Beginning of SOL on Assessments for Nonpartnership Items

E, K and others were partners (Ps) in GIA partnership during tax years 19831986. In April 1990, the IRS disallowed loss and deduction items for GIAs equipment-leasing activities in a Notice of Final Partnership Administrative Adjustment. Attorney R represented Ps and petitioned the Tax Court for readjustment of the taxes.

In January 1991, R wrote to IRS attorneys to inquire about the possibility of settlement and to request a closing agreement to settle items not before the Tax Court, such as penalties and phantom income. In response, the IRS offered the partners a settlement (IRS Offer).

A series of counteroffers and rejections ensued. In an Oct. 17, 1992 letter, the IRS confirmed the terms of the original offer. On Oct. 22, 1992, the IRS demanded that Rs clients accept or reject the IRS offer before Dec. 1, 1992. R wrote to the IRS on Nov. 13, 1992, requesting an extension and also addressed the need for a closing agreement, but only as to all issues that are not partnership item issues and therefore are not before the Court in this proceeding. R clarified that he would ask his clients to accept the IRS Offer, [n]otwithstanding this request, attached a model acceptance form for his clients to sign (R acceptance form) and asked the IRS attorneys, Will you please confirm by fax that a letter in this form received in your office within the time specified would constitute a valid acceptance of the settlement? The IRS attorney responded on Nov. 17, 1992: We agree with your outline of the settlement terms set out in the Draft Acceptance Form. In addition, we agree to your request for an additional 30 days to solicit acceptance of the settlement. Attached is our anticipated closing agreement language. On Dec. 30, 1992, R mailed a series of the R acceptance forms, signed by Ps.

On Feb. 18, 1993, IRS attorneys expressed a reservation to the settlement, writing in bold type that no settlement occurs until closing agreements are signed by your clients and countersigned by the appropriate Service representative. On Sept. 10, 1993, R submitted signed closing agreements for Ps, countersigned by the appropriate IRS representative on Sept. 22, 1993.

SOL Dispute

The parties dispute the date on which the statute of limitations (SOL) began to run. The taxpayers allege it began the day the R acceptance forms were submitted, Dec. 30, 1992; the IRS contends it began Sept. 22, 1993, the date the IRS countersigned the closing agreements. The IRS assessed deficiencies against Ps as individuals between Jan. 3, 1994 and Aug. 8, 1994.

Under Sec. 6229(f), the IRS may assess a partnership-related tax item if the assessment occurs within one year after the date on which the items become nonpartnership items. A partnership item converts to a nonpartnership item when the IRS enters into a settlement agreement with the partner with respect to such items; Sec. 6231(b)(1)(C). Granting summary judgment, the Court of Federal Claims concluded that the parties agreed to a closing agreement to finalize the tax settlement; thus, the date of signing of the closing agreements, Sept. 22, 1993, was the proper date to begin the SOL running. The taxpayers appealed to the Federal Circuit.

Appeal

Tax settlements are governed by general principles of contract law; the formation of a contract requires mutual assent to essential terms; Linear Tech. Corp., 275 F3d 1040 (Fed.Cir.2001). In accepting an offer, the offeree cannot change, add to or qualify the terms of the contract in any material respect.

Settlement of an issue before the Tax Court does not require any particular method or form and can be accomplished by letters of offer and acceptance between the IRS attorneys assigned to the case and the taxpayers; see Cinema 84, 294 F3d 432 (2d Cir. 2002). In contrast, settlement of items not before the Tax Court requires the execution of a Form 906, Closing Agreement, signed by an appropriate senior IRS employee; see Secs. 7121, 7122; Treaty Pines Inv. Pship, 967 F2d 206 (5th Cir. 1992).

In granting summary judgment to the IRS, the Court of Federal Claims determined that Rs clients and the IRS clearly contemplated the need to execute a closing agreement to finalize the settlement; Gingerich, 54 Fed. Cl. 222, 229 (2002). However, R and the IRS attorney submitted conflicting affidavits concerning the requirement (or lack thereof) for a closing agreement. In addition, the correspondence, especially Rs Nov. 13, 1992 letter and the Nov. 17, 1992 response, suggest that the R acceptance form could have been sufficient to accept the IRS Offer without further documentation. This evidence presents genuine issues of material fact that must be resolved by further proceedings, rather than summary judgment; thus, the summary judgment is vacated and remanded to determine whether the parties required a closing agreement to effect the settlement of issues before the Tax Court.

Fenton Gingerich, Fed. Cir., 12/2/03