39 F.3d 402 (2nd Cir. 1994), 242, Goldman v. C.I.R.

Docket Nº:242, Docket 94-4027.
Citation:39 F.3d 402
Party Name:Leo GOLDMAN and Pauline Goldman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Case Date:November 02, 1994
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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39 F.3d 402 (2nd Cir. 1994)

Leo GOLDMAN and Pauline Goldman, Petitioners-Appellants,



No. 242, Docket 94-4027.

United States Court of Appeals, Second Circuit

November 2, 1994

Argued Sept. 8, 1994.

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Norman Nadel, New York City, for petitioners-appellants.

Randolph L. Hutter, Tax Div., Dept. of Justice, Washington, DC (Loretta C. Argrett, Asst. Atty. Gen., Gary R. Allen, Kenneth L. Greene, Tax Div., Dept. of Justice, Washington, DC, of counsel), for respondent-appellee.

Before: MESKILL, MAHONEY and WALKER, Circuit Judges.

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MESKILL, Circuit Judge:

In this appeal from a judgment of the United States Tax Court, Fay, J., we must determine whether a settlement agreement between petitioners-appellants Leo and Pauline Goldman and the Internal Revenue Service (IRS) for the 1981 tax year also applied to their 1982 tax liability, and whether appellants, who filed joint returns for both tax years, properly deducted their share of the losses of an oil exploration partnership on their 1982 joint federal income tax return. The tax court answered both these questions in the negative, and found appellants liable for an income tax deficiency for the 1982 tax year, plus additions to tax under 26 U.S.C. Secs. 6621(c) (underpayment attributable to a tax-motivated transaction), 6653(a)(1) and (2) (negligent underpayment of tax), and 6661 (substantial underpayment of tax), as in effect in 1982. We have jurisdiction over appellants' timely appeal pursuant to 26 U.S.C. Secs. 7482(a) and 7483. We affirm.


In December 1991 Leo Goldman signed a purchase agreement for one and one-half units in Midcontinent Drilling Associates-II (MCDA-II), a limited partnership formed to engage in oil and gas exploration. Goldman first learned of the MCDA-II partnership in late 1981 from Stephen Burr, a member of the accounting firm that regularly prepared appellants' personal and business tax returns. Burr showed Goldman MCDA-II's offering memorandum, which stated that the partnership was organized to engage in drilling operations and to use a "Terra-Drill" in drilling for oil, and which also contained maps showing that several large oil companies were drilling near MCDA-II's proposed site.

While the partnership's purported purpose was to generate profits, the offering memorandum estimated that limited partners would assume partnership losses of $40,000 for every $10,000 invested for the first three years, permitting each limited partner to deduct up to 400 percent of an initial investment from his or her federal income tax returns in those years. The offering memorandum stated that these deductions increased the likelihood that a limited partner's tax return would be audited by the IRS, and warned that investment in the partnership was not recommended for investors without both a substantial net worth and a marginal federal income tax bracket of at least 49 percent. MCDA-II derived this loss in large part from an expensive sublicense agreement for the right to use the Terra-Drill, even though no prototype of the drill had been developed. The offering memorandum also stated that MCDA-II possessed no oil production or transportation facilities.

Goldman invested $15,000 in MCDA-II in both 1981 and 1982, and appellants claimed their share of the losses of the partnership as deductions on their 1981 and 1982 joint federal income tax returns in the amounts of $59,400 and $64,451, respectively. Goldman based his investment decision on his review of the offering memorandum and on Burr's advice. Burr had no experience in the oil and gas business, and his knowledge about MCDA-II also was limited to what he read in the offering memorandum. Burr was listed on the MCDA-II subscription agreement signed by Goldman as the soliciting dealer and sales representative. Burr received a commission as a result of Goldman's investment.

On August 6, 1987 the Commissioner informed appellants by letter that the deduction of MCDA-II's losses in their 1981 tax return was disallowed. The letter offered a settlement whereby appellants could deduct 75 percent of their initial investment as a loss in 1981 if they waived all deductions arising from the partnership for all other years. The offer also included forgiveness of any penalties, but required the assessment of interest on the unpaid tax. Appellants refused to accept the settlement offer, which the Commissioner withdrew on July 8, 1988.

Appellants then received another settlement offer concerning their 1981 return on November 2, 1988. This second offer came in the form of a handwritten letter from IRS Appeals Officer Seymour Margolis, which stated that appellants would be allowed to deduct 100 percent of their initial investment as a loss on their 1981 tax return. The offer

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further stated that no other deductions derived from MCDA-II's losses would be allowed in any other year, that all penalties would be removed, and that interest would be applied on any unpaid tax. Leo Goldman accepted the offer by signing and returning an enclosed form, and on July 7, 1989 Margolis...

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