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S&O Liquidating Partnership v. Commissioner of Internal Revenue

May 23, 2002


Appeal from the United States Tax Court No. 7131-98--John O. Colvin, Judge.

Before Coffey, Rovner and Evans, Circuit Judges.

The opinion of the court was delivered by: Coffey, Circuit Judge.

Argued November 5, 2001

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.


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 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, 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 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 ...

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