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

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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 BRIEF __________

Pursuant to the Court's Order, defendant submits the following post-trial brief setting forth the conclusions of fact that defendant contends are established by the evidence presented during the trial of the above-captioned consolidated cases. Throughout this brief defendant uses the term "plaintiffs" to refer to all the plaintiffs in the above-captioned consolidated cases. Almost of all of the evidence presented at trial upon which defendant is relying relates to all the plaintiffs. However, in the event a specific matter is raised that relates only to a specific plaintiff, defendant will refer to that plaintiff individually.

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I. SUMMARY OF THE ARGUMENT The time for assessing additional tax attributable to a settlement of a proceedings brought under the Tax Equity and Fiscal Responsibilty Act (hereinafter, "TEFRA"), is governed by Sections 6231(b)(1)C) and 6229(f) of the Internal Revenue Code.1 Section 6231(b)(1)(C) provides that partnership items become non-partnership items on the date the IRS enters into a settlement agreement with the partner. Section 6229(f) provides that the IRS has one year from that date to assess any additional tax attributable to those items. While plaintiffs admit they owe the additional tax they paid, they nevertheless seek a refund of those payments on the basis that the IRS did not timely assess the agreed additional tax. Plaintiffs' entitlement to the refunds they claim is based on whether the assessments made by the IRS were timely, which depends entirely on the determination of the date on which the IRS entered into a final settlement agreement with plaintiffs regarding the additional taxes in issue. Plaintiffs argue that there was a final settlement reached between the IRS and plaintiffs on December 30, 1992, when Redding, plaintiffs' counsel, submitted to the IRS his "Acceptance Forms" signed by plaintiffs. Defendant contends that there was no final settlement until September 22, 1993, when the IRS executed Forms 906 Closing Agreements (hereinafter, "Closing Agreements").2 This Court granted summary judgment in favor of defendant,

Citations to the Internal Revenue Code at to the provisions of the Code in effect during the years in issue in this case. The Form 906 Closing Agreement is the method prescribed in § 7121 for settling tax cases. Section 7121(b) provides that execution of a Closing Agreement by the IRS is a final resolution of the issues set forth therein. During the trial there were questions raised about whether disputes between partners and the IRS in TEFRA proceedings could be resolved by using IRS Forms 870L(AD) or 870P. (Tr. 510, l. 20-24.) The testimony of Stoddard and Wilpon, the IRS District Counsel who represented the IRS in plaintiffs' TEFRA case, and who 2
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concluding that there was no dispute of material fact over whether the parties intended that a Closing Agreement was required to effectuate a settlement of plaintiffs' cases, and, therefore, there was no settlement until September 22, 1993, when the IRS executed the Closing Agreements. Gingerich, et al. v. United States, 52 Fed.Cl. 222, 229 (2002). The Federal Circuit reversed and remanded the case to this Court for further proceedings. Gingerich, et al. v. United States, 82 Fed.Appx. 35 (2003 WL 22854662) (Fed.Cir. Dec. 2, 2003). The Federal Circuit concluded that there were disputes of material fact concerning whether the parties intended that a Closing Agreement would be required to effectuate the settlement at issue. 82 Fed.Appx. at 39. The Federal Circuit further questioned whether the Redding Acceptance Form constituted a valid acceptance of the terms of the IRS basis for settlement even if no Closing Agreement was required. Ibid. The Federal Circuit never examined the question of whether the terms set out by the IRS as the basis for settling plaintiffs' cases could be accepted by means of an exchange of letters.3 An exchange of letters between counsel is effective only to settle issues pending before the Tax Court. Treaty Pines Inv. Partnership v. Commissioner, 967 F.2d 206, 212 (5th Cir. 1992). However, "settlement of items not before the Tax Court requires the execution of a Form 906

negotiated the settlement at issue here, is that they always used Closing Agreements to settle TEFRA cases. (Stoddard Tr. 453, l. 1 to 454, l. 2, 460, l. 4-7, 501, l. 9-11; Wilpon Tr. 317, l. 817, 556, l. 14-22, 583, l. 6-8.) The use of a Form 870L(AD) or P was never considered as a means to settle the dispute between plaintiffs and the IRS. (Stoddard, Tr. 513, l. 10-21; Wilpon, Tr. 581, l. 16-20.) Therefore, whether a Form 870L(AD) or P could be used to settle disputes between the IRS and partners in TEFRA partnerships is irrelevant here. The IRS settlement offer at issue in Treaty Pines was not submitted into the record. There is no indication in the opinion in that case that the settlement contained matters that were not pending before the Tax Court. 3
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Closing Agreement signed by an appropriate senior IRS employee." Gingerich, 82 Fed. Appx at 39. Therefore, if any of the terms of the settlement proposed by the IRS were not matters within the jurisdiction of the Tax Court, that offer could not be accepted by an exchange of letters. It is not disputed that most of the terms set forth in the IRS settlement proposal were not items pending before the Tax Court. (Redding Tr. 882, l. 9 to 883, l. 3, 961, l. 6-18; Paine Tr, 428, l. 15 to 429, l. 12; Stoddard Tr. 453, l.1 to 454, l. 2; Wilpon Tr. 557, l. 20 to 558, l. 2.) It is well established that an acceptance must mirror the terms of the offer. The "offeree cannot change, add to, or qualify the terms of [the offer]." Minneapolis & St. Louis Railway Co. v. Columbus Rolling-Mill, Co., 119 U.S. 149, 151 (19886); Varnum v. United States, 2000 WL1141656, at 4 (S.D. Tex. 2000). Even if one item in the proposed settlement was a matter pending before the Tax Court, an exchange of letters still could not be used for a settlement, unless there was an agreement to settle that item separately from the other settlement terms. There is no evidence that any party ever proposed such a bifurcated settlement and the uniform testimony is that the IRS would never have agreed to such a settlement. Therefore, the IRS settlement proposal could not have been accepted by an exchange of letters. Gingerich, 82 Fed.Appx. at 39. In addition, the evidence at trial established clearly that the parties always intended that a Closing Agreement would be used to settle plaintiffs' Tax Court cases. II. A CLOSING AGREEMENT WAS REQUIRED FOR A SETTLEMENT The Federal Circuit questioned whether the parties intended that a Closing Agreement be used to settle the dispute between plaintiffs and the IRS. The first question to be addressed is whether the settlement could be accepted by an exchange of letters between counsel in the Tax Court. Defendant submits that it is clear that the settlement proposed by the IRS could not be

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accepted by an exchange of letters between counsel because the terms of that settlement involved matters that were not pending before the Tax Court. A. The Tax Court case. On April 9, 1990, the IRS issued a notice of final partnership adjustment (hereinafter, "FPAA"), to General Information Associates (hereinafter, "GIA"), for the years 1983-1986. (Px. 21.) The FPAA proposed eliminating all the losses reported by GIA on its partnership returns for the years in issue. (Px. 21 at 159.) This adjustment was based on disallowing all the deductions claimed by GIA in each of the years for depreciation, fees, and expenses. (Px. 21 at 160.) As a result of the disallowance of GIA's losses in 1983-1986, the partners' distributive share of those losses would also be disallowed, resulting in additional income tax liability for those partners. On August 16, 1990, Raymond and Irma Ziff, partners other than the tax matters partner of GIA, acting pursuant to the provisions of § 6226(b), filed a petition in the Tax Court contesting the adjustments set out in the FPAA. (Px. 163.) On February 19, 1991, also pursuant to § 622(b), plaintiffs filed a notice of election to participate in the Tax Court proceeding regarding GIA. (Px. 163.) It is not disputed that the Tax Court had jurisdiction only over the matters set forth in the FPAA issued to GIA. (Redding Tr. 873, l. 2-4; 933, l. 17-25.) The FPAA addressed only the depreciation and business expense deductions claimed by GIA in 1983-1986. (Px. 21 at 160.) The jurisdiction of the Tax Court in the GIA TEFRA proceeding was limited to those matters set forth in the FPAA. (Redding Tr. 872, l. 22 to 874, l. 12; Stoddard Tr. 467, l. 5-9; 442, l. 23 to 443, l. 11.) Since the only issue addressed in the FPAA was the depreciation and other deductions claimed by GIA during the years in issue, the Tax

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Court's jurisdiction was limited to those matters. The terms the IRS proposed as a basis for settlement did not address GIA's depreciation or other deductions. Defendant submits that none of the terms set forth by the IRS as a basis for settling plaintiffs' cases, or set forth in Redding's Acceptance Form, were within the jurisdiction of the Tax Court, so there could be no settlement by means of an exchange of letters. Gingerich, 82 Fed. Appx at 39. B. The settlement terms proposed by the IRS. The IRS first proposed to settle with plaintiffs on January 31, 1991. (Px. 18.) The IRS proposal set forth five terms for settlement of plaintiffs' cases. (Px. 18.) Those five terms never changed from the time they were proposed by the IRS, until they were incorporated in Closing Agreements fully executed by the parties on September 22, 1993. (Redding Tr. 998, l.3-14; Wilpon Tr. 620, l. 16-17.) The five terms proposed by the IRS were (Px. 18 at 1.): 1. For the first open year of each partners' investment, the investor will be allowed, to the extent of losses claimed in 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 section 163. 2. The Government will concede the applicability of the additions to the tax under sections 6653, 6659, and 6661, if any. 3. The investors are required to concede the applicability of the increased rate of interest established under section 6621(c), formerly section 6621(d). 4. No other losses, investment interest expense or other deductions attributable to this partnership shall be allowed in any other year.

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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. On November 13, 1992, Redding wrote to Wilpon and Stoddard concerning settlement of plaintiffs' cases. (Px. 9.) Attached to that letter was an "Acceptance Form" which consisted of six terms. The first five terms were identical to those set forth in the IRS' letter of January 31, 1991. (Px. 9 at 75B; Px 18 at 1.) The sixth term in Redding's Acceptance Form provided that, "any gains reported in years subsequent to the initial investment year shall be reversed and not included in income." (Px. 9 at 75B.) This term was only a restatement of the fifth term set out in the IRS proposal. Therefore, Redding's Acceptance Form mirrored the earlier IRS proposal for settling plaintiffs' cases. (Redding Tr. 998, l. 12-14.) Redding never submitted to the IRS an Acceptance Form, or other document, which proposed settling only on the basis of the deduction of 60% of the partner's verified cash. Redding testified that the first term of the IRS offer was a mix of matters before the Tax Court and matters outside the jurisdiction of the Tax Court. (Redding Tr. 948, l. 15 to 949, l. 4.) According to Redding, the provision allowing a deduction equal to 60% of each partner's verified cash investment in the partnership was within the jurisdiction of the Tax Court because that deduction was measured by the amount of partnership losses claimed by the partners in the years in question. Redding did concede that the last two sentences of the first term of the settlement proposal, dealing with a deduction of interest, was not within the jurisdiction of the Tax Court. (Redding Tr. 949, l. 23 to 950, l. 4.) In contrast, Stoddard and Wilpon, the IRS district counsel who negotiated the settlement on behalf of the IRS, testified that the 60%-of-verified-cash investment provision was not within

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the jurisdiction of the Tax Court because the FPAA issued to GIA addressed only GIA's deductions, and the IRS was not allowing any of those deductions in the settlement. (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.) Stoddard explained at length how, as a condition of the settlement, the IRS would disallow all the partnership losses and, in lieu thereof, allow the partners an ordinary deduction equal to 60% of their own cash investment. (Stoddard Tr. 471, l. 7-25; 473, l. 2-17; 478, l. 24 to 479, l. 2.) Wilpon pointed out there was no rational relationship between the deduction of 60% of a partner's cash investment and the partnership losses reported on GIA's returns for the years in issue. (Wilpon Tr. 640, l. 15 to 641. L. 16.) While the Tax Court could issue a decision allowing a participating partner a deduction of all or part of that partner's distributable share of the losses reported by GIA, the Tax Court could not issue a decision allow the partner a deduction equal to 60% of his cash investment in lieu of any deduction of partnership losses. The 60%-of-verified-cash deduction set forth in the IRS settlement proposal was clearly not a matter before the Tax Court. Redding conceded that the second and third terms of the IRS offer were not partnership issues which could come within the jurisdiction of Tax Court. (Redding Tr. 950, l. 8-13; 951, l. 16-20.) Redding testified that the fourth term, while containing a mix of partnership and nonpartnership issues, was not within the jurisdiction of the Tax Court because the partnership issues involved years which were not before that Court. (Redding Tr. 952. L. 14 to 954, l. 5.) He acknowledge that the fifth term, although a partnership issue, was not a matter pending before the Tax Court because the years involved were not before that court. (Redding Tr. 954, l. 14-17.)

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Redding testified that the sixth term in his Acceptance Form was outside the Tax Court's jurisdiction to the extent the years in which gains were reported by GIA were not before that Court. (Redding Tr. 976 l. 22 to 977, l. 10.) The FPAA issued to GIA shows that in each of the years involved in the Tax Court case, the partnership reported only losses, not gains. (Px. 21.) Therefore, the sixth term in the Acceptance Form, although primarily a restatement of the matters set forth in the fifth term, is also not a matter before the Tax Court. Since none of the terms in the IRS's settlement proposal, the same terms as in Redding's Acceptance Form, were matters pending before the Tax Court, a Closing Agreement was required for any settlement. Even if the Court were to accept Redding's assertion that the 60%of-verified-cash issue was a matter pending before the Tax Court, an exchange of letters could be a mechanism for settling that issue only if the IRS had agreed to settle that issue separately from all the other terms in its settlement proposal. The evidence presented at trial clearly established that the IRS never agreed to settle the 60%-of-verified-cash issue separately from the other settlement terms, so a Closing Agreements was the only mechanism available for finalizing the settlement at issue in this case. C. The parties never agreed to bifurcate the IRS settlement proposal. Under plaintiffs' theory of the case, there was final settlement of the 60%-of-verifiedcash issue at the time the Acceptance Forms were submitted to the IRS on December 30, 1992. However, the IRS could not determine how much additional tax would be owed in connection with that issue until plaintiffs provided substantiation of their investment.4 (Wilpon Tr. 325, l.

Some of the plaintiffs submitted their substantiation to the IRS along with the Acceptance Forms on December 30, 1992. Most of the plaintiffs' substantiation was not submitted to the IRS until April 5, 1993. (Px. 144.) 9

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15 to 326, l. 7.) Even then, the IRS could not finally determine how much additional tax plaintiffs would owe as a result of the settlement until the Closing Agreements were executed, resolving the remaining issues involved in the settlement. (Wilpon Tr. 573, l. 14-22; 584 l 25 to 585, l. 13; 585, l. 23 to 586, l, 14.) The need of a Closing Agreement to be able to assess the additional tax liability was made clear by Wilpon. (Tr. 669, l. 25 to 670, l. 21.) I, mean, the government needs a document which will allow us to implement the basis of settlement or the settlement that we reached, and the closing agreement is a document that allows us to do it. It binds both parties to the terms of the agreement. It's something that would remove the particular taxpayers from participating in the partnership proceeding. It would allow us to make the assessments and the adjustments to that partner [which was not possible] until the actual closing agreement and terms were set forth in the closing agreement. I mean, all we had was some sort of basis for settlement. We had the 60 percent of verified cash, but we didn't know what that verified cash was. We didn't know what year the deduction would be allowed, and until those numbers were put into a closing agreement and we agreed on what particular year the deduction and what the amount of deduction would be, there was nothing that would allow us to act upon an agreement and close out the case. That was the real significance of having a closing agreement. Under plaintiffs' argument the one-year period for assessments began on December 30, 1992, even though the tax liability related to that settlement could not be assessed until after September 20, 1993, when the Closing Agreements were executed. The evidence at trial was clear that the IRS would never have agreed to such an absurd result. (Wilpon, Tr. 571, l. 1-13; Stoddard Tr. 453, l. 16 to 454 l. 19.) Stoddard made this absolutely clear, stating (Stoddard Tr. 493, l. 25 to 494, l. 19) (emphasis supplied): Mr. Redding is a sophisticated attorney as were Babcock MacLean and Linda Paine. They had considerable experience in settling tax shelters. All of them are settled with a closing agreement to prevent a phantom income issue in subsequent years. I don't have 10

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to tell Mr. Redding to use a spoon to eat soup. He just knows it. A closing agreement was part and parcel of any settlement agreement that we have. There was no way to assess a number on a taxpayer's return without a taxpayer substantiating their cash investment, and there was no way to ensure finality of all the years that were not before the Tax Court as well as the nonpartnership items without the use of a closing agreement. And there was never any meeting of the minds that I was going to settle partnership items via an exchange of letters and other items using a closing agreement. That would have just not been done. I wouldn't have done it. This was also the testimony of Wilpon (Wilpon Tr. 571, l. 1-13): It was an understanding that when you meant 60 percent of verified cash, it was just the basis of how we're going to settle this. And once everybody said yes, my client will go for that, then we all knew we were going to use a closing agreement to make that happen. And there's also no discussion in any of these letters about bifurcating anything, about we're going to enter into a Tax Court settlement on these particular years before the Tax Court and just do a closing as to these other years. I mean, there was always a closing agreement as to everything, and that was the need-be assessment vehicle. Linda Paine, who represented another partner involved in the GIA TEFRA proceeding, also indicated that it was her understanding that all terms of the settlement would be resolved by execution of a Closing Agreement. (Paine Tr, 428, l. 15 to 429, l.) Redding testified that he couldn't recall any discussion with the IRS about settling any portion of the IRS settlement proposal on the basis of an exchange of letters. (Redding Tr. 1019, l. 6-11.) On November 13, 1992, Redding wrote to the IRS about settling plaintiffs' cases. (Px. 9.) Attached to that letter was a document titled "Acceptance Form." (Px. 9 at 75A.) The draft Acceptance Form contained essentially the same terms set out in the IRS settlement proposal. Redding did not propose an Acceptance Form which contained only the matters pending before the Tax Court. (Px. 9 at 75A.) Further, in his letter Redding states that he approved of the draft Closing Agreement submitted to the IRS by Paine on November 12, 1992. (Px.9 at 73.) 11

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The closing agreement attached to Paine's letter to the IRS covered all the terms in the IRS settlement proposal, not just those matters pending before the Tax Court.5 (Dx. 1 at 273.) The fact that Redding's Acceptance Form, and the draft Closing Agreement he approved, included all the terms of the IRS settlement proposal, not just those which were pending before the Tax Court, precludes any conclusion that Redding proposed settling only the 60%-ofverified-cash term in December, 1992, reserving settlement of the other terms until later. On November 17, 1992, Wilpon responded to Redding's letter. (Px. 8.) Wilpon's response did not signify any agreement to bifurcate the proposed settlement. Wilpon wrote that the IRS agreed "with the outline of the settlement terms set out in the Draft Acceptance Form." (Px. 8 at 55.) Since the terms in the IRS settlement proposal and Redding's Acceptance Form were essentially the same, Wilpon's approval of the outline of the terms in the Acceptance Form could not be construed to be an agreement to settle on the basis of only one of the terms set forth therein. Wilpon attached to his response to Redding's letter draft Closing Agreement language which covered all the terms set out in the IRS settlement proposal. Wilpon testified that his response to Redding's letter was not an acceptance of any settlement offer or any agreement that the IRS would bifurcate the settlement in this case. (Wilpon Tr. 681, l. 18 to 682, l. 7.). Q. Now in the fax, you indicate that you've reviewed and agree with an outline of the settlement terms, if that correct? A. That's correct.

Paine's letter also states that Redding reviewed and approved of the draft Closing Agreement attached to her letter to the IRS. (Dx. 1.) 12

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Q. In this letter do you say that the government agrees that there's a final settlement in this case? A. No. I mean, by the fact that I attach a closing agreement, it was my intention and I believed it was everybody's understanding that there had to be this executed closing agreement. Q. And that's the reason you had attached the anticipated closing agreement language to your response? A. That's correct. A further fact militating against plaintiffs' contention that the IRS intended the Acceptance Form to be a settlement was the fact that the IRS never countersigned the Acceptance Form as requested by Redding. (Wilpon Tr. 673, l. 8-9.) None of the draft settlement documents proposed by the parties, including Redding, ever proposed settling only the 60%-of-verified-cash issue. The January 31, 1991, IRS settlement proposal (Px. 18), Redding's July 5, 1991, draft Closing Agreement (Px. 12), Paine's November 12, 1992, draft Closing Agreement (Dx. 1), Redding's November 13, 1992, Acceptance Form (Px. 9 at 75A), and the IRS's November 17, 1992, draft Closing Agreement (Px. 8), all contained the same basic terms. Since most, if not all, of the terms set forth in those settlement documents could not have been accepted by an exchange of letters between counsel, there could not have been a final settlement on December 30, 1992, when Redding submitted to the IRS the Acceptance Forms signed by his clients. It is clear that the settlement between the IRS and plaintiffs was not final until September 22, 1993, when the IRS executed the Closing Agreements. Redding indicated at trial that the statement in Wilpon's fax, agreeing to a 30-day extension of the deadline for plaintiffs' to accept the IRS offer, was somehow an agreement to a

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bifurcated settlement. (Redding Tr. 971, l. 10 to 972, l. 6.) However, Wilpon explained that the deadline was not for a final settlement, but was merely a deadline for plaintiffs to indicate whether they intended to settle or proceed to trial. (Wilpon Tr. 637, l. 22 to 638, l. 5.) Like I told you before, we needed to know whether we were going to have to prepare for trial. If the investors or the participating partners weren't willing to accept the verified 60 percent of cash as a basis for settlement, we needed to prepare for trial on the underlying merits of the case. So that was the purpose of the December deadline, and I don't recall, but maybe the Court was telling us to move this thing along, also. Plaintiffs have not been able to point to any other document to indicate an intention on the part of the IRS to bifurcate the settlement at issue in this case. Given the nature of the terms uniformly set forth in every parties' settlement proposal it is clear that a Closing Agreement was required to effectuate the settlement in this case. III. A CLOSING AGREEMENT WAS CLEARLY INTENDED TO BE USED TO SETTLE PLAINTIFFS' TAX COURT CASES A. The documentary evidence establishes that the parties intended to use a Closing Agreement to settle the cases. The letters exchanged between the IRS and counsel for the partners in the GIA partnership repeatedly reference the use of a Closing Agreement. Those same letters never mentioned settlement by an exchange of letters or proposed a settlement of the 60%-of-verifiedcash item separately from the other settlement terms. On July 5, 1991, Redding wrote the IRS proposing a basis for settling plaintiffs' cases. (Px. 12.) Attached to that letter was draft closing agreement covering all the issues presented by the IRS settlement proposal.6 (Px. 12 at 87.)

The primary substantive difference between the IRS settlement proposal and Redding's draft Closing Agreement was the fact that Redding proposed allowing a deduction of 100%-ofverified-cash, rather than the 60% proposed by the IRS. Redding's counter-offer was rejected by the IRS on October 22, 1992. (Px. 10.) 14

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Redding states in his letter that the draft closing agreement should be the format to be used to settle plaintiffs' cases. (Px. 12 at 85.) There is no mention in Redding's letter to settling part of the terms by an exchange of letters and settling the remaining by a closing agreement. On November 12, 1992, Paine sends the IRS a draft closing agreement. (Dx. 1.) That closing agreement also covers all issues. Redding represented to the IRS that he approved of the draft submitted by Paine. (Px. 9 at 38.) The Closing Agreement proposed by Redding with his July 5, 1991, letter, and the Closing Agreement proposed by Paine with her November 12, 1992, letter, were consistent with the understanding of the IRS that a Closing Agreement would be used to effect any settlement. (Stoddard Tr. 455, l. 22 to 456, l. 8; 461, l. 20-25; Wilpon, Tr. 579, l. 15-19.) Paine testified that the Closing Agreement was intended to cover all the terms of the settlement and that she did not consider settling the 60%-of-verified-cash item separately from the other terms of the IRS settlement proposal. (Paine Tr, 428, l. 15 to 429, l.) The first document in which anything other than a Closing Agreement was discussed as a basis for settling plaintiffs' cases was Redding's November 13, 1992, letter, which submitted a draft Acceptance Form to the IRS. (Px. 9.) However, that Acceptance Form included the terms that could be resolved only by use of a Closing Agreement. In fact, Redding specifically stated in his letter that he wanted a Closing Agreement. (Px. 9 at 74.) The IRS response to that letter was another draft Closing Agreement covering all the issues set out in the IRS settlement proposal. (Px. 8.) As Wilpon noted at trial, every party proposed a Closing Agreement. (Wilpon Tr. 557, l. 20 to 558, l. 2; 677, l. 11-17.) The Federal Circuit posed the question whether Redding's November 13, 1992, letter and Wilpon's November 17, 1992, response could have constituted a binding settlement agreement.

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However, the evidence presented at trial established that was not the case. Redding wrote plaintiffs on December 1, 1992, transmitting them the Acceptance Form, in which he made it clear that they could decline to enter into a settlement with the IRS. (Px. 162.) The evidence presented at trial established that there was no settlement on or before November 17, 1992, therefore, there was no agreement at the time the IRS submitted its draft Closing Agreement language to plaintiffs. B. The testimony also establishes that a Closing Agreement was required. Stoddard, Wilpon, and Paine all testified that it was always understood that a Closing Agreement would be used for settlement of the dispute between the IRS and plaintiffs. (Stoddard Tr. 453, l. 16-18; 487, l. 5-7; 493, l. 20-23; Wilpon, Tr. 557, l. 20 to 558, l. 2; 566, l. 23 to 567, l. 4; 583, l. 6-8; Paine, 453, l. 1 to 453, l. 2.) The reason a Closing Agreement was required was there was no other way to resolve all the issue between the IRS and plaintiffs and compute plaintiffs' tax liability for the years in issue. Wilpon made this clear when he stated (Wilpon Tr. 325, l. 15 to 326 l. 7.): I mean, you can't divorce from all the letters the vehicle which we always believed was the closing agreement. I mean, it's unfortunate that we always talk in terms of settlement, but I'm not sure what other word to use. You know, when we give you the terms and say are you willing to accept say 60% of verified cash and you say yes, you know, our clients are willing to accept that, I mean, then we have to put into the closing agreement you need to verify your cash. There's more involved that just saying yes, you know, to have a settlement. At that point I don't even know what the terms of the settlement are. I don't know what your clients are entitled to as a loss say in 1983 because you haven't verified your cash yet. I mean, I don't know whether you are going to agree with the number I come up with.

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Wilpon further explained the need for a Closing Agreement as follows (Redding Tr. 573, l. 14-22.): To make the offer work for the IRS so that the IRS can actually assess the correct amount of tax for any particular year and also process like the claims for refund for the phantom income, that I'm sure all these taxpayers filed in later years, we needed a vehicle to make that happen, and that was a closing agreement. That allowed everything to be processed at the same time and assessments and refunds to happen. Stoddard also made it clear that the IRS always wanted a Closing Agreement to settle with plaintiffs (Stoddard Tr. 453, l. 1 to 454, l. 2): Q. Okay. What was the mechanism that was going to be used to effectuate any settlement? A. There was going to be a closing agreement. Q. Now, was that the understanding of everybody from the inception, from back in 1991? A. Clearly. Q. Do you recall if there were any discussions that you had with Mr. Redding from 1991 forward whereby the case would be settled with an exchange of letters for whatever TEFRA issues there might be and a closing agreement for other issues, or in other words, a two-part settlement? A. If your question is, do I recall, the answer is we didn't have those discussions so there's nothing to recall. Q. All right. Okay. Would the IRS have agreed to such a two-step or bifurcated settlement? A. No. Q. What did the IRS require in order to settle the case? A. I wanted a closing agreement. I mean, if not ­I say "I." The IRS and the taxpayers, everybody wanted a closing agreement. The reason the taxpayers want a closing agreement is to avoid phantom income in later years, and the IRS wants it for the same finality, that they don't want to have to go out and audit these partnerships for later years either. 17

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On September 7, 1993, the Tax Court issued an order to remove the tax matters in the GIA TEFRA case. (Px. 166A.) Attached to that order was a list of the participating partners who had not yet settled with the IRS. (Px. 166A at 2787.) Plaintiffs were included on that list. It was noted by the Tax Court that those partners had not settled because they had not executed Closing Agreements with the IRS. (Px. 166A, fn.) This is a clear indication that there was no final settlement between the IRS and plaintiffs on December 30, 1992. Further, this is yet another way in which this case is distinguishable from Treaty Pines. In that case the taxpayer was included on a list of partners who had settled their cases. The exact opposite is true here. Defendant submits that the evidence presented at the trial of this case establishes that there was no final settlement between plaintiffs and the IRS until the Closing Agreement were executed by the IRS on September 22, 1993. The assessments in this case, made in May 1994, were timely.

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CONCLUSION For the reasons set forth above, plaintiffs' claims should be dismissed, with prejudice.

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/David Gustafson Of Counsel

March 20, 2007

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