Free Memorandum of Contentions of Fact and Law - 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 PRE-TRIAL MEMORANDUM OF CONTENTIONS OF LAW AND FACT __________

Pursuant to RCFC App. A, ¶¶ 14-16, and this Court's November 2, 2006, Order, defendant, the United States, submits the following pre-trial memorandum of contentions of law and fact. INTRODUCTION This case is before the Court on a remand from the Federal Circuit. Gingerich, et al. v. United States, 82 Fed.Appx. 35 (2003 WL 22854662)(Fed. Cir., Dec. 2, 2003). After determining that "there exist genuine questions of material fact concerning the appropriate [assessment] date for purpose of the statute of limitations" (82 Fed.Appx. at 37), the Federal Circuit mandated that the Court resolve two issues at the trial. First, the Federal Circuit

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mandated that this Court make "specific findings concerning whether or not the parties required a closing agreement to effectuate the settlement." 82 Fed. Appx. at 39. Second, in the event the Court concludes that the parties intended that a Closing Agreement was not required, then the Court is to decide "if the Redding Acceptance Form constituted a valid acceptance of the IRS Offer despite the variations in terms between the two documents." Ibid. The evidence to be presented at trial will establish that a Closing Agreement was required by the parties to effectuate a settlement. Further, the evidence at trial will establish that the Redding Acceptance Form could not have constituted a final settlement agreement because the parties continued to negotiate the terms of the settlement for seven months after the date of that form and ultimately executed Closing Agreements containing terms different from those set forth in the form. This Court's November 2, 2006, Order required plaintiffs to file their pre-trial memorandum, and exhibit and witness lists, on November 7, 2006.1 As of this date, plaintiffs have not filed any of those documents with the Court. The Court's November 2, 2006, Order stated that the defendant was to file a "responsive memorandum" on November 21, 2006. Since plaintiffs have not filed anything, there is nothing to which defendant can respond. Therefore, this memorandum will set forth the contentions of fact and law that the defendant will establish at the trial of this case.

The complaint was originally filed on behalf of plaintiffs Fenton and Eunice Gingerich, Seung C. and Young Ho Karl, Choong H. And Joung S. Kim, Albert and Dorothy Liebovich, Carl and Nelle Liebovich, Gregory and Gail Liebovich, Joe and Belle Liebovich, Larry J. and Barbara J. Liebovich, Samuel D. and Erna S. Liebovich, Eugene M. Rosol, Charles H. Scruggs, and Dae-Sob and Moon K. Yoon. The Court has now severed the claims of each of these plaintiffs and consolidated the cases for purposes of trial. The defendant uses the term "plaintiffs" in this memorandum to refer collectively to all the above-referenced individuals. 2

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Defendant's memorandum of contentions of fact is complicated by the fact that plaintiffs have not indicated whether they intend to proffer any exhibits or witnesses at the trial. Since defendant does not know what, if any, evidence plaintiffs might present at trial, defendant is not in a position to set forth a response to that evidence at this time. Therefore, defendant's contentions of fact in this memorandum are limited to the evidence the defendant will present at the trial. Concurrent with this memorandum, defendant is filing a motion in limine requesting that the Court preclude plaintiffs from presenting any exhibits or witnesses at the trial as a sanction for their repeated failure to comply with the Court's pre-trial orders.2 In the event the Court allows plaintiffs to present evidence at the trial, defendant requests leave to file a supplemental memorandum, either pre-trial or post-trial, setting forth its response to any exhibits or witnesses plaintiffs are allowed to present at the trial. I. CONTENTIONS OF FACT Plaintiffs Fenton and Eunice Gingerich, Seung C. and Young Ho Karl, Choong H. And Joung S. Kim, Eugene Rosol, Charles K. Scruggs, and Dae-sob and Moon K. Yoon were direct partners in General Information Associates Partnership (hereinafter, "GIA"). The Liebovichs were indirect partners of GIA by virtue of their status as shareholders of LouBess, Inc., a Subchapter S corporation controlled by the Liebovichs, which was a direct partner in GIA.

This is the third time plaintiffs have failed to comply with the Court's orders that they file exhibit and witness lists. Plaintiffs did not provide preliminary exhibit and witness lists by September 27, 2006, or their final exhibit and witness lists on October 2, 2006, as required by the Court's January 30, 2006, Order. At the status conference on October 24, 2006, plaintiffs were ordered to file their exhibit and witness lists on November 7, 2006. Plaintiffs have not done so, as of the date of this filing. 3

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On April 9, 1990, after an examination of GIA's returns, the Internal Revenue Service mailed a notice of final partnership administrative adjustment (hereinafter, "FPAA") for the years 1983-1986. On August 16, 1990, Raymond and Irma Ziff, partners other than the tax matters partner, filed a petition in the Tax Court contesting the adjustments set out in the FPAA. On February 19, 1991, the plaintiffs filed a notice of election to participate in the Tax Court proceeding. The Ziffs were represented by Babcock MacLean, Robinson, Brog, Leinwald, Reich, Genovese & Gluck, in New York, New York. Plaintiffs were represented in the Tax Court by Thomas Redding, Redding & Associates, in Houston, Texas. Partner Marshall Harrell filed an elections to participate in the Tax Court proceeding on June 20, 1991. He was represented by Linda S. Paine, Chamberlain, Hrdlicka, White, Johnson & Williams, in Houston, Texas. Beginning in early 1991, MacLean, Paine, and Redding, on behalf of the partners, and Bruce Wilpon and William Stoddard, on behalf of the IRS, began discussing settlement of the partners' tax liability related to their investments in GIA. From the beginning of the settlement discussions, both Wilpon and Stoddard made it clear to MacLean, Paine, and Redding that a closing agreement would be necessary to effect any settlement. The fact that a Closing Agreement was required is evident from Redding's July 5, 1991, letter to Wilpon and Stoddard, which enclosed several draft Closing Agreements. (Dx. 1.)3 Further, on November 12, 1992, Paine wrote to Wilpon and Stoddard, enclosing a draft Closing Agreement. Paine stated that she was writing on behalf of herself, MacLean, and Redding. (Dx. 2.) In that letter Paine stated that "we [herself, MacLean, and Redding] have made this recommendation on the condition that an

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appropriate Closing Agreement can be entered into." (Dx. 2.) Further, Paine wrote, "we have discussed the terms of the enclosed Closing Agreement and believe that they accomplish those objectives." (Dx. 2.) According to Paine's letter the draft Closing Agreement attached to her letter was approved by Redding and MacLean. Paine requested that Wilpon and Stoddard let her know if they wished to include any additional provisions in the draft Closing Agreement. (Dx. 2.) On December 19, 1992, Wilpon wrote to MacLean, stating, "although it is our intention to continue to make the settlement available to all the investors, we can neither accept nor process any investor settlement (e.g. closing agreements) or enter into a decision in this case (setting forth the settlement) until a new tax matters partner is chosen for the partnership." (Dx. 3.) On January 26, 1993, Wilpon sent letters to Redding, Paine, and MacLean, forwarding to them copies of the Closing Agreement that the IRS expected their clients to execute, in order to settle their cases. The letter also states, "that this settlement is subject to review and acceptance on behalf of the respondent [IRS]." (Dx. 4.) On February 18, 1993, Wilpon wrote to Redding, stating that no settlement would be reached until the IRS executed a closing agreement with respect to each partner. (Dx. 5.) The letter stated in bold face type, "no settlement occurs until closing agreements are signed by your clients and countersigned by the appropriate Service representative." (Dx. 5.) In addition to those documents, which clearly indicate that all the parties understood that a Closing Agreement would be necessary in order to effectuate a settlement, the testimony of Wilpon and Stoddard will establish that Closing Agreements were required for any settlement. Wilpon and Stoddard will testify that they engaged in numerous conversations with Redding,

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Paine, and MacLean where it was made clear that Closing Agreements would be required. They do not recall any conversations with Redding, Paine, or MacLean where settling the case by some other means was discussed. Paine also will testify that it was her understanding that a Closing Agreement would be necessary for a settlement, which is why she sent a draft Closing Agreement to Wilpon and Stoddard on November 12, 2006. Paine does not recall any discussion with the IRS where the possibility of settling the cases on the basis of an exchange of letters was discussed. Plaintiffs contend in the complaint that they and the IRS arrived at a final settlement agreement on December 30, 1992. However, the events occurring after that date make it clear that no final agreement had been reached on that date. Within weeks of that date, Wilpon and Stoddard wrote to Redding, clearly indicating that a settlement had not occurred and that any settlement could not occur until Closing Agreements were executed by the IRS. (Dx. 4, 5.) Most significantly, the Closing Agreements ultimately executed by plaintiffs included provisions not in the documents that Redding submitted to the IRS on December 30, 1992. Those documents did not include any terms regarding plaintiffs' basis in their partnership interests in GIA. The Closing Agreement that the IRS forwarded to Redding contained a provision that the partner's basis in the partnership would be zero. (Dx. 4.) On March 17, 1993, Redding wrote to Wilpon, objecting to the zero-basis provision. (Dx. 6.) However, after further negotiation, Redding, on June 8, 1993, withdrew his objection to the zero-basis provision in the closing agreement. (Dx. 7.) The fact that the parties continued negotiation from December, 1992, to

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June, 1993, on the zero-basis provision in the Closing Agreement is clear evidence that there was not a final settlement agreement on December 30, 1992. This conclusion is further supported by the fact that the zero-basis provision Redding objected to was included in the Closing Agreements that were ultimately executed by plaintiffs. Thus, there was no settlement until the Closing Agreements were executed by plaintiffs and the IRS. Plaintiff Eugene Rosol executed a Closing Agreement on March 16, 1993. (Dx. 8.) The remaining plaintiffs executed Closing Agreements between July 12, 1993 and September 3, 1993.4 (Dx. 9-14.) The IRS executed the Closing Agreements on September 22, 1993. The additional tax due pursuant to the Closing Agreements of the plaintiffs was assessed at various dates between January 3, 1994 and August 8, 1994, all less than one year after the Closing Agreements were executed. (Dx. 8, 15-26.) II. CONTENTIONS OF LAW A. The Code provisions at issue in this case. Partnerships are not subject to the income tax; it is the partners who are liable for the tax in their individual capacities. Partnerships are nevertheless required to file annual information returns reporting the partners' distributive shares of income, gain, deduction, or credit. §§ 701, 6031; Treas. Reg. §§ 1.701-1, 1.6031-1(a)(1). To achieve consistent treatment of all partners in the same partnership and to remove the substantial administrative burden occasioned by

The Closing Agreement related to the Liebovichs was signed by LouBess, Inc., the subchapter S corporation that was the direct partner in GIA. Since LouBess, Inc. was a subchapter S corporation, the tax effect of the settlement would be assessed to the shareholders of LouBess, Inc., the Liebovichs. Therefore, in order to establish the assessment dates, the defendant has proposed as exhibits the Forms 2866 Certificates of Assessments and Payments for each of the Liebovich plaintiffs. (Dx. 19-23.) 7

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duplicative audits and litigation, §§ 6221-6233, added in 1982 to the Code by the Tax Equity and Fiscal Responsibility Act (hereinafter, "TEFRA"), contain coordinated procedures for determining all items of partnership income, loss, deduction, or credit uniformly at the partnership level in single, unified audit and judicial proceeding. If the IRS audits a partnership return, it must send the partners a notice of the beginning of an administrative proceeding. § 6223 (a) (1). In general, all partners whose addresses have been furnished to the IRS are entitled to notice that the audit has commenced; and although the tax matters partner takes the lead and must keep the partners apprised, § 6228(g), any partner may participate. § 6224(a).5 If the IRS disagrees with the partnership's reporting of any partnership item, it must send a notice of final partnership administrative adjustment (FPAA) to the partners entitled to notice before making any assessment attributable to this item. §§ 6223(a)(2), (d)(2), 6225(a); Transpac Drilling Venture, 1983-2 by James M. Dobbins v. United States, 83 F.3d 1410, 1412 (Fed. Cir. 1996). The tax matters partner has 90 days to file a petition in the Tax Court, a federal district court or the Court of Federal Claims. § 6226(a). If no such petition is filed, any notice partner or 5-percent group has 60 days after the close of the 90-day period within which to bring such a suit, § 6626(b)(1), and the tax matters partner may intervene.6 § 6226(b)(6); Transpac Drilling Venture, 1983-2, 83 F.3d at 1412. If a petition is filed, all partners with interests in the outcome

If the partnership has more than 100 partners, the IRS need only send such notice to partners with at least 1-percent profits interests in the partnership, except that groups of partners having, in the aggregate, at least a 5-percent profits interest may request notification. § 6223(b). A 5-percent group is a group of partners who for the taxable year involved have profits interests in the partnership which aggregated 5-percent or more. § 6231(a)(11) 8
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are treated as parties, § 6226(c), (d), and the court has jurisdiction to determine all partnership items to which the FPAA relates. § 6226 (f). Meanwhile, once the FPAA is mailed, § 6225(a) prohibits the IRS from making an assessment attributable to partnership items during the time a § 6226 proceeding may be filed, and, if one is brought, until the decision therein becomes final; and § 6229(d) generally tolls the statute of limitations on assessment during that same time and for one year thereafter. Under § 6224(c)(1), the IRS may enter into a settlement agreement relating to partnership items with one or more partners that, "[i]n the absence of a showing of fraud, malfeasance, or misrepresentation of fact," is binding upon "all parties to such agreement."7 In the case of a tiered partnership, indirect partners (such as the shareholders of LouBess here) are bound by a pass-through partner. § 6224 (c) (1). On the date a partner and the IRS "enter [] into a settlement agreement," the partner's partnership items are converted into nonpartnership items under § 6231(b)(1)(C). Crnkovich v. United States, 202 F.3d 1325, 1326 (Fed. Cir. 2000) (settlement agreement was "entered into" when closing agreement was executed); Olson v. United States, 172 F.3d, 1311, 1317 (Fed. Cir. 1999). If the settlement is entered into during the

Section 7121 of the Code similarly provides that "the Secretary is authorized to enter into an agreement in writing" to settle a tax liability dispute and that such an agreement (known as a closing agreement) shall not be reopened "except upon a showing of fraud or malfeasance, or misrepresentation of a material fact." See Botany Worsted Mills v. United States, 278 U.S. 282, 288-289 (1929). Congress chose to employ the same criteria for determining the validity of a settlement agreement under § 6224 (c) as is employed in connection with closing agreements under § 7121. See H. Graphics/Access, Ltd. v. Commissioner, 63 T.C.M. (CCH) 3148 (1992). The authority to settle disputed tax liabilities still derives from §§ 7121 (relating to closing agreements) and 7122 (relating to compromises), but § 6224 (c) details the binding effect such an agreement will have when partnerships are involved. Crowell v. United States, 305 F.2d 474, 478 (6th Cir. 2002); Segel v. United States, 97-1 U.S. Tax Cas. (CCH) ¶ 50,404 (S.D. Fla. 1997). 9

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pendency of a proceeding challenging the FPAA, the partner is no longer considered to have the requisite interest in the outcome under § 6226(d) (1), and he is no longer treated as a party under § 6226 (c). With that, § 6225(a)`s restrictions on assessment no longer apply. Section 6230(a) permits the IRS to assess the appropriate "computational adjustment" that properly reflects the settlement's treatment of the converted partnership items as applied to the partner, see § 6231(a) (6), without first sending the partner a notice of deficiency under Section 6212, in the same manner as an assessment is made to reflect an unchallenged FPAA or a final court decision. Olson, 172 F.3d at 1317. Finally, § 6229(f) of the Code provides that, if, before the expiration of the statute of limitations on assessment of partnership items otherwise provided, see § 6501, such items are converted to nonpartnership items under § 6231(b), the period for assessing any tax attributable to a partnership item (or an affected item) "shall not expire before the date which is 1 year after the date on which the items become nonpartnership items." See Crnkovich, 202 F.3d at 1328 (assessment more than one year after execution of closing agreement was time-barred). In this case, the partnership items underwent such conversion on the date the IRS and plaintiffs "enter[ed] into a settlement agreement" under § 6231(b)(1)(C). As the evidence at trial will establish, the settlement agreements between the IRS and plaintiffs were not entered into until the Closing Agreements were countersigned on behalf of the IRS, rather than on December 30, 1992. As a result, the assessments made against taxpayers within one year after the Closing Agreements were countersigned were timely under § 6229(f). B. Requirements for a valid settlement agreement.

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As contracts, tax settlements are governed by general principles of contract law. Treaty Pines Inv. Partnership v. Commissioner, 967 F.2d 206, 212 (5th Cir. 1992.) "A contract is a set of promises requiring an objective manifestation of mutual assent by the parties, generally in the form of an offer and an acceptance." Gregory v. United States, 111 F.Supp. 2d 851, 855 (S.D. Tex. 2000). The formation of a contract requires mutual assent to the essential terms. Linear Tech. Corp. v. Micrel, Inc., 275 F.3d 1040, 1052 (Fed. Cir. 2001); Buesing v. United States, 47 Fed. Cl. 621, 630 (2000). There must be a "specific ascertainable settlement," which is clearly accepted in a responsive letter. Varnum v. United States, 2000 WL 1141656, p. 4 (S.D. Tex. 2000). In accepting the offer, "the offeree cannot change, add to, or qualify the terms of the contract in any material respect." Minneapolis & St. Louis Railway Co. v. Columbus RollingMill, Co., 119 U.S. 149, 151 (1886). A valid contract requires "a mutual intent to contract, including offer, acceptance, and consideration; and authority on the part of the Government." Buesing, 47 Fed.Cl. at 630. In determining the proper meaning of the terms of the agreement, the Court must look to the language of the agreement and circumstances surrounding its execution. Buesing; Robbins Tire and Rubber Co. v. Commissioner, 52 T.C. 420, 435-36 (1969). "Generally, extrinsic evidence will not be admitted to expand, vary, or explain the terms of a written agreement unless the agreement is ambiguous." Wahsoe Ranches # 1, Ltd. v. Commissioner, 72 T.C..M. (CCH) 1176, T.C. Memo. 1996-495 (1996). The taxpayer bears the burden of proving that his or her interpretation of any ambiguous contract language is correct. Rink v. Commissioner, 100 T.C. 319, 326 (1993); aff'd, 47 F.3d 168 (6th Cir. 1995); Buesing.

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Matters pending in the Tax Court can be settled by an exchange of letters setting forth a clearly ascertainable offer to settle and a clear acceptance of that offer. Treaty Pines. However, where the letters exchanged by counsel reference the execution of certain documents, there can be no settlement agreement until those documents are fully executed. Estate of Ray v. Commissioner, 112 F.3d 194, 196-197 (5th Cir. 1997); see also, Jaffe v. Commissioner, T.C. Memo. 2004-122 (2004), aff'd, 175 Fed.Appx. 853 (9th Cir. 2006); Gregory, 111 F.Supp. 2d at 856 (S.D. Tx. 2000). When the parties to a tax settlement contemplate the execution of a closing agreement, all the procedural requirements of § 7121 must be met, since a closing agreement not executed in conformity with the requirements of that section are not binding on the IRS. Grossman v. United States, 57 Fed. Cl. 319, 322 (2003), aff'd, 95 Fed. Appx. 356 (Fed. Cir. 2004); Botany Worsted. Since the evidence at trial will establish that the parties understood that a closing agreement was required to effect a settlement, the settlement in this case occurred when the IRS executed the Closing Agreements (i.e., on September 22, 1993), not on December 30, 1992. C. Treaty Pines does not support any contention that settlements were concluded on December 30, 1992.

Taxpayers might rely on Treaty Pines to support the proposition that the settlements were entered into on December 30, 1992. However there are significant differences between that case and the instant case. In Treaty Pines, the Fifth Circuit found, on the basis of an admittedly "sparse" record, that the IRS and the taxpayer had concluded a settlement agreement. The only evidence before the court, however, was a letter from the taxpayer purporting to accept the IRS settlement offer and a subsequent letter from the IRS to the taxpayer, dated almost two years later, confirming the taxpayer's acceptance. As a result, the Fifth Circuit did not address the 12

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issue whether an exchange of correspondence constitutes a settlement when, following that exchange, the taxpayer and the IRS continue to negotiate settlement terms and subsequently execute a comprehensive closing agreement that is a "final and conclusive" determination of the taxpayer's liability and which contains terms not present in the prior letters. Nor did the court in Treaty Pines address the question whether an exchange of correspondence concludes a settlement when the completion of a closing agreement is essential to the taxpayer's acceptance of an IRS offer.8 Treaty Pines is also distinguishable in that the IRS acknowledged in that case that, prior to the execution of the Closing Agreement, it had entered a settlement with the taxpayer. This acknowledgment was included in a letter to the taxpayer and in a representation to the Tax Court that the taxpayer's case was not "unagreed." In this case, however, there is no evidence that the IRS ever represented to plaintiffs or to the Tax Court that a settlement of the GIA cases had been concluded on the basis of the exchange of letters. In fact, the IRS's view that the Redding Acceptance Forms did not constitute a binding settlement is evidenced by their declining to sign and return them to Redding. Here, the parties clearly understood that closing agreements were to be executed. Plaintiffs cannot overcome the unambiguous language of the Closing Agreements

Although the IRS contended that the taxpayer in Treaty Pines eventually executed a Closing Agreement, the Agreement was not part of the record and was disregarded by the court. 967 F. at 210 n.6. In this case the Closing Agreements will be presented as exhibits at trial. Further, there was no testimony presented in Treaty Pines regarding the intent of the parties involved in the settlement negotiations regarding the necessity of a Closing Agreement. By contrast, at the trial the defendant will present testimony from three witnesses that will clearly establish that all parties understood that Closing Agreements would be required to effectuate any settlement. 13

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they executed, that those Agreements embodied a "final and conclusive" determination of the plaintiffs' tax liability. CONCLUSION For the reasons set forth above, the defendant submits that after the trial of the abovecaptioned case the claims of plaintiffs 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/Mary M. Abate Of Counsel

November 21, 2006

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CERTIFICATE OF SERVICE I certify that service of the foregoing Defendant's Pre-Trial Memorandum of Contentions of Law and Fact has, this 21st day of November, 2006, been made on counsel for the plaintiff by mailing a copy thereof to the following:

Teresa Womack, Esquire Redding & Associates, P.C. 2914 W.T.C. Jester Houston, Texas 77018

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) 307-6440

2045225.1