Spendthrift Farm, Inc., In re, 90-6063

• Decision Date: 01 May 1991
• Docket Number: No. 90-6063,90-6063
• Citation: 931 F.2d 405
• Parties: -924, 91-1 USTC P 50,220 In re SPENDTHRIFT FARM, INC., Debtor. SPENDTHRIFT FARM, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 405

931 F.2d 405

67 A.F.T.R.2d 91-924, 91-1 USTC P 50,220

In re SPENDTHRIFT FARM, INC., Debtor.

SPENDTHRIFT FARM, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 90-6063.

United States Court of Appeals, Sixth Circuit.

Argued April 1, 1991.

Decided May 1, 1991.

Joseph H. Terry, Barbara B. Edelman (argued), and James A. Nitsche, Wyatt, Tarrant & Combs, Lexington, Ky., for plaintiff-appellant.

Louis DeFalaise, U.S. Atty., David Middleton, Asst. U.S. Atty., Office of the U.S. Atty., Lexington, Ky., Lawrence P. Blaskopf, U.S. Dept. of Justice, Tax Div., Gary R. Allen, Acting Chief, Richard Farber, Murray S. Horwitz, and Teresa McLaughlin (argued), U.S. Dept. of Justice, Appellate Section, Tax Div., Washington, D.C., for defendant-appellee.

Before RYAN and SUHRHEINRICH, Circuit Judges, and McRAE, Senior District Judge. ^*

RYAN, Circuit Judge.

Plaintiff, Spendthrift Farm, Inc., appeals the district court's order reversing a bankruptcy court decision which sustained objections to statutory interest for past taxes arising under I.R.S. Sec. 6601(d)(1). This appeal addresses whether the district court correctly found that the closing agreement between the IRS and the plaintiff did not preclude the IRS from assessing restricted interest. For the following reasons, we affirm.

I.

This case arises from the IRS' proof of claim in the Chapter 11 Bankruptcy proceedings of Spendthrift for taxes and interest assessed against Spendthrift. The IRS audited Spendthrift in 1987 and proposed increases in Spendthrift's taxable income for taxable years 1981-1984. Charles Hembree, Spendthrift's tax attorney, and Gerald Huber, an IRS appeals officer, reached a tentative settlement, pursuant to 26 U.S.C. Sec. 7121, in the spring of 1989. In April 1989, Huber sent Hembree a proposed settlement which included IRS claims against Combs Stallions, a corporation related to Spendthrift. Under the proposed settlement, Spendthrift would concede proposed increases in its taxable income in exchange for the IRS conceding its asserted claims for increases in Combs Stallions' taxable income.

On May 3, 1989, Hembree telephoned Huber concerning the tentative settlement and proposed changes in the language of the agreement. Hembree claims he told Huber that he wanted it made clear in the agreement that Spendthrift was not liable for statutory interest arising under 26 U.S.C. Sec. 6601(d)(1), known as "restricted interest," for the 1981 and 1982 tax years. In contrast, Huber maintains that the telephone conversation was brief and that although Hembree discussed restricted interest, he told Hembree that he was not sure whether restricted interest was involved. Huber denies telling Hembree that he was not looking for restricted interest and claims that he thought Hembree's problem was with the bankruptcy procedures. Nevertheless, Huber asked Hembree to pencil in the proposed changes and send them to him.

Hembree returned the draft agreement with a handwritten proposed change to Huber. The change added the statement, "Solely for purposes of determining the amounts of net operating loss carryovers to years after the year [1984]," at the beginning of the sentence "[t]he taxable income of Spendthrift Farm, Inc., shall be increased by $1,844,270, $2,467,730, $1,292,935 and $784,891 for the years [1981], [1982], [1983], [1984], respectively." Hembree stated in a cover letter to Huber that the change was needed in the agreement so that Spendthrift would not be liable for any outlay of funds except for a tax deficiency in 1984, plus interest. Huber thought the proposed language had no effect on restricted interest, and agreed to its addition.

The bankruptcy court approved the proposed closing agreement and the IRS executed it on June 5, 1989.

In October 1989, the IRS submitted a proof of claim to the bankruptcy court in the amount of $1,198,688.47 for restricted interest. Spendthrift objected to this claim in November 1989, arguing that the closing agreement foreclosed the claim. Spendthrift maintained that although not specifically stating it in the cover letter or agreement, Hembree added the "solely" language to the closing agreement in order to prevent Spendthrift from being liable for restricted interest. In response, the IRS contended that because the closing agreement did not specifically mention that the IRS waived restricted interest, such interest was not waived.

Following a hearing in January 1990, the bankruptcy court sustained Spendthrift's objection to the assessment of the IRS' claim for statutory interest finding that the closing agreement precluded restricted interest. The IRS filed a motion to alter and amend the order, but the bankruptcy court overruled the motion. The IRS appealed to the district court.

The district court reversed the decision of the bankruptcy court, finding that the closing agreement did not bar the IRS' claim for restricted interest. The court also remanded the case back to the bankruptcy court for a determination of the amount of restricted interest due because "the agreement bars the use of the figures conceded by Spendthrift in the closing agreement in the calculation of the restricted interest." Spendthrift appeals.

II.

Spendthrift argues that the...