Goldman v. C.I.R.

• Decision Date: 02 November 1994
• Docket Number: No. 242,D,242
• Citation: 39 F.3d 402
• Parties: -6923, 94-2 USTC P 50,577 Leo GOLDMAN and Pauline Goldman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ocket 94-4027.
• Court: U.S. Court of Appeals — Second Circuit

Page 402

39 F.3d 402

74 A.F.T.R.2d 94-6923, 94-2 USTC P 50,577

Leo GOLDMAN and Pauline Goldman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 242, Docket 94-4027.

United States Court of Appeals Second Circuit.

Argued Sept. 8, 1994.

Decided Nov. 2, 1994.

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.

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.

BACKGROUND

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 The Commissioner also disallowed the $64,451 deduction claimed by appellants on their 1982 tax return for their share of MCDA-II's losses, and assessed penalties for an underpayment attributable to a tax-motivated transaction and for negligent and substantial underpayment. ¹ Appellants petitioned for a review of this determination before the tax court, which sustained the deficiency and penalties assessed by the Commissioner. See Goldman v. Commissioner, T.C.Memo. 1993-480, 66 T.C.M. (CCH) 1060, 1993 WL 414846 (1993). This appeal followed.

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 sent appellants a form entitled "Offer of Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and of Acceptance of Overassessment" (Form 870-AD), which permitted the $15,000 deduction, recalculated appellants' 1981 taxes, and assessed interest. Both appellants signed and returned this form, which referred only to their tax liability for 1981 and made no reference to any other tax year.

DISCUSSION

A. Settlement Agreement

Appellants first contend that they are not liable for any tax deficiency for 1982 because the settlement agreement reached with Appeals Officer Margolis resolved the tax consequences of their investments in MCDA-II not only for 1981 but for all subsequent years. The tax court held that the settlement agreement applied only to appellants' 1981 tax liability and did not cover any subsequent years. To the extent that it constitutes a finding of fact, the tax court's determination that an agreement was reached by the parties is reviewable for clear error. Sullivan v. Commissioner, 985 F.2d 704, 706 (2d Cir.1993). The Court reviews de novo, however, the tax court's interpretation of the clear terms of that agreement. See Rothenberg v. Lincoln Farm Camp, 755 F.2d 1017, 1019 (2d Cir.1985).

Under the settlement agreement appellants agreed to waive all restrictions on the assessment and collection of the deficiency in their 1981 joint tax return, while the recalculated amount permitted appellants to deduct their $15,000 investment in MCDA-II for that year. The agreement further removed the addition to tax for an overstatement of a deduction's value, pursuant to section 6659 of the Code. In return, appellants agreed to a deficiency determination:

Pursuant to the provisions of section 6213(d) of the Internal Revenue Code of 1986 or corresponding provisions of prior internal revenue laws the undersigned offers to waive the [notice] restrictions provided in section 6213(a) of the Internal Revenue Code of 1986 or corresponding provisions of prior internal revenue laws and to consent to the assessment and collection of the following deficiencies with interest as provided by law.

The agreement then specifically assessed appellants' deficiency of $25,374 for the year ending December 31, 1981, and did not mention appellants' tax liability for any other year. Both appellants executed their consent to the deficiency amount, and the agreement subsequently was "[a]ccepted for [the] Commissioner" by Vincent J. Simone, Associate Chief of the Long Island Appeals Office, who was Appeals Officer Margolis' superior.

As the settlement agreement constituted a contract, general principles of contract law must govern its interpretation. See Treaty Pines Invs. Partnership v. Commissioner, 967 F.2d 206, 211 (5th Cir.1992); cf. SEC v. Levine, 881 F.2d 1165, 1178-79 (2d Appellants also argue that Appeals Officer Margolis' November 2, 1988 dated proposal letter, and not the Form 870-AD, constituted the settlement agreement between the parties. We fail to see how this argument helps the appellants. The letter informed appellants that "[y]ou will be allowed as an ordinary deduction in the initial year (1981) 100% of your 'out-of-pocket [sic] cash investment." The letter explicitly limited this offer, however, to the 1981 tax year: "Other than as provided [above], no losses are allowable in any year as a result of your investment in the Mid-Continent Drilling Associates Partnership." Goldman signalled his assent to this offer by checking an acceptance provision and returning the letter. This agreement subsequently was memorialized in the Form 870-AD. The proposal letter, however, merely contained a conditional offer of settlement from the Commissioner that could not be binding until accepted by both appellants and executed in a separate closing agreement. See Klein v. Commissioner, 899 F.2d 1149, 1153 (11th Cir.1990) (holding proposal letter from IRS was conditional offer that required execution of closing agreement to constitute binding contract). Further, Appeals Officer Margolis was assigned to review only appellants' 1981 tax liability, and he had no authority to bind the Commissioner to a settlement for a term of years. See Dorl v. Commissioner, 507 F.2d 406, 407 (2d Cir.1974) (per curiam) (holding...