S&oliquidating Partnership v. Commissioner of Internal Revenue

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-1631
S&O LIQUIDATING PARTNERSHIP, et al.,
Petitioners-Appellees,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
Appeals of: David Beach, Robert M. Berliner,
Jay I. Borow, et al.
Appeal from the United States Tax Court
No. 7131-98--John O. Colvin, Judge.
Argued November 5, 2001--Decided May 23, 2002
Before COFFEY, ROVNER and EVANS, Circuit
Judges.
COFFEY, Circuit Judge. The Tax Court
permitted several former partners of the
now-defunct accounting firm of Spicer &
Oppenheim ("Spicer") to intervene and
participate in a global settlement
regarding the partnership’s tax returns.
The appellants, who are the original
partners and signatories to the
agreement, objected to the intervention
but nonetheless signed closing agreements
that resolved their disputes with the
Commissioner prior to filing this appeal
of the Tax Court’s decision. Because the
closing agreements render this appeal
moot, we dismiss for lack of subject
matter jurisdiction.
I. FACTUAL BACKGROUND
Spicer was a general partnership that
performed certified public accounting
services and was headquartered in New
York City. The firm suffered substantial
financial difficulties caused by the
stock market crash of 1987 and the loss
of a number of clients. In an effort to
retain its partners, Spicer borrowed
money against its accounts receivable,
i.e., its anticipated future income, and
used this money to make cash payments to
the partners. Spicer recorded these

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payments as debts owed to the
partnership, and these debts exceeded the
combined value of the partnership’s
income and the partners’ capital
accounts. That is to say, the business
ran a deficit, as reflected by the amount
invested by each partner in the
partnership, throughout much of the late
1980s.
During the firm’s taxable year ending
September 30, 1990, a total of twenty-
nine partners--including the appellants--
withdrew from the partnership. The amount
that the withdrawing partners were
obligated to reimburse Spicer totaled
approximately $6.25 million.
Unfortunately, none of these partners
attempted to repay his or her debts at
the time of withdrawal, and a dispute
arose over the proper treatment of this
$6.25 million for purposes of paying
taxes. The departing partners
characterized their distributions as
"loans" rather than taxable "gross
income." The remaining partners, on the
other hand, insisted that the
distributions should be reported as
"deemed distributions" or "guaranteed
payments" that were deductible on the
Spicer’s tax returns and chargeable as
gross income to the departing partners.
I.R.C. sec. 707(c). In the end, Spicer’s
executives claimed the entire amount as a
deductible guaranteed payment and advised
the withdrawing partners that they should
report their receipt of money as "gross
income" for purposes of personal tax
liability during the 1990 tax year.
Spicer ceased doing business in November
1990 and changed its name to the S&O
Liquidating Partnership ("S&O"). The
Internal Revenue Service ("IRS") then
conducted a partnership-level audit of
S&O’s records and ultimately disallowed
the partnership’s deductions for the
payments it made to the withdrawing
partners. S&O protested this ruling and
filed a formal challenge in the Tax
Court. Eleven of the twenty-nine partners
who had withdrawn money from the firm
elected to participate in this
proceeding. (This group of partners was
led by Appellant David T. Beach and
became known as "the Beach group"). In
December 1999, after nine years of
litigation, a "Stipulation of Settlement"
or "Settlement Agreement" was reached
among the Beach group, the Commissioner,

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and S&O. The agreement contained numerous
provisions, including an explicit
statement that the settlement was
intended to "resolve all of the issues in
this case."
Participants in the settlement were
required to: (1) file amended individual
tax returns for 1997; and (2) execute
written "closing agreements" that
definitively and conclusively itemized
the amount of their tax liability and
listed their outstanding obligations to
the United States. The participants also
agreed to withdraw their claim stating
that the guaranteed payments were loans
rather than income and, thus, agreed to
pay income tax on the disbursements.
However, the participating partners also
were granted two significant tax breaks.
First, the IRS allowed them to avoid
seven years of interest and penalties by
treating the payment as due in 1997
rather than 1990. Second, in what the
parties refer to as "the concession," S&O
agreed to refrain from claiming a
$467,000 tax deduction on behalf of the
partnership. The settlement provided that
the $467,000 would be allocated equally
among every partner who joined in the
settlement, resulting in each participant
being excused from reporting his share of
that concession as income.
The most controversial aspect of the
Settlement Agreement--which caused this
appeal--was a provision that granted ten
additional Spicer partners, who neither
prosecuted nor supported the litigation,
an option to intervene in the settlement
at this late date and receive a portion
of the $467,000 concession. Specifically,
the agreement provided that each partner
who joined in the settlement would
receive a proportional share of the
concession if he or she: (1) executed
closing agreements and filed amended
individual tax returns for 1997; and (2)
filed these documents within two weeks
from the date that the Tax Court approved
the Settlement Agreement itself. Tax Ct.
R. 248(b). The IRS insisted on this
clause because it wished to reach a
global settlement involving as many of
the former Spicer partners as possible.
On the other hand, the Beach group
members agreed to this provision only
reluctantly, for they realized that since
the concession was equally divisible
among each participant, every individual

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partner would receive a smaller share of
the concession as a result of the total
number of parties being increased.
Ultimately, seven additional Spicer
partners elected to join in the
settlement, and the court thereafter
issued an order on March 15, 2000
permitting their intervention upon the
submission of closing agreements and
amended tax returns within two weeks.
While these "new" partners submitted
their returns on March 30, 2000--one day
after the deadline mandated by the
Settlement Agreement--Judge Colvin
overruled the Beach group’s objection
that the submissions were untimely,
stating as follows:
While the Court filed the notices of
election to participate on March 15,
2000, the first possible date for
participation by the new participating
partners would be March 16, 2000. Thus,
it was reasonable to interpret from the
deadline by counting two weeks from March
16, 2000, with March 17, 2000 counted as
Day One. Thus . . . we find that the new
participating partners and respondent
correctly calculated March 30, 2000 as
the deadline.
The court further noted that the
Settlement Agreement did not contain any
"time-essence" provision and also found
that, even assuming that the Spicer
partners’ documents were filed one day
late, the partners had committed only an
immaterial breach of the agreement that
failed to warrant denying them a place at
the table.
After the Commissioner moved to enforce
the Settlement Agreement, the Beach group
filed a brief in opposition to the
motion. The group members stated that
they were responding "for the limited
purpose of preserving appellate rights"
and again argued that the Tax Court erred
by accepting the submissions of the newly
participating partners. Without
addressing this argument, the Tax Court
issued an order enforcing the settlement
on behalf of the Commissioner, S&O, and
all eighteen partners--including the
seven intervening Spicer partners.
Now it must be recalled that, despite
the court’s enforcement of the Settlement
Agreement, each partner who wished to

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take advantage of the concession remained
obligated to file a closing document with
the IRS delineating the precise amount of
his or her tax liability for 1997.
Several days after the Tax Court’s
decision was entered, each member of the
Beach group executed a revised closing
document recalculating his or her
liability. The revisions were necessary
because the Beach group’s original
closing documents and tax computations
had been calculated and filed under the
assumption that its share of the
concession would be reduced by the amount
necessary to accommodate the
participation of all ten of the "new"
partners. Thus, since only seven "new"
partners joined in the settlement, each
Beach group member’s revised closing
documents were adjusted to reflect a
greater share of the concession than the
amount set forth in his or her original
documents.
The revised closing documents all state
that they are intended to "globally
resolve the dispute" and that the
settlement was executed because "the
parties to this agreement wish to
determine with finality the amounts . . .
to be reported under the global
settlement." (Emphasis supplied). The
documents further state that "[t]his
agreement is final and conclusive." The
documents neither mention any right of
appeal nor contain any language
indicating a reservation of appellate
rights. However, in a cover letter
forwarding the revised closing agreements
to the Commissioner, counsel for the
Beach group stated: "The submission of
these documents should not be construed
as a waiver of any appellate rights of my
clients." Shortly after submitting the
revised closing statements to the
Commissioner and the Tax Court, the Beach
group filed a Notice of Appeal
challenging the court’s decision that the
seven Spicer partners’ submissions were
timely filed in accordance with the terms
of the Settlement Agreement.
II. DISCUSSION
The Commissioner contends that we may
not consider the merits of this appeal
because the appellants’ voluntary and
final settlement of all issues before the
Tax Court has rendered this action moot.
We agree with the Commissioner, for we

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are convinced that the Settlement
Agreement disposed of the underlying
controversy between the parties and
deprived us of jurisdiction over this
appeal. U.S. Const. art. III sec. 2; United
States Bancorp Mortg. Co. v. Bonner Mall
P’ship, 513 U.S. 18 (1994).
A closing agreement is a written
agreement between an individual and the
Commissioner that settles or "closes" an
individual’s liability for taxes during
the period governed by the agreement.
Matter of Avildsen Tools & Mach. Inc.,
794 F.2d 1248, 1253 (7th Cir. 1986). If
the document is signed by an individual
and accepted by the Commissioner, then it
is final, conclusive, and binding upon
both the taxpayer and the IRS, for the
purpose of the agreement is to terminate
and dispose of tax controversies once and
for all. United States v. National Steel
Corp., 75 F.3d 1146, 1150 (7th Cir.
1996). Our colleagues on the Ninth
Circuit recently dismissed a post-closure
appeal and emphasized the finality to be
accorded to a closing agreement by
stating as follows:
In signing the closing agreement, Ms.
Hopkins explicitly agreed to have her tax
liability determined by the closing
agreement. If Ms. Hopkins wished to try
later to avoid the tax consequences
flowing from that agreement, she had a
duty to preserve any possible defenses to
personal liability in that agreement.
Having failed to do so, Ms. Hopkins
should not now be permitted to reopen the
question of her liability. . . .
Permitting her to do so would undermine
the very purpose of entering into a
closing agreement in the first place.
In re Hopkins, 146 F.3d 729, 733 (9th
Cir. 1998). In other words, the execution
of a closing agreement resolves the
underlying controversy and moots the case
absent a showing of "fraud, malfeasance,
or misrepresentation of a material fact."
26 U.S.C. sec. 7121(b).
In this case, although the Beach group
opposed the entry of a final order
allowing the Spicer partners to
participate in the settlement, the group
proceeded to file amended tax returns
along with "final and conclusive" closing
agreements shortly after the Tax Court
entered its decision. Thus, by its own

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actions, the group manifested an intent
to proceed with the settlement and adhere
to its requirements. The group waived any
objections to the Tax Court’s ruling on
the inclusion of the Spicer partners and,
therefore, mooted the underlying
controversy.
Members of the Beach group argue that
they had no meaningful choice but to sign
the revised closing agreements, for the
terms of the Settlement Agreement
required the filing of such materials
within a reasonable time after the court
ordered its enforcement. (Reply at 5.) We
reject this argument, for it contradicts
the very language of the Settlement
Agreement, which explicitly provides that
any partner could refuse to sign the
documents. According to the agreement, if
any partner chose to reject the revised
terms of settlement, then the Government
was "entitled to release such party’s
closing agreement and any amended return
to [the IRS] for processing." In other
words, if a partner refused to submit a
revised statement, then his or her
original statement would become the final
one. Although Beach group partners who
filed the original statement would
receive smaller shares of the $467,000
concession as a result of the judge’s
decision to allow the last-minute
intervention of the Spicer partners, this
does not imply that any Beach partner was
under some type of compulsion to file the
revisions. An individual is not deprived
of her freedom of choice simply because
neither option offers the precise package
she wants. See Hitke v. Commissioner, 296
F.3d 639 (7th Cir. 1961).
By executing the revised closing
agreements, the Beach group took
affirmative steps to obtain better
settlement terms than it would have
received if it had adhered to the terms
of the original agreements. A party who
has accepted the benefits of a contract
cannot "have it both ways" by
subsequently attempting to avoid its
burdens. Skelton v. GM Corp., 860 F.2d
250, 260 (7th Cir. 1988). By acting to
obtain more favorable settlement terms,
the Beach group must also bear any
burdens that have accrued as a result of
the settlement, such as waiving the right
to appeal any rulings of the Tax Court in
the underlying litigation. See id.

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We also reject the appellants’ argument
that we should give effect to the letter
that their attorney mailed to the IRS,
which stated his view that the revised
closing agreements must "not be construed
as a waiver of any appellate rights."
(Br. at 18-19.) A duly approved closing
agreement, signed by the participating
individuals, is a contract that is
governed by federal common law and is
interpreted under "standard principles of
contract law--more precisely, the core
principles of the common law of contract
that are in force in most states."
National Steel, 75 F.3d at 1150. Thus, if
a closing agreement’s terms are clear and
unambiguous, we are obligated to enforce
the language as it is written, without
resort to extrinsic evidence or
interpretive devices, such as a letter
from a party’s attorney purporting to
attach a hidden meaning to anything
therein. See id.; Rink v. Commissioner,
47 F.3d 168, 171 n.3 (6th Cir. 1995).
The closing agreements clearly,
unequivocally, and unambiguously state
that they are "final and conclusive"
documents that "globally resolve[d]" this
tax dispute. Neither the closing
agreement nor the Settlement Agreement
contains any provision that modifies this
language and preserves the appellate
rights of the Beach group members. Thus,
we are convinced that the closing
agreements have mooted any present
challenge to the Tax Court’s prior inter
pretation of the Settlement Agreement,
meaning that we lack jurisdiction over
this appeal. See Anheuser-Busch Inc. v.
Local #744, 280 F.3d 1133, 1141 (7th Cir.
2002); Funeral Fin. Sys. v. United
States, 234 F.3d 1015, 1018 (7th Cir.
2000); Caisse Nationale de Credit
Agricole v. CBI Indus. Inc., 90 F.3d
1264, 1272 (7th Cir. 1996).
In so holding, we note that we are
unpersuaded by the argument that
dismissal would punish the group members
for choosing not to "breach the
Settlement by refusing to execute the
documents required" by the agreement.
(Br. at 18.) A party cannot vitiate a
closing agreement by attacking the
provisions of the agreement that were
negotiated, drafted, approved and signed
by the party. The Beach group appellants
were represented by learned and
experienced counsel during the entire

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nine years that this case was pending. It
was foreseeable that the Tax Court would
interpret the Settlement Agreement in a
manner that would permit the intervention
of the seven Spicer partners, yet the
appellants thereafter signed a "final and
conclusive" closing agreement that failed
to preserve their right to dispute this
ruling. "Men must turn square corners
when they deal with the Government." FCIC
v. Merrill, 332 U.S. 380, 385 (1947).
Thus, this appeal must be dismissed. In
re Miller, 174 B.R. 791, 797 (BAP 1994),
aff’d, 81 F.3d 169 (9th Cir. 1996)
(table).
III. CONCLUSION
We hold that this case was settled when
the appellants voluntarily chose, after
the Tax Court entered its decision, to
execute contracts that were "final and
conclusive" resolutions of their disputed
tax liability. The absence of a live case
or controversy between the parties
deprives us of jurisdiction to entertain
the merits of the appeal, and this case
is therefore DISMISSED.
It is so ordered.

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