallowance. This sole source of the assessments was also the only settlement term over which the Tax Court had jurisdiction and IRS counsel Wilpon and Stoddard had authority to settle. The other nonpartnership items and items for other years did not result in assessments. They were effectively concessions by the IRS to not assess penalties and concessions by the partners to not take future partnership related deductions. The Tax Court did not have jurisdiction to enforce settlement of these terms, nor did IRS counsel Wilpon and Stoddard have authority to accept and bind the IRS with respect to those terms. In the settlement, the partners did agree to the imposition of a higher rate of interest under §6621(c). Section 6621(c) penalty interest is an affected item. N.C.F. Energy Partners v. C.I.R., 89 T.C. 741, 745 (1987). By statute interest would have been assessed against the partner's tax liability regardless of the §6621(c) concession, and while the IRS's procedure is that §6621(c) interest should be assessed with the underlying tax, the IRS also recognizes that §6621(c) interest can be assessed pursuant to the normal rules for assessing interest, i.e., the IRS has ten years after assessing the underlying tax to independently assess and collect §6621(c) interest. §6601(g) and §6502(a). 1990 LGM TL-21, 1990 WL 1086208 at n.8. The Sixth Circuit recently reached the same conclusion, holding that the IRS has ten years from the date of the underlying tax assessment to assess §6621(c) interest. Field v. United States, 381 F.3d 109, 113 (6th Cir. 2004). The Notice of Final Partnership Administrative Adjustments ("FPAA") issued in this case, like all FPAAs, proposed to adjust the partnership items of the partnership. Those partnership item adjustments were challenged by petition to the Tax Court in August of 1990. [Tr: 939-40]. Redding 13

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entered his appearance on behalf of his clients who made elections to participate in that litigation in February of 1991. Redding first learned about the IRS settlement offer in early 1991 when he was given a copy of the Madison Equipment letter, a letter outlining IRS settlement terms sent by Madison Equipment Management Corporation to the limited partners. [Tr: 943-6; PE: 19]. Redding wrote to IRS counsel in the GIA Tax Court proceeding, Stoddard, asking for clarification and more information regarding the settlement offer and for documentation regarding the statute of limitations issue. [Tr: 944-8; PE: 19]. IRS counsel responded to Redding with a re-statement of the settlement terms set out in the Madison Equipment letter and extending the offer to Redding's clients. Redding understood the IRS counsel's response to his letter to be a settlement offer. [Tr: 948; PE: 18]. At trial Redding categorized each of the settlement terms in that offer as partnership or nonpartnership items. He identified the first numbered paragraph of the settlement terms as being a mix of the two types of items. The first part, that allowed a percentage of partnership deductions equal to 60% of cash invested, was a partnership item and an item before the Tax Court. The second part, regarding interest on capital contribution notes, was a nonpartnership, affected item. [Tr: 9489]. He identified paragraph 2 regarding penalties as an affected item. [Tr: 950-1]. He identified the items addressed in paragraph 3 as nonpartnership items. [Tr: 952]. He identified the items in paragraph 4 as also being mixed. The term denying any deductions for later years was a partnership item, but the consequence of also denying a deduction for lost basis in the partnership was an affected item. [Tr: 952-4]. Redding recognized that the partnership item terms in paragraph 4 were not before the Tax Court because they were for later years. [Tr: 952]. He recognized that paragraph 5 14

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addressed partnership items but, again, for later years not then before the Tax Court. [Tr: 954-5]. Redding correctly believed that the request for proof of cash invested in the IRS's settlement offer was meant to implement the settlement, not a condition precedent to acceptance or the formation of a settlement contract. [Tr: 955-6]. The IRS letter plainly stated that proof of cash investment should be supplied to "apply" the settlement. [Tr: 956; PE: 18]. In at least two cases Redding and the respective plaintiff supplemented their acceptance with proof of cash invested. The IRS never challenged these supplemental proofs of investment and accepted the settlements. Moreover, it later became evident that proof of cash invested was irrelevant because the partner's investment matched the unit investment, which also matched the information on the partnership's Schedule K-1's in the IRS possession. [Tr: 890-2 and 911-2; PE: 38 and 145]. The IRS's offer was conspicuously silent with respect to instructions for acceptance and did not mention a closing agreement. [Tr: 960-1 and 962-3; PE: 18]. Redding believed that the Plaintiffs could have accepted by any form of written acceptance. [Tr: 960-1 and 962-3; PE: 18]. Nevertheless, it was Redding (and Paine) who asked the IRS for a closing agreement with respect to nonpartnership items and partnership items for years not before the Tax Court. [Tr: 961-2]. Redding absolutely did not believe that settlement of the partnership items then before the Tax Court required a signed closing agreement. [Tr: 962]. Shortly after the IRS made its offer to Redding's clients, the Plaintiffs in this action, Redding, Paine, McLean and the IRS agreed to table the settlement process while the taxpayers pursued their motions for summary judgment. [Tr: 956-7]. In conjunction with the agreement to table the outstanding settlement offer, both Redding and 15

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Paine testified that the parties arrived at a agreement to coordinate the discovery and briefing associated with the limitations issue through McLean, an attorney who represented other partners in the Tax Court proceeding. [Tr: 414-5, 959-60]. Their testimony, coupled with the plain language of the IRS's letter summarizing the agreement, made it clear that scope the of McLean's duties as liaison only extended to discovery and briefing. There was no agreement that McLean (or Paine) would represent all the partners with respect to settlement. [PE: 15]. Redding did not agree to, authorize, or represent that either of the other two taxpayer counsel, McLean or Paine, were authorized to speak on his behalf or represent his clients. [Tr: 960]. Paine testified that she did not represent the Plaintiffs in that Tax Court proceeding, that Redding was his own man, that the two of them did not always see eye to eye on some issues, and that she did not have authority to negotiate or settle on behalf of Redding's client, the Plaintiffs in this action. [Tr: 423-4, 425-6, and 427]. She testified that her representations regarding Redding and McLean represented their general agreement as to the terms of the settlement, not necessarily the mechanism for acceptance. She was aware that the IRS had not specified a closing agreement as the mechanism for acceptance and knew that her client needed a closing agreement because of his special issues so she balanced her concerns differently than Redding. [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 adopted by the Second Circuit in Cinema '84. Paine also testified that she was aware of Treaty Pines at the time the Fifth Circuit issued the opinion on August 5, 1992, which was shortly before the IRS sent the partners' attorneys its final 16

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notice regarding the settlement offer on October 17, 1992. She was not surprised to learn that Redding had sent his own settlement response letter to IRS counsel agreeing to proceed with the settlement by exchange of letters and without conditioning acceptance on a closing agreement almost contemporaneously with her own November, 1992 letter because that was consistent with his actions in other cases, including Treaty Pines. [Tr: 427-9]. During the time that the partners were pursuing their limitations issue, Redding asked the IRS to consider revising the tabled settlement offer to take the limitations issue into account. In that letter Redding asked the IRS to consider his draft closing agreement of those alternative terms and requested that the government resolve the issue of the format for the settlement because of his concerns regarding the enforceability of the nonpartnership items and items for years not before the Tax Court. [Tr: 957-8 and 965-7; PE: 12] The IRS rejected that proposal and reaffirmed that the original settlement offer remained open. Again, the IRS specifically referred to its settlement "offer" and Redding understood that the IRS proposal was an "offer" to settle. [Tr: 968-9; PE:11]. Once again the IRS did not specify a means for acceptance. [Tr: 969; PE: 11]. Nor did the IRS address Redding's concerns regarding the items not before the Tax Court. [Tr: 957-8 and 967-8; PE: 11]. After the Tax Court denied the partners' summary judgment motion, the IRS sent a letter to Redding setting December 1, 1991 as the deadline for accepting the previously tabled settlement offer. Redding understood that letter to make a drop dead, take it or leave offer to settle, which the partners could accept in the legal sense, and not an invitation for discussions. [Tr: 971-3; PE:10]. The IRS's offer, again, did not specify a means for acceptance. The only condition respecting acceptance was that it be in writing by December 1, 1991. [Tr: 973-4; PE:10]. 17

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Because the IRS had not specified a method for acceptance, Redding drafted an acceptance form. [Tr: 969-70]. His past experience, supported by Tax Court precedent, was that he could settle on behalf of his clients by simply sending a letter saying he accepted the settlement offer. [Tr: 973]. His concern in having a form for acceptance that his clients could complete and send to the government was that there would not be any dispute as to the terms. [Tr: 973]. Consequently, he asked IRS counsel to vet the terms before he sent it to his clients for their signatures. [Tr: 970, 973-4; PE: 9]. The terms in Redding's proposed acceptance letter appear to differ slightly from the IRS offer at PE: 18 - there are six terms instead of five. But as Redding explained, the new paragraph is a clarification of the income and capital gains issues in the IRS's paragraph 5. [Tr: 977-8]. The IRS response to Redding's letter plainly states that his acceptance letter is an accurate statement of the settlement terms to which the IRS agreed. [Tr: 978, 980-1; PE: 8]. Redding also specifically told IRS counsel in his letter requesting approval of the acceptance form that, if they approved the form of the letter, he would then notify his clients that this was the IRS approved acceptance form that they could sign and return to accept the settlement. [Tr: 981-2; PE: 9]. The IRS did not object to using this form letter to secure his client's acceptances of the IRS's settlement offer. [PE: 8]. In his letter to the IRS, Redding yet again asked IRS counsel to consider using a closing agreement to settle the nonpartnership and other items not before the Tax Court. Redding was emphatic in his trial testimony that at that point the IRS had not mentioned a closing agreement - had never asked for one and had never said one was needed. [Tr: 974]. But Redding did not condition acceptance of the IRS's offer on obtaining a closing agreement. In the letter he plainly states that he 18

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intends to recommend acceptance of the settlement notwithstanding a closing agreement. [PE: 9]. Redding did not include a draft closing agreement with his draft proposed acceptance letter. He did mention Paine's recent request for a closing agreement to finalize the acceptance of the nonpartnership and other items not before the Tax Court - which was consistent with every representation he made to the IRS through the pendency of the offer. Redding did not authorize Paine to represent him or his clients and she did not speak for him when she conditioned acceptance of the settlement on obtaining a closing agreement. [Tr: 975-6; PE: 9]. Redding testified that he believed conditioning acceptance on obtaining a closing agreement would have been a rejection of the offer, and he wasn't going to do anything to disturb his client's ability to accept the offer. [Tr: 976]. Lastly, Redding asked the IRS counsel for an enlargement of time until December 30, 1991, to secure and return his client's acceptances to IRS counsel. [PE: 9]. The IRS agreed to that enlargement of time. [PE: 8]. In his response approving the terms of the acceptance letter and agreeing to enlarge the deadline for acceptance, Wilpon attached an incomplete draft of a closing agreement that he proposed for Redding's review. [PE: 8]. Nothing in the correspondence indicated that the IRS conditioned acceptance of its outstanding offer on that closing agreement or on obtaining any executed closing agreement. [Tr: 988-9]. Moreover, the draft closing agreement could not have been used to accept the settlement offer by the December 31, 1991 deadline because it was incomplete including lacking standard terms, key information, and signature lines. [Tr: 988-9; PE: 8]. Redding was aware that his clients had no understanding of the status of the litigation, Tax Court jurisdiction, or TEFRA settlements. [Tr: 990-1]. After Redding received Wilpon's response confirming that the proposed acceptance form accurately stated the settlement terms, Redding sent 19

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each of his clients a copy of the approved acceptance form and an explanation of the status of the litigation at that point and the settlement process, just as he told IRS counsel he would. [Tr: 918; PE: 162]. He explained that because the government had left the acceptance mechanism uncertain, he had sought and obtained the IRS counsel's approval of the attached acceptance form, which they could execute and return to him or to IRS counsel. [Tr: 989-90]. That letter also described Redding's concerns regarding settlement of the items not before the Tax Court and reassured the partners that he would continue to try to obtain a formal, enforceable settlement of those issues, but that he nonetheless recommended accepting the IRS offer as it stood. The Plaintiffs followed Redding's advice and executed the acceptance letters which Redding timely sent to Wilpon. [Tr: 883 - 912, 991-3; PE: 7, 22, 22A, 24, 24A, 36, 36A, 38, 45, 45A, 132, 132A, 144, 144A, and 145], with the exception of Rosol who signed and sent Redding's preapproved acceptance form directly to IRS counsel. [Tr: 902-3, PE: 112, and Declaration attached as Exhibit 1 to this brief]. Redding was emphatic, there were never any discussions between counsel regarding conditioning the settlement of the partnership items before the Tax Court on a closing agreement until after the Plaintiffs submitted their acceptances to the IRS. [Tr: 970-1]. The correspondence between the parties supports Redding's testimony. None of the IRS's correspondence prior to acceptance references the format for accepting the settlement. While Redding often referenced a closing agreement, it was in the context of his constant plea that the IRS confirm a means for acceptance and do so in a way that would address the nonpartnership items and other items that were not before the Tax Court. In response to this Court's question regarding the necessity for a Tax Matters Partner in the 20

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Tax Court proceeding, Redding's response to the Tax Court's Order at PE: 166A was to file a motion to dismiss for lack of jurisdiction as to the partners that are plaintiffs in this action on the grounds that those partners had previously settled and were no longer subject to the proceeding, including that order to locate a Tax Matters Partner. The Tax Court granted that motion to dismiss on the grounds that the partners had previously settled, but declined to address the date of the settlement. [Tr: 9204]. As Redding explained at trial, a Tax Matters Partner was not relevant to his clients' activities in the case, i.e., preparation of a motion for summary judgment challenging the statute of limitations and obtaining settlements on behalf of his individual partners. [Tr: 940-1]. B. Individual Partners' Intent

At trial, Plaintiffs proved that they had no specialized tax background and specifically had no knowledge or understanding of procedural intricacies of TEFRA. The individual partners who are parties to this action relied entirely on the advice of their counsel, Redding, to explain the terms of and the procedure to effectuate the settlement. The particulars of each plaintiff's testimony are summarized below. 1. Fenton Gingerich and Eunice Gingerich

Fenton Gingerich is deceased. [Tr:280, 283] His wife, Eunice Gingerich, is the Executor of his estate. Mrs. Gingerich is 82 years old and unable to travel due to her health. [Tr: 280-281] Mrs. Gingerich, both individually and as Executor for the Estate of Fenton Gingerich, was represented at trial by Roy F. Chaplin, Jr. [PE:176; Tr:282, 283-284] Mr. Gingerich was "old order Amish" with an eighth grade education. [Tr:285] By profession, Mr. Gingerich owned and operated a car dealership. [Tr:285] Mrs. Gingerich has a high school education, was a housewife for most of her life, and did not participate in the family business 21

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or investments. [Tr:285-186] Mr. Chaplin married the Gingerichs' niece and knew them intimately from 1965 on. [Tr:284-285] Mr. Gingerich had no specialized training in tax accounting and relied on professionals for those matters. [Tr:286, 287-288] Mr. Gingerich had no knowledge, background or training in the areas of TEFRA tax settlements, Tax Court jurisdiction, or IRS settlement authority nor would he have known the legal and technical differences between partnership items and nonpartnership items. [Tr:287] Mr. Gingerich relied on professionals to handle his GIA tax controversy, specifically he relied on Redding and would have accepted and followed Redding's legal advice on those matters. [Tr:288; 298] Mr. Chaplin authenticated the Gingerichs' signatures on their executed Redding Acceptance Form, on their instructions to Redding to submit their acceptance to the IRS, on their Form 906 Closing Agreement, and on the refund claims on which their action in this case is based. [PE:2 p. 6, 24A, 27-34, 135-142, 162F; Tr:288-298] The Gingerichs would not have filed the refund claims if they did not believe the basis for the claims was valid. [Tr:298-299] The Government did not challenge the testimony or the evidence presented on behalf of Mr. and Mrs. Gingerich. [Tr:299] Specifically, the Government did not challenge the evidence presented that Mr. and Mrs. Gingerich relied on the legal advice of Redding regarding the settlement of their GIA tax controversy. 2. Seung C. Karl and Young Ho Karl

Dr. Seung C. Karl is in his eighties and in very frail health. [Tr:219-220] Young Ho Karl is deceased. [Tr:221] Mrs. Karl was not a partner in GIA and is a party to this proceeding only because 22

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she signed a joint tax return with her husband. [Tr:228-229] Dr. Karl was represented at trial by their CPA Paul Demshar. [Tr:207-209, 218] Mr. Demshar has represented the Karls as their CPA, prepared their taxes, and known them well since 1981. [Tr:209-210]. Dr. Karl is a retired pediatrician. [Tr:210] He has no specialized background in finance, accounting, or tax and relies on professionals for those matters. [Tr:210] He has no knowledge, background or training in the areas of TEFRA tax settlements, Tax Court jurisdiction, or IRS settlement authority nor does he know the legal and technical differences between partnership items and nonpartnership items. [Tr:210-211] Dr. Karl was a partner in GIA. [Tr:222] ]Mr. Demshar represented the Karls during the settlement period and communicated on their behalf with Redding. [Tr:214] As to the GIA tax controversy, Mr. Demshar did not make independent representations to Dr. Karl but relied on advice from Redding. [Tr:225] Dr. Karl relied on Redding to handle his GIA tax controversy and accepted and followed Redding's legal advice on those matters. [Tr:223, 225] Mr. Demshar authenticated Dr. Karl's signature on his executed Redding Acceptance Form, on his instructions to Redding to submit his acceptance to the IRS, on his Form 906 Closing Agreement, on the checks used to evidence Dr. Karl's cash investment in GIA, and on the refund claims on which the Karls' action in this case is based. [PE:2 p.16, 36A, 38, 40-43, 162E; Tr:225233] Dr. Karl would not have filed the refund claims if he did not believe the basis for the claims was valid. [Tr:234] The Government did not challenge the validity of the testimony or the evidence presented on behalf of Dr. Karl. [Tr:255-269] Specifically, the Government did not challenge the evidence 23

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presented that Dr. Karl relied on the legal advice of Redding regarding the settlement of his GIA tax controversy. 3. Choong H. Kim and Joung S. Kim

At the time of trial Dr. Choong H. Kim was out of the country in Korea. [Tr:242] Joung S. Kim was not a partner in GIA and is a party to this proceeding only because she signed a joint tax return with her husband. [Tr:239] Dr. Kim was represented at trial by their CPA Paul Demshar. [Tr:235, 235-236] Mr. Demshar has represented Dr. Kim as his CPA, prepared his taxes, and known him well for 25 years. [Tr:236, 240] Dr. Kim is a family doctor. [Tr:238] He has no specialized background in finance, accounting, or tax and relies on professionals for those matters. [Tr:240] He has no knowledge, background or training in the areas of TEFRA tax settlements, Tax Court jurisdiction, or IRS settlement authority nor does he know the legal and technical differences between partnership items and nonpartnership items. [Tr:240] Dr. Kim was a partner in GIA. [Tr:239, 240-241] Mr. Demshar represented the Kims during the settlement period and communicated on their behalf with Redding. [Tr:241] As to the GIA tax controversy, Mr. Demshar did not make independent representations to Dr. Kim but relied on advice from Redding. [Tr:241] Dr. Kim relied on Redding to handle his GIA tax controversy and accepted and followed Redding's legal advice on those matters. [Tr:241; 255] Mr. Demshar authenticated the Kims' signatures on their executed Redding Acceptance Form, on their instructions to Redding to submit their acceptance to the IRS, on their Form 906 Closing Agreement, on the checks used to evidence Dr. Kim's cash investment in GIA, on the refund claims on which the Kims' action in this case is based, and on the answers to the defendant's first set 24

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of interrogatories as to the Kims. [PE:2 p.21, 45A, 46, 49-51, 53-56, 162D, 174; Tr:242-254] The Kims would not have filed the refund claims if they did not believe the basis for the claims was valid. [Tr:255] The Government did not challenge the validity of the testimony or the evidence presented on behalf of Dr. Kim. [Tr:255-269] Specifically, the Government did not challenge the evidence presented that Dr. Karl relied on the legal advice of Redding regarding the settlement of his GIA tax controversy. 4. Lou-Bess, Inc.

Lou-Bess, Inc. was an S-corporation in which numerous members of the Liebovich family invested. [Tr:86, 87, 120, 140] Lou-Bess, Inc. was a partner in GIA. [Tr:87, 140] William Reinberg was the chief financial officer of Lou-Bess, Inc. with authority to represent Lou-Bess, Inc., sign documents and enter into contracts on its behalf. [Tr:88] Reinberg held a Master's degree in Business Administration. [Tr:89] Tax returns for Lou-Bess, Inc. were prepared by accounting firms. [Tr:89] It is highly unlikely that Reinberg had any knowledge, background or training in the areas of TEFRA tax settlements or Tax Court jurisdiction or that he knew the legal and technical differences between partnership items and nonpartnership items. [Tr:89] Redding was retained to represent Lou-Bess, Inc. regarding the GIA tax controversy. [Tr:89-90] Renberg, on behalf of LouBess, Inc. relied on Redding's legal advise regarding the GIA tax controversy. [Tr:144-145. Reinberg executed a Redding Acceptance Form on behalf of Lou-Bess, Inc. and instructed Redding to submit it to the IRS. [Tr:92-93, 94, 141] Reinberg subsequently executed an forwarded to the IRS a Form 906 Closing Agreement on behalf of Lou-Bess, Inc. [PEx:2, 22A, 23; Tr:97-98, 99, 99-100] 25

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The Government did not challenge the testimony or the evidence presented regarding LouBess, Inc. Specifically, the Government did not challenge the evidence presented that Dr. Yoon relied on the legal advice of Redding regarding the settlement of her GIA tax controversy. 5. Albert A. Liebovich and Dorothy E. Liebovich

Albert A. Liebovich is deceased and Dorothy E. Liebovich is elderly and suffers from advanced Alzheimer's disease. [Tr:520, 524] They were represented at trial by their son Theodore Liebovich. [PE:176F, 176G, 176H, 176I, 176J; Tr:521, 522, 524, 525, 528, 529] Albert A. Liebovich was a shareholder in Lou-Bess, Inc. and, thereby, an indirect partner in GIA. [Tr:531-532] Albert A. Liebovich had no formal education past high school. [Tr:532] Mr. Liebovich was a founder of Liebovich Brothers, Inc., a company which provided steel services and fabrication. [Tr:86, 523] Mrs. Liebovich had a high school education and minimal participation in the family finances. [Tr:536] Mr. Liebovich had no formal training in finance, accounting, or tax and relied on professionals to prepare his tax returns and advise him on tax matters. [Tr:532-533, 533-534] He had no independent knowledge, background or training in the areas of TEFRA, tax settlements, or Tax Court jurisdiction nor did he know the legal and technical differences between partnership items and nonpartnership items. [Tr:533-534] Mr. Liebovich relied on professionals to handle his GIA tax controversy, specifically he relied on Reinberg and Redding and he and his wife accepted and followed their legal advice on that matter. [PE:2, 171; Tr:534-535, 535, 536-539] After the liabilities were assessed and paid, Mr. and Mrs. Liebovich filed the refund claims on which their action in this case is based. [PE:59-64; Tr:540-545] Mr. and Mrs. Liebovich would not have filed the claims had he not believed that their bases were valid. [Tr:546] 26

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The Government did not challenge the testimony or the evidence presented by and on behalf of Albert A. and Dorothy E. Liebovich. [Tr:546] Specifically, the Government did not challenge the evidence presented that Albert A. and Dorothy E. Liebovich relied on the legal advice of Redding regarding the settlement of their GIA tax controversy. 6. Carl V. Liebovich and Nellie D. Liebovich

Carl V. Liebovich is deceased and Nellie D. Liebovich is elderly and suffers from advanced Alzheimer's disease. [Tr:110, 112] They were represented at trial by their son Gregory A. Liebovich. [PE:176, 177; Tr:109-110(7), 112(14)-114(2), 116(20)-117(17)] Carl V. Liebovich was a

shareholder in Lou-Bess, Inc. and, thereby, an indirect partner in GIA. [Tr:120] Carl V. Liebovich had no formal education past high school and Nellie D. Liebovich had a tenth grade education. [Tr:119] Mr. Liebovich was a founder of Liebovich Brothers, Inc., a company which provided steel services and fabrication. [Tr:86, 119] Mrs. Liebovich was a housewife [Tr:119] Neither Mr. Liebovich nor Mrs. Liebovich had any background in finance, accounting, or tax and relies on professionals to prepare their tax returns. [Tr:119] They had no knowledge, background or training in the areas of TEFRA, tax settlements, or Tax Court jurisdiction nor did they know the legal and technical differences between partnership items and nonpartnership items. [Tr:119-120] Mr. Liebovich relied on professionals to handle his GIA tax controversy, specifically he relied on Reinberg and Redding and he and his wife accepted and followed their legal advice on that matter. [PE:172; Tr:120-121, 121-123] After the liabilities were assessed and paid, Mr. and Mrs. Libovich filed the refund claims on which their action in this case is based. [PE:67-70; Tr:124-126] Mr. Liebovich would not have filed the claims had he not believed that their bases were valid. [Tr:127] 27

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The Government did not challenge the testimony or the evidence presented by and on behalf of Carl V. and Nellie D. Liebovich. [Tr:127-132] Specifically, the Government did not challenge the evidence presented that Carl V. and Nellie D. Libovich relied on the legal advice of Redding regarding the settlement of their GIA tax controversy. 7. Gregory A. Liebovich and Gail Liebovich

Gregory A. Liebovich was a shareholder in Lou-Bess, Inc. and, thereby, an indirect partner in GIA. [Tr:86, 87] He has a Master's Degree in Industrial Technology and prior to his retirement was CEO of a company which provided steel services and fabrication. [Tr:86] He has no expertise in finance, accounting, or tax and relies on professionals for those matters. [Tr:90] He has no knowledge, background or training in the areas of TEFRA tax settlements, Tax Court jurisdiction, or IRS settlement authority nor does she know the legal and technical differences between partnership items and nonpartnership items. [Tr:90-91] Mr. Liebovich relied on professionals to handle his GIA tax controversy, specifically he relied on his accounting firm and Redding and he and his wife accepted and followed Redding's legal advice on that matter. [PE:173; Tr:91, 96-97] After the liabilities were assessed and paid, Gregory A. and Gail Libovich filed the refund claims on which their action in this case is based. [PE:73-80; Tr:101, 102-107] Mr. Liebovich relied on Redding to prepare the explanations for his refund claims and would not have filed the claims had he not believed that their bases were valid. [Tr:108] The Government did not challenge the testimony or the evidence presented by and on behalf of Gregory A. and Gail Libovich. [Tr:127-132] Specifically, the Government did not challenge the evidence presented that Gregory A. and Gail Libovich relied on the legal advice of Redding 28

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regarding the settlement of their GIA tax controversy. 8. Joe Liebovich and Belle Liebovich

Joe and Belle Liebovich are both deceased. [Tr:202-203] They were represented at trial by their son Lou Liebovich. [PE:176D, 176E; Tr:186-187, 191-192, 192-193] Joe Liebovich was a shareholder in Lou-Bess, Inc. and, thereby, an indirect partner in GIA. [Tr:189] Joe Liebovich had no formal education past high school. [Tr:188-189] Mr. Liebovich was a founder of Liebovich Brothers, Inc., a company which provided steel services and fabrication. [Tr:86, 189] Mrs. Liebovich was a housewife with perhaps one year o college and had minimal participation in the family finances. [Tr:190] Neither Mr. Liebovich nor Mrs. Liebovich had any background in finance, accounting, or tax and relied on professionals to prepare their tax returns. They had no knowledge, background or training in the areas of TEFRA, tax settlements, or Tax Court jurisdiction nor did they know the legal and technical differences between partnership items and nonpartnership items. [Tr:187-188] Mr. Liebovich relied on professionals to handle his GIA tax controversy, specifically he relied on Redding and he and his wife accepted and followed their legal advice on that matter. [PE:168; Tr:193-196, 202] After the liabilities were assessed and paid, Mr. and Mrs. Libovich filed the refund claims on which their action in this case is based. [PE:83-90; Tr:196-201] Mr. Liebovich would not have filed the claims had he not believed that their bases were valid. [Tr:202] The Government did not challenge the testimony or the evidence presented by and on behalf of Joe and Belle Liebovich. [Tr:202, 203-204] Specifically, the Government did not challenge the evidence presented that Carl V. and Nellie D. Libovich relied on the legal advice of Redding 29

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Case 1:98-cv-00533-CFL

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regarding the settlement of their GIA tax controversy. 9. Larry J. Liebovich and Barbara J. Liebovich

Larry J. Liebovich was a shareholder in Lou-Bess, Inc. and, thereby, an indirect partner in GIA. [Tr:139, 140-141] He has a Bachelor's Degree in Industrial Technology and prior to his retirement was employed by Liebovich Brothers, Inc., a metal distribution business. [Tr:139] Mrs. Liebovich was a beautician with a high school education. [Tr:146] Mr. Liebovich has no background in tax, finance or accounting and relied on professionals to prepare his tax returns. [Tr:144, 145] He has no knowledge, background or training in the areas of TEFRA tax settlements, Tax Court jurisdiction, or IRS settlement authority nor does she know the legal and technical differences between partnership items and nonpartnership items. [Tr:143-144] Mr. Liebovich relied on professionals to handle his GIA tax controversy, specifically he relied on his accounting firm and Redding and he and his wife accepted and followed Redding's legal advice on that matter. [PE:170; Tr:147] After the liabilities were assessed and paid, Larry J. and Barbara J. Liebovich filed the refund claims on which their action in this case is based. [PE:93-100; Tr:148-153] Mr. Liebovich relied on Redding to prepare the explanations for his refund claims and would