“A mutual mistake exists where there has been a meeting of the minds of the parties and an agreement actually entered into but the agreement in its written form does not express the actual intention of the parties.”
How later courts described this case
- “A mutual mistake exists where there has been a meeting of the minds of the parties and an agreement actually entered into but the agreement in its written form does not express the actual intention of the parties.”
Written by the judges who cited it.
The opinion
United States Tax Court
T.C. Memo. 2025-71
ARDEN ROW ASSETS, LLC, NATURAL AGGREGATES PARTNERS,
LLC, PARTNERSHIP REPRESENTATIVE,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
__________
Docket No. 3817-23. Filed July 8, 2025.
__________
Daniel A. Rosen, Daniel B. Wharton, Michael B. Coverstone, Jay R.
Nanavati, Michael Todd Welty, Andrew W. Steigleder, Lyle B. Press,
Macdonald A. Norman, Merima Mahmutbegovic, and Andrew M.
Weiner, for petitioner.
Vivian Bodey, Brandon M. Chavez, William C. Bogardus, Daniel C.
Chavez, Kristin H. Joe, Matthew A. Cappel, Alei A. Carrington, Brittany
M. Reid, and Nick G. Nilan, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Arden Row Assets, LLC (Arden Row), claimed a
$57,080,000 noncash charitable contribution deduction for its short
taxable year December 11 to 31, 2018 (2018 taxable year), for the grant
of a conservation easement (easement deduction), which respondent
disallowed in its entirety. During this proceeding the parties engaged in
settlement discussions and exchanged letters for the purpose of reaching
a settlement. Petitioner has filed a Motion to Enforce Settlement
asserting that the exchange of letters resulted in a binding agreement.
Respondent argues that the exchanged letters did not result in a binding
agreement. We hold that the parties did not enter into a binding
agreement.
Served 07/08/25
2
[*2] FINDINGS OF FACT
The findings of fact are based on the parties’ Stipulations of Facts
with attached Exhibits, testimony at an evidentiary hearing, and
Exhibits admitted at the hearing.
Arden Row is treated as a partnership for federal tax purposes
and is subject to the partnership audit and litigation procedures enacted
by the Bipartisan Budget Act of 2015 (BBA), Pub. L. No. 114-74, 129
Stat. 584, for its 2018 taxable year. Natural Aggregates Partners, LLC
(Natural Aggregates), is Arden Row’s partnership representative. See
§ 6223(a) (requiring a partnership to designate a partnership
representative under the BBA). 1 Matthew S. Kaynard is the designated
individual. See Treas. Reg. § 301.6223-1(b)(3) (requiring a partnership
to have a designated individual where the partnership representative is
an entity). When the Petition was timely filed, Arden Row’s principal
place of business was in Alabama. See § 6234(a).
I. Arden Row Transaction
Natural Aggregates is owned, directly or indirectly, by Matthew
Ornstein and Frank Schuler. The two men are real estate professionals.
From 2012 to 2018 they organized, promoted, and implemented
approximately 138 syndicated and nonsyndicated conservation
easement transactions (Ornstein-Schuler transactions). Mostly, they
conducted these activities through Ornstein-Schuler Investments, LLC
(OSI), which they coowned, but also used other entities in which they
held interests (collectively, related entities). They retained minority
interests, directly or indirectly, in the partnerships that engaged in the
syndicated conservation easement transactions, and their related
entities served as the tax matters partner or partnership representative
for each partnership. During 2018 Mr. Kaynard was OSI’s chief
operating officer and general counsel.
From 2012 to 2018 Messrs. Ornstein and Schuler also engaged in
at least 15 conservation easement transactions for which they did not
seek outside investors, i.e., the transactions were nonsyndicated. In
2018 they formed Natural Aggregates to engage in nonsyndicated
conservation easement transactions. They owned nearly all of the
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect at all relevant times, and regulation references are to
the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
3
[*3] partnerships used to donate the conservation easements in the
nonsyndicated transactions.
On December 11, 2018, Underwood Assets, LLC (Underwood), an
entity owned by unrelated individuals, contributed 208.04 acres of real
property to Arden Row for a 100% interest. On December 14, 2018,
Natural Aggregates acquired 98% of Arden Row. The parties did not
stipulate the manner of acquisition. However, Schedule M–2, Analysis
of Partners’ Capital Accounts, attached to Arden Row’s 2018 Form 1065,
U.S. Return of Partnership Income, shows cash capital contributions of
$110,900. The owners of Underwood who contributed real property to
Arden Row owned the remaining 2%.
On December 19, 2018, Arden Row donated a conservation
easement to a qualified section 501(c)(3) organization and claimed a
$57,080,000 easement deduction on its 2018 partnership return.
Natural Aggregates is the investment-tier partnership in the Arden Row
transaction.
During 2018 Natural Aggregates owned 98% interests in eight
entities including Arden Row and Kellum Resources, LLC (Kellum
Resources), which also engaged in a conservation easement transaction
during 2018. Kellum Resources has a case docketed before this Court at
No. 2585-23 involving the disallowance of a $48,696,199 easement
deduction. Natural Aggregates is Kellum Resources’ partnership
representative, and Michael Todd Welty of Todd Welty, P.C. (Welty PC),
and other Welty PC attorneys are counsel in that case. Messrs. Ornstein
and Schuler stopped promoting syndicated conservation easement
transactions in early 2019.
II. Settlement Discussions
At least 128 cases have been filed with this Court involving
Ornstein-Schuler transactions (Ornstein-Schuler cases) including this
case. Welty PC, counsel for petitioner in this case, has represented the
tax matters partner or partnership representative in over 120 Ornstein-
Schuler cases. Mr. Welty is Welty PC’s principal. From April 2019 to the
date of the evidentiary hearing in this case, Mr. Welty spent
approximately 75% of his work hours on matters for Mr. Ornstein, Mr.
Schuler, and OSI including matters relating to the Ornstein-Schuler
transactions. He participated in settlement discussions and was
responsible for evaluating settlement proposals and recommending to
clients whether to pursue the proposals. Welty PC attorney Macdonald
4
[*4] Norman represented petitioner during the audit, drafted the
Petition, and prepared for litigation. Former Welty PC attorney Kevin
Johnson worked on trial preparation, including discovery. Lyle Press
also worked on the Ornstein-Schuler cases.
Around April 2019 Mr. Welty contacted a manager in the Internal
Revenue Service (IRS) Examinations Unit to discuss settling the
Ornstein-Schuler cases. Around that time attorneys from Skadden,
Arps, Slate, Meagher & Flom LLP (Skadden Arps), including Armando
Gomez, began representing the partnerships that claimed the easement
deductions and joined Mr. Welty in settlement discussions with the IRS.
Mr. Gomez has not filed an entry of appearance in this case. With the
addition of the Skadden Arps attorneys, counsel changed tactics and
approached the IRS National Office of Chief Counsel (National Office)
to discuss a global settlement of the Ornstein-Schuler cases. Settlement
discussions continued during 2019 and 2020. However, the IRS had not
yet completed the audits of most Ornstein-Schuler partnership returns,
and the National Office declined to pursue a settlement at that time.
Within the National Office, there is a group of management-level
attorneys assigned to oversee conservation easement cases, which we
refer to as the Oversight Committee.
III. IRS Settlement Initiative
On June 25, 2020, the IRS announced a settlement initiative for
taxpayers with syndicated conservation easement cases pending before
this Court. I.R.S. News Release IR-2020-130 (June 25, 2020). On
October 1, 2020, the IRS issued guidance setting forth the terms of the
initiative. I.R.S. Chief Counsel Notice CC-2021-001 (Oct. 1, 2020). The
IRS offered settlements that disallowed the easement deductions in
their entirety and allowed deductions of out-of-pocket costs that
investors incurred to participate in the easement transactions (investor
out-of-pocket costs). The IRS offered to reduce penalties to 10% to 20%
but also stated that it would concede penalties if it could not establish
compliance with supervisory approval under section 6751(b). The
initiative was not available to individuals who organized, marketed, or
implemented syndicated conservation easement transactions, referred
to in the Notice as Category One partners. In the Notice the IRS warned
that taxpayers should not expect to settle their docketed cases on better
terms. Under the initiative, investors were required to substantiate
their out-of-pocket costs and to finalize the settlements by executing
closing agreements, and the partnerships were required to consent to
the entry of decisions in this Court. Mr. Welty was familiar with the
5
[*5] terms of the 2020 settlement initiative. However, investors who
engaged in the Ornstein-Schuler transactions were not offered the
settlement because their returns were still under audit.
On July 13, 2022, Mr. Gomez again met with the National Office
including Area Counsel Robert Dillard to propose a global settlement for
approximately 128 Ornstein-Schuler partnerships including
partnerships with docketed cases and ongoing audits (July 2022
proposal). The proposal generally followed the 2020 settlement
initiative: a concession of the easement deduction in its entirety, a
deduction for investor out-of-pocket costs, and a reduction of the
penalties to 10%. Mr. Gomez proposed that Messrs. Ornstein and
Schuler receive the same settlement terms, which was inconsistent with
the 2020 settlement initiative because they are Category One partners.
At Mr. Dillard’s request, Mr. Gomez identified 138 syndicated and 15
nonsyndicated transactions that Messrs. Ornstein and Schuler had
implemented.
For settlement purposes Skadden Arps maintained a spreadsheet
of the amounts of easement deductions and investor out-of-pocket costs
for the Ornstein-Schuler transactions. In an August 19, 2022, letter to
Mr. Dillard, Mr. Gomez stated that the July 2022 proposal would result
in the disallowance of over $4 billion in easement deductions from 128
Ornstein-Schuler syndicated transactions and “would facilitate the
collection of over $1.5 billion from more than 2,000 separate investors.”
He further estimated that Messrs. Ornstein and Schuler would owe
approximately $150 million in additional tax, interest, and penalties. In
November 2022 Mr. Dillard informed Mr. Gomez that the IRS did not
agree to the July 2022 proposal but was amenable to continuing
settlement discussions consistent with, but not more favorable than, the
2020 settlement initiative.
IV. Issuance of Notice of Final Partnership Adjustment
On February 13, 2023, respondent mailed a Notice of Final
Partnership Adjustment (FPA) for Arden Row that disallowed the
$57,080,000 easement deduction in its entirety and determined an
imputed underpayment of income tax of $21,119,600. In the alternative
respondent determined that Arden Row was entitled to an easement
contribution deduction of $230,100 or $340,578. He also determined
penalties of over $8.4 million, which he has conceded for noncompliance
with section 6751(b). Discussions for a global settlement continued after
respondent issued the FPA. Mr. Gomez continued to advocate a global
6
[*6] settlement that disallowed the easement deductions in their
entirety but allowed investors to deduct their out-of-pocket costs.
V. Backdated Supervisory Penalty Approval Form
In early 2023 Welty PC learned that IRS personnel might have
backdated a supervisory penalty approval form in a different easement
case. See LakePoint Land II, LLC v. Commissioner (LakePoint),
No. 13925-17 (T.C. filed June 22, 2017). In mid-March 2023 Mr. Gomez
and Mr. Welty met with the National Office to discuss the backdated
form in LakePoint.
Petitioner did not assert respondent’s noncompliance with section
6751(b) in its Petition filed on March 21, 2023. At some point Welty PC
discovered that the IRS might have backdated the penalty approval
form for the penalties asserted in this case, but the record does not
establish when Welty PC made this discovery. On July 26, 2023, Mr.
Johnson of Welty PC sent informal discovery requests to respondent
relating to supervisory penalty approval. Respondent’s counsel Kristin
Joe requested additional time to respond, but Mr. Johnson refused, and
on August 16, 2023, petitioner filed a Request for Admissions on the
issue.
On August 29, 2023, the Court issued an opinion in LakePoint
holding that IRS personnel had backdated the penalty approval form. It
further held the Commissioner subject to sanctions for filing a false
declaration relating to the approval, the amount of which would be
determined at a later date. LakePoint, T.C. Memo. 2023-111. The next
day Mr. Gomez met with the National Office and proposed a settlement
in LakePoint that disallowed the easement deduction in its entirety,
allowed a deduction of investor out-of-pocket costs, and provided that
the Commissioner concede all penalties. 2 The National Office agreed
and suggested using the amount of the cash capital contributions shown
on Schedule M–2 of the investment-tier partnership’s return as the
amount of investor out-of-pocket costs instead of requiring investors to
substantiate their costs. The National Office indicated that the
Commissioner had used the investment-tier partnership’s Schedule
M–2 as an approximation of investor out-of-pocket costs for settlements
in other syndicated easement cases.
2 The Wall Street Journal published an article about the backdated penalty
approval forms in this and other cases on September 29, 2023. See Editorial, A Case of
Tax Fraud—at the IRS, Wall St. J., Sept. 29, 2023, at A12.
7
[*7] The parties later decreased the amount of deduction from the
amount shown on Schedule M–2 to exclude the out-of-pocket costs of
Messrs. Ornstein and Schuler and their related entities. Messrs.
Ornstein and Schuler and their related entities were not entitled to
deduct their out-of-pocket costs because they were Category One
partners as defined in the 2020 settlement initiative. As part of the
settlement the taxpayer in LakePoint agreed not to seek an award for
attorney’s fees and to withdraw a request under the Freedom of
Information Act for documents relating to supervisory penalty approval.
LakePoint was Welty PC’s first settlement of an Ornstein-Schuler
transaction.
VI. Schedule M–2 as a Proxy for Investor Out-of-Pocket Costs
For syndicated conservation easement transactions, the amount
of cash capital contributions shown on the investment-tier partnership’s
Schedule M–2 generally approximates investor out-of-pocket costs. In a
typical syndicated transaction, two entities are formed, one to hold the
real property and donate the easement, and a second to promote the
easement transaction to investors. The latter entity is the investment-
tier partnership. The investors contribute cash capital to the
investment-tier partnership in exchange for interests in the partnership
and are promised easement deductions that significantly exceed their
cash investments. The investment-tier partnership uses the cash to
purchase a majority interest in the entity holding the real property and
then votes to grant the conservation easement.
Under this structure the amount of the investors’ cash capital
contributions to the investment-tier partnership, which is shown on the
investment-tier partnership’s Schedule M–2, generally approximates
the investors’ out-of-pocket costs to engage in the syndicated
conservation easement transaction although it may not capture all
investor costs. However, for nonsyndicated easement transactions there
is no infusion of cash capital from the sale of interests in the investment-
tier partnership to investors who want to claim the promised easement
deduction. There may not be any outside investors. Accordingly, for a
nonsyndicated transaction the investment-tier partnership’s Schedule
M–2 may not approximate investor out-of-pocket costs incurred to
participate in the easement transaction especially where the
investment-tier partnership owned multiple entities.
8
[*8] VII. Exchange of Letters
Around September 2023, after the Court’s opinion in LakePoint,
the National Office told Ms. Joe and her cocounsel Matthew Cappel to
review the supervisory penalty approval in this case. Ms. Joe and Mr.
Cappel determined that there was an issue with respondent’s
compliance with section 6751(b). Ms. Joe alerted the National Office,
and the National Office decided to concede the penalties. On October 13,
2023, Ms. Joe notified Mr. Johnson of Welty PC that respondent was
conceding the penalties for possible noncompliance with section 6751(b).
She also objected to outstanding discovery requests relating to section
6751(b) compliance as moot.
Shortly after respondent conceded the penalties, the National
Office decided to propose a settlement in this case and other Ornstein-
Schuler cases that would allow deductions for investor out-of-pocket
costs but disallow the easement deductions in their entirety. Respondent
also proposed to reduce or, alternatively, to concede penalties if he could
not establish compliance with section 6751(b). For the cases in which
respondent conceded the penalties, the National Office created a
template letter to propose the settlements (template). On October 17,
2023, Kimberly Mattonen, an attorney with the Oversight Committee,
emailed the template to Ms. Joe and other trial attorneys who were
assigned to cases in which the Commissioner conceded penalties. In her
email Ms. Mattonen wrote that the template was to be used for
syndicated easement cases. She instructed the trial attorneys to
complete highlighted items in the template that related to each case and
to send the letters to opposing counsel as soon as possible. In pertinent
part the template required the trial attorneys to “ADD AMOUNT FROM
SCHEDULE M–2, CAPITAL CONTRIBUTED (CASH) LINE.” The
template directed that “[i]n a BBA case, [counsel] must ask for the filed
version of the investment-tier’s Form 1065, including the schedu[l]e
M–2” to determine the amount of the deduction for investor out-of-
pocket costs.
On October 16, 2023, Ms. Joe told Mr. Johnson that respondent
would be making a settlement offer. Later, she requested a copy of
Natural Aggregates’ Schedule M–2 and explained that respondent
would use the amount of the cash capital contributions shown on
Schedule M–2 for the amount of the deduction of investor out-of-pocket
9
[*9] costs. 3 On October 23, 2023, Mr. Johnson provided a copy of
Schedule M–2 to Ms. Joe, and she began to complete the template
letters. Natural Aggregates’ Schedule M–2 did not disclose that it owned
eight entities.
Ms. Joe determined from a review of Form 886–A, Explanation of
Items, which was part of the revenue agent’s report, that Natural
Aggregates owned multiple entities and had engaged in more than one
conservation easement transaction during 2018. She did not follow up
with the Oversight Committee about the impact of these facts on the use
of the template. She believed that she had very specific instructions to
use the template. She was changing IRS offices and moving, and she
wanted to send the letter before she took leave for the move.
Ms. Joe provided the draft letter to her supervisor Steven Woodliff
for review. Mr. Woodliff did not have experience with easement
transaction cases or partnership cases. With Ms. Joe’s assistance, he
confirmed that the proposed deduction matched the amount shown on
Natural Aggregates’ Schedule M–2. He also confirmed that the letter
followed the template. He asked members of the Oversight Committee
whether anyone wanted to review the letter before it was sent. The only
response that he received was to send it to the Committee if he thought
it was necessary. Mr. Woodliff did not know that the Arden Row
transaction was nonsyndicated and did not have outside investors or did
not understand the impact of those facts. Ultimately, Mr. Woodliff did
not forward the letter to the Oversight Committee for review.
A. Respondent’s Purported Offer
On October 24, 2023, respondent sent Mr. Johnson a letter that
was based on the template. Both Ms. Joe and Mr. Woodliff signed the
letter. The letter incorrectly describes this case as involving a
“syndicated conservation easement transaction.” The letter further
states:
This letter is a follow-up to our discussion on October
16, 2023 and sets forth terms upon which the
Commissioner . . . would agree to resolve the docketed
matter:
3 Respondent’s records for this case would not have included Natural
Aggregates’ return because it is not relevant to the easement deduction.
10
[*10] 1. Partnership is not entitled to a charitable contribution
deduction claimed for a conservation easement of
$57,080,000.
2. Partnership is entitled to an “other deduction” of
$24,586,319. This other deduction approximates out-of-
pocket costs (i.e., the estimated amount partners paid for
their interest in an investment-tier partnership).
Respondent determined this other deduction by reference
to the investment-tier partnership’s Schedule M–2, Capital
Contributed (Cash).
3. Respondent concedes all penalties . . . because he has not
established that the procedural requirements of I.R.C.
§ 6751(b) were satisfied. Respondent and Petitioner agree
that no negative inference regarding the merits of the
penalties should be drawn from Respondent’s concession of
the penalties in the instant case.
4. Interest will accrue as required by law.
5. Respondent and Petitioner agree to resolve this case by
filing a decision document.
For convenience, we refer to this letter as the settlement proposal.
The settlement proposal did not specify a deadline for petitioner to
respond. On October 30, 2023, Welty PC asked Ms. Joe for an additional
30 days to respond; Ms. Joe agreed.
From October 17 to 26, 2023, the Commissioner sent at least eight
letters in other Ornstein-Schuler cases to Welty PC with substantially
similar terms that proposed deductions for investor out-of-pocket costs
determined by reference to the investment-tier partnership’s Schedule
M–2. These other cases involved syndicated conservation easement
transactions and had outside investors. Not all conceded penalties. On
October 31, 2023, attorneys from Skadden Arps and Welty PC including
Messrs. Gomez and Welty again met with the National Office to discuss
a global settlement of the Ornstein-Schuler cases. The National Office
declined to pursue a global settlement.
B. Petitioner’s Acceptance
When Mr. Johnson received the settlement proposal, he
recognized that Natural Aggregates did not have investor out-of-pocket
11
[*11] costs of $24,586,319 because the Arden Row transaction was
nonsyndicated and did not have outside investors. He knew that the
settlement proposal was inconsistent with the 2020 settlement initiative
and the Commissioner’s standard settlement proposals in easement
cases. Accordingly, he knew that respondent had made a mistake in
ascertaining the amount of investor out-of-pocket costs. Mr. Norman
also knew that respondent had made a mistake in the amount of
investor out-of-pocket costs, which he defined as “the amount that the
owners of [Natural Aggregates] paid for their interests.” He knew that
Natural Aggregates owned eight entities and that $24,586,319 was the
amount that Natural Aggregates contributed to all eight entities
including Kellum Resources, which claimed a $48,696,199 easement
deduction.
Mr. Johnson raised his concerns about the amount of the proposed
deduction with Mr. Welty. Mr. Welty was aware that the
Commissioner’s standard settlement offer was a deduction for investor
out-of-pocket costs. He was familiar with the 2020 settlement initiative,
the LakePoint settlement, and the negotiations for the global settlement
of the Ornstein-Schuler cases. He knew that respondent intended to
propose a deduction for the approximate amount of Natural Aggregates’
out-of-pocket costs and that respondent had made a mistake in
determining Natural Aggregates’ investor out-of-pocket costs for the
Arden Row transaction. Welty PC attorneys, including Mr. Welty,
discussed investor out-of-pocket costs in a nonsyndicated transaction
such as the Arden Row transaction, including via email. Mr. Welty told
the other attorneys that they did not need to confirm whether
$24,586,319 was the amount of investor out-of-pocket costs because
respondent agreed to use the amount shown as cash capital
contributions on the investment-tier partnership’s Schedule M–2 for the
deduction.
Mr. Welty told Mr. Schuler that respondent had proposed a
$24,586,319 deduction in exchange for disallowance of the easement
deduction in its entirety and sought Mr. Schuler’s approval to accept the
offer. However, he did not tell Mr. Schuler that respondent meant to
propose a deduction for investor out-of-pocket costs or that respondent
used the cash capital contributions shown on Natural Aggregates’
Schedule M–2 as a proxy for Natural Aggregates’ out-of-pocket costs.
Mr. Welty did not ask Mr. Schuler the amount of Natural Aggregates’
out-of-pocket costs for the Arden Row transaction. The two men did not
discuss Natural Aggregates’ out-of-pocket costs or the Schedule M–2.
Instead, they discussed whether petitioner should accept a settlement
12
[*12] for a $24,586,319 deduction. They recognized that the settlement
proposal was better than respondent’s settlement proposals in other
Ornstein-Schuler cases and discussed this shared opinion. Mr. Schuler
considered the $24,586,319 deduction relative to the disallowed
$57,080,000 easement deduction and authorized Mr. Welty to accept a
settlement proposal for a fixed deduction of $24,586,319. In making his
decision to proceed with the settlement, Mr. Schuler did not consider
Natural Aggregates’ out-of-pocket costs. 4
Although the two men did not discuss Natural Aggregates’ out-of-
pocket costs, both men knew that the costs were not $24,586,319. Mr.
Welty did not suggest to Mr. Schuler that respondent had made a
mistake in the amount of the proposed deduction. Mr. Schuler knew that
Natural Aggregates’ out-of-pocket costs were substantially less than
$24,586,319.
Mr. Welty instructed Mr. Norman to draft a response accepting
the settlement proposal. Mr. Norman confirmed that the amount shown
on Natural Aggregates’ Schedule M–2 matched the amount of the
proposed deduction. He did not investigate or seek substantiation for the
amount of Natural Aggregates’ cash contribution to Arden Row.
On November 7, 2023, Mr. Welty sent a letter in response to the
settlement proposal to Ms. Joe that stated:
We are writing in response to your letter dated
October 24, 2023, wherein the Office of Chief Counsel
proposed to settle the above referenced case. . . . We have
been instructed, on behalf of Petitioner, to accept the
settlement proposal. We agree with your proposal to
determine the amount of the allowed “other deduction” by
reference to . . . the investment-tier partnership’s Schedule
M–2, Capital Contributed (Cash).
For convenience, we refer to this letter as the acceptance letter.
Mr. Welty attached a copy of the settlement proposal to the letter. Mr.
Welty did not consult Mr. Ornstein before he sent the acceptance letter.
Mr. Ornstein delegated decision making relating to the litigation and
4 Petitioner has not established that Welty PC provided a copy of the
settlement proposal to Mr. Schuler before he authorized acceptance of a $24,586,319
fixed deduction. Mr. Schuler testified that he first saw the settlement proposal in the
first or second quarter of 2024. Accordingly, Mr. Schuler’s knowledge about the terms
of the settlement proposal was based on his conversation with Mr. Welty.
13
[*13] settlement of Ornstein-Schuler cases to Mr. Schuler. Nor did Mr.
Welty consult with Mr. Kaynard, Arden Row’s designated individual.
Mr. Welty did not seek or receive Mr. Kaynard’s approval before sending
the acceptance letter. Mr. Kaynard did not testify at the evidentiary
hearing, and there is no information in the record as to why he was not
consulted about the settlement proposal.
Around the same time, Welty PC sent substantially similar
letters in response to six of the eight settlement proposals that it
received for Ornstein-Schuler cases during October 2023.5 After the
exchange of letters in those six cases, respondent agreed to small
increases in the deductions for out-of-pocket costs to include amounts
not shown on the investment-tier partnership’s Schedule M–2.
VIII. Parties’ Communications After Exchange of Letters
In December 2023 Ms. Joe prepared a draft of a decision
document that allowed a $24,586,319 deduction and shared it with the
Oversight Committee for review. Ms. Mattonen responded that a
$24,586,319 deduction seemed high for out-of-pocket costs. On
December 12, 2023, Mr. Cappel informed Mr. Johnson via email that
respondent was “having difficulty ascertaining the out-of-pocket
amount” for the Arden Row transaction. Within a few days the two men
spoke by phone, and Mr. Cappel told Mr. Johnson that the parties
needed to discuss the amount of Natural Aggregates’ out-of-pocket costs.
Mr. Johnson told Mr. Cappel that petitioner thought that there was a
deal.
On January 23, 2024, Mr. Cappel sent a letter to Mr. Norman that
proposed to change the amount of the proposed deduction to $110,900,
the amount of cash capital contributions shown on Arden Row’s
Schedule M–2. The letter stated that “[u]pon further review, the
$24,586,319 amount does not represent the approximate out-of-pocket
costs.” Mr. Cappel advised that if petitioner did not agree to $110,900,
it would need to substantiate investor out-of-pocket costs. Welty PC did
not request substantiation from Natural Aggregates for its out-of-pocket
costs. As of the evidentiary hearing, petitioner had not produced any
substantiation.
5 The amounts of the proposed deductions were between 16.32% and 16.49% of
the easement deductions in seven of the eight cases. For one case, the percentage was
22.34%. For this case, a $24,586,319 deduction is 43.07% of the easement deduction.
14
[*14] On January 31, 2024, the parties notified the Court in a Joint
Status Report for a consolidated group of 34 Ornstein-Schuler cases that
included this case that they had reached a “tentative basis for
settlement.” The Court granted an extension of time for the parties to
file motions for entry of decision. Welty PC attorneys were counsel of
record in all 34 consolidated cases. Mr. Johnson left Welty PC on
February 5, 2024.
During a conference call on February 7, 2024, Ms. Joe again
informed petitioner’s counsel that she believed that $24,586,319 was not
the correct amount of investor out-of-pocket costs. She reiterated
respondent’s position that if petitioner did not agree to a $110,900
deduction, it would need to substantiate investor costs. Petitioner’s
counsel replied that they needed to confer with the client. On March 12,
2024, Ms. Joe emailed Mr. Norman to follow up on respondent’s January
23, 2024, letter, noting that the parties needed to file a decision
document or a joint status report by April 1, 2024.
On March 20, 2024, Mr. Norman emailed Ms. Joe stating that
“Petitioner accepted respondent’s offer to settle” through the exchange
of letters. He wrote:
Notwithstanding such prior offer and acceptance,
Respondent’s letter, dated January 23, 2024, proposes to
modify the amount of the . . . deduction from $24,586,319
to $110,900 . . . .
We are only authorized to accept . . . a settlement proposal
that allows Arden Row . . . [a] deduction equal to
$24,586,319. Accordingly, we cannot agree to Respondent’s
Proposal to modify the amount of the . . . deduction from
$24,586,319 to $110,900. If Respondent allows [a] . . .
deduction equal to $24,586,319 (as was originally offered
and accepted), we remain authorized . . . to settle . . . on
such terms. In addition, we are also authorized to engage
in mediation pursuant to Tax Court Rule 124 to resolve the
amount of the other deduction . . . .
(Internal quotation marks omitted.)
The next day Ms. Joe sent a letter to Mr. Norman stating
respondent’s position that there is no binding agreement. Ms. Joe wrote:
15
[*15] Given the current state of our correspondence, the
parties do not have a settlement or a meeting of the minds
in this case. The provision that you cited from respondent’s
proposed settlement letter of October 24, 2023, also noted
that the other deduction was intended to approximate out-
of-pocket costs. The investment tier partnership – Natural
Aggregates Partners, LLC – held interests in numerous
other partnerships, and the $24,586,319 amount could not
reflect the out-of-pocket costs to participate in the Arden
Row transaction, when the Schedule M–2 for Arden Row
Assets, LLC reflected cash of only $110,900. Your firm has
acknowledged the mistake in our discussions. Accordingly,
respondent does not agree that mediation would be useful.
Ms. Joe further stated that she would inform the Court in a status
report due April 1, 2024, that there is no settlement agreement.
On March 27, 2024, Mr. Welty filed a Motion for Extension of
Time to file decision documents in 11 of the 34 consolidated cases for
partnerships subject to the BBA. In the Motion Mr. Welty wrote that
“the parties have not reached a basis for settlement with respect to one
case—Arden Row.” He excluded this case from the request for an
extension of time.
On April 1, 2024, the parties filed a Joint Status Report informing
the Court that “[t]he parties do not have a basis for settlement.” The
parties continued to engage in trial preparation and exchanged informal
discovery requests. Respondent engaged valuation experts and made
site visits. On May 1, 2024, the parties filed a Joint Status Report that
proposed trial dates on the substantive issues in this case. The Court set
the trial for September 2024. On May 21, 2024, petitioner filed a Motion
to Enforce Settlement.
OPINION
A controversy before this Court may be settled by agreement of
the parties. Stamm Int’l Corp. v. Commissioner, 90 T.C. 315, 316 (1988).
A settlement is a contract, and accordingly, general principles of
contract law determine whether the parties have reached a settlement.
Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320, 330 (1997) (citing
Manko v. Commissioner, T.C. Memo. 1995-10), aff’d, 208 F.3d 205 (3d
Cir. 2000) (unpublished table decision). Formation of a contract requires
the mutual assent of the parties to its essential terms, i.e., a meeting of
16
[*16] the minds, which is manifested through an offer and acceptance.
Id.; Manko, T.C. Memo. 1995-10; Heil v. Commissioner, T.C. Memo.
1994-417.
The parties may enter into a binding settlement agreement
through the exchange of letters. Dorchester Indus. Inc., 108 T.C. at 330;
Haiduk v. Commissioner, T.C. Memo. 1990-506; see also Treaty Pines
Invs. P’ship v. Commissioner, 967 F.2d 206, 211 (5th Cir. 1992).
Accordingly, the Commissioner may enter into a binding agreement to
settle a controversy pending before this Court without filing a
stipulation of settlement or decision document. See Johnston v.
Commissioner, 122 T.C. 124, 129 (2004), supplementing 119 T.C. 27
(2002), aff’d, 461 F.3d 1162 (9th Cir. 2006); Himmelwright v.
Commissioner, T.C. Memo. 1988-114.
Whether the parties have reached a settlement agreement is
governed by general principles of contract law. Robbins Tire & Rubber
Co. v. Commissioner, 52 T.C. 420, 435–36 (1969), supplemented by
53 T.C. 275 (1969); Haiduk, T.C. Memo. 1990-506. The interpretation of
a contract, including whether the contract is ambiguous, is a question of
law. Estate of Ray v. Commissioner, 112 F.3d 194, 196 (5th Cir. 1997)
(citing FDIC v. McFarland, 33 F.3d 532 (5th Cir. 1994)), aff’g
T.C. Memo. 1995-561. However, whether there was a meeting of minds
is a question of fact. U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping
Co., 241 F.3d 135, 146 (2d Cir. 2001); Estate of Halder v. Commissioner,
T.C. Memo. 2003-84, slip op. at 6, supplemented by T.C. Memo. 2003-
284. Petitioner has the burden to prove that there is a binding
settlement agreement in this case. See Applegarth v. Commissioner,
T.C. Memo. 2024-107, at *20. Where the parties have entered into a
settlement agreement, it is generally enforceable in the absence of fraud,
coercion, mutual mistake, or other extraordinary circumstances.
See, e.g., Estate of Jones v. Commissioner, 795 F.2d 566, 573–74 (6th Cir.
1986), aff’g T.C. Memo. 1984-53; Dorchester Indus. Inc., 108 T.C. at 335;
Saigh v. Commissioner, 26 T.C. 171, 176 (1956); Holland v.
Commissioner, T.C. Memo. 1992-691. A settlement agreement is binding
regardless of the actual merits of the controversy. Dorchester Indus. Inc.,
108 T.C. at 330 (citing Manko, T.C. Memo. 1995-10).
We find that there is no binding settlement agreement. There are
three grounds for this decision, each independently sufficient to find
that no settlement agreement exists. For the sake of completeness, we
address all three.
17
[*17] I. Decision Document
Respondent argues that under the terms of the settlement
proposal, a decision document is required for a binding agreement. We
agree. An offer is generally defined as a manifestation of willingness to
enter into a contract. Restatement (Second) of Contracts § 24 (Am. L.
Inst. 1981). An offer must be made in a manner “as to justify another
person in understanding that his assent to that bargain is invited and
will conclude [the contract].” Id. “A manifestation of willingness to enter
into a bargain is not an offer if the person to whom it is addressed knows
or has reason to know that the person making it does not intend to
conclude a bargain until he has made a further manifestation of assent.”
Id. § 26; see also Dorchester Indus. Inc., 108 T.C. at 330 (citing Manko,
T.C. Memo. 1995-10). Accordingly, we have stated that the offeror has
the power to prescribe the method of accepting the offer. Lamborn v.
Commissioner, T.C. Memo. 1994-515, 1994 WL 565157, at *5.
The Commissioner may condition a settlement agreement on the
execution of an additional document such a decision document. When
the Commissioner does so, the execution of that document controls
whether a binding agreement was in fact reached. See, e.g., Estate of Ray
v. Commissioner, 112 F.3d 194 (finding settlement offer required the
execution of an IRS form signed by both parties as a condition to a
binding agreement); Treaty Pines Invs. P’ship v. Commissioner, 967 F.2d
at 211 (binding agreement existed where IRS did not contemplate
execution of further, formal documents); Dorchester Indus. Inc., 108 T.C.
at 332–33 (finding offer only “called for a written acceptance,” i.e., a
letter was sufficient); Greenberg Bros. P’ship #12 v. Commissioner,
T.C. Memo. 1998-198.
The terms of the settlement proposal clearly and unambiguously
indicate that respondent required the filing of a decision document to
reach a binding agreement. Clause 5 provides that “Respondent and
Petitioner agree to resolve this case by filing a decision document.”
Respondent required more than a simple exchange of letters for
petitioner to accept the settlement proposal. Petitioner did not accept
respondent’s purported offer in the manner that respondent prescribed.
Under the terms of the settlement proposal, there is no binding
agreement until a decision document is filed. 6 Petitioner characterizes
6 We easily distinguish this case from Stamm International Corp., 90 T.C. 316,
and Dorchester Industries Inc., 108 T.C. 320, in which we enforced settlements as
binding agreements. In each case there was no doubt that a settlement agreement
18
[*18] the filing of a decision document as a “purely ministerial act.” We
disagree. We find that the filing of a decision document is a material
term of the settlement proposal.
Petitioner’s own actions confirm that it did not believe that the
exchange of letters accomplished a binding agreement. Petitioner had
many opportunities to notify the Court of its current position that the
parties had entered into a binding agreement. It did the opposite. 7 It
filed Joint Status Reports informing the Court that there was no
settlement and proposing trial dates on the substantiative issues in this
case. We set the case for trial. The parties continued to pursue discovery
and to draft stipulations of fact. Respondent engaged experts and made
site visits. Petitioner did not inform the Court of its position that there
is a binding agreement until May 21, 2024, when it filed the Motion to
Enforce Settlement. We canceled the trial date to consider petitioner’s
Motion, not because of respondent’s actions.
We find it implausible that if, in fact, petitioner believed that
there was a binding agreement, it would not have protested respondent’s
alleged reneging on the agreement earlier. Respondent had been
questioning the $24,586,319 amount since December 2023. Welty PC
attorneys realized that respondent had made a mistake in the amount
of Natural Aggregates’ out-of-pocket costs even before it sent the
acceptance letter. After respondent discovered the mistake, petitioner
tried to negotiate with respondent. When negotiations failed, petitioner
filed the Motion at issue. We are not convinced by petitioner’s arguments
to explain away the Joint Status Reports. It argues that the
representations to the Court that there was a basis for settlement meant
that they were still negotiating the terms of the decision document. We
find that petitioner agreed to file the Joint Status Report because it
existed because the parties filed a stipulation of settled issues or otherwise notified the
Court that they had reached a settlement agreement. See also Bailey v. Commissioner,
T.C. Memo. 2021-55, at *12–14 (finding that the parties filed a stipulation of settled
issues); Tompkins v. Commissioner, T.C. Memo. 1989-363 (same). On June 3, 2025,
petitioner filed a Notice of Supplemental Authority citing an order in Moretti v.
Commissioner, No. 5983-24 (T.C. June 2, 2025), in which the Court refused to set aside
a settlement stipulation and a stipulated decision that the parties filed with the Court
approximately five weeks before the scheduled trial date. We find that Moretti is
similar to Stamm International Corp. and Dorchester Industries Inc. and easily
distinguishable from this case.
7 According to respondent’s March 21, 2024, letter to Welty PC, Welty PC had
previously acknowledged that there was a mistake in the settlement proposal.
19
[*19] knew that there was no binding agreement and respondent
refused petitioner’s request to engage in mediation. 8
The terms of the settlement proposal required the filing of an
agreed decision document. Accordingly, there was no binding agreement
through the exchange of letters.
II. Mutual Assent
Respondent argues that there was no mutual assent to the
amount of the allowable deduction and, thus, no settlement agreement.
Alternatively, he argues that if the Court finds that there was mutual
assent, there was a mutual mistake regarding the deduction for out-of-
pocket costs, and the Court should set aside the agreement.
“A prerequisite to the formation of a contract is an objective
manifestation of mutual assent to its essential terms.” Dorchester Indus.
Inc., 108 T.C. at 330 (first citing Heil, T.C. Memo. 1994-417; then citing
17 Am. Jur. Contracts §§ 27 and 28 (1991); and then citing 1 Williston
on Contracts § 3:5 (4th ed. 1990)). According to Restatement § 20(1),
there is no manifestation of mutual assent if the parties attached
materially different meanings to their manifestations and neither party
knew the meaning attached by the other party, or alternatively, if both
parties knew the meaning attached by the other party. See also
Restatement § 201(2) and (3). Thus, a material difference in the parties’
understanding of the terms of the exchange means that there is no
mutual assent. According to the Restatement, we determine each party’s
attached meaning on the basis of an objective standard, and the parties’
subjective intentions or understandings do not govern the question of
mutual assent. Restatement § 20 cmt. b.
8 In practice the exchange of letters did not end negotiations over the amounts
of the deductions for out-of-pocket costs. After the exchange of substantially similar
letters in six other Ornstein-Schuler cases, the parties increased the amounts of the
deductions from the amounts stated in the Commissioner’s settlement proposals.
Similarly, in LakePoint, the parties decreased the amount of the deduction to exclude
part of the cash capital contributions shown on the investment-tier partnership’s
Schedule M–2 that was attributable to Mr. Ornstein’s, Mr. Schuler’s, and their related
entities’ out-of-pocket costs, consistent with the Commissioner’s position in the 2020
settlement initiative, which provided that Category One partners were not entitled to
deduct out-of-pocket costs. We have previously found that the continued negotiations
that sought to modify a central settlement term “illustrate[] that a meeting of the
minds had not occurred between the parties.” Barela v. Commissioner, T.C. Memo.
2004-175, slip op. at 12.
20
[*20] The mutual mistake doctrine comes into play when there is a
contract, i.e., there was a meeting of the minds, and a party asks to have
the contract voided, or reformed, because of a mutual mistake. Id.
§ 152(1). A mutual mistake occurs when the parties make the same
erroneous assumption about the facts. Id. §§ 151 and 152; see also
Dutton v. Commissioner, 122 T.C. 133, 139 (2004) (“A mutual mistake
exists where there has been a meeting of the minds of the parties and
an agreement actually entered into but the agreement in its written
form does not express the actual intention of the parties.”).
We find that there was no mutual assent. It is clear that the
parties attached different meanings to the allowable deduction.
Petitioner asserts that the parties agreed to a deduction for a fixed
amount. It is clear that a fixed deduction of $24,586,319 is the meaning
that Mr. Schuler, the person who authorized acceptance of the offer,
attached to the settlement proposal. 9 Mr. Welty told Mr. Schuler that
respondent proposed a deduction of $24,586,319 but did not disclose that
respondent based the amount on investor out-of-pocket costs. The two
men discussed only the fixed amount. They did not discuss Natural
Aggregates’ cash capital contributions to Arden Row, the amount of its
out-of-pocket costs for the Arden Row transaction, or its Schedule M–2.
Accordingly, Mr. Schuler did not consider or agree to a deduction for the
approximate value of Natural Aggregates’ out-of-pocket costs. He agreed
to a fixed deduction of $24,586,319 and that was his meaning.
It is equally as clear that respondent attached a different
meaning to clause 2 of the settlement proposal. Respondent objectively
manifested his intent to enter into a settlement that allowed a deduction
of investor out-of-pocket costs although he agreed to accept the amount
shown on Schedule M–2 as an administrative convenience instead of
requiring investors to substantiate their costs. Welty PC knew
respondent’s manifested intent from the 2020 settlement initiative,
nearly four years of discussions with petitioner for a global settlement,
and the LakePoint settlement. The meaning given to words of a contract
depends to a varying extent on the context and the prior experience of
the parties. Restatement § 20(1) & cmt. b. Mr. Johnson admitted that
he knew that a deduction for investor out-of-pocket costs was the
Commissioner’s standard settlement proposal.
9 As we discuss infra Part III, Mr. Schuler was not the proper person to
authorize the settlement. Nevertheless, he was the only person who authorized the
settlement, and we find that his meaning is determinative.
21
[*21] Respondent argues that Natural Aggregates had out-of-pocket
costs of $110,900, the amount of cash capital contributions shown on
Arden Row’s Schedule M–2. Petitioner has not established that investor
out-of-pocket costs were more than $110,900. Mr. Schuler testified that
he did not know Natural Aggregates’ out-of-pocket costs for the Arden
Row transaction but admitted they were substantially less than
$24,586,319. That amount likely grossly overstated costs.
Having found that the parties attached different meanings to the
proposed deduction, the next question is whether each party knew the
other’s attached meaning. We find that neither party knew the meaning
attached by the other party. 10 Mr. Welty told Mr. Schuler that
respondent had proposed a deduction of $24,586,319 in exchange for a
full concession of the $57,080,000 easement deduction. He did not tell
Mr. Schuler that respondent based this figure on Natural Aggregates’
out-of-pocket costs for the Arden Row transaction or its Schedule M–2.
In deciding whether to accept the settlement proposal, Mr. Schuler
considered the $24,586,319 deduction relative to the $57,080,000
easement deduction. He did not consider out-of-pocket costs.
It is clear that Welty PC attorneys knew that respondent
intended to propose a standard settlement proposal of investor out-of-
pocket costs. Welty PC attorneys knew that the Arden Row transaction
was nonsyndicated and did not have outside investors and that they
knew Natural Aggregates owned eight entities. Two Welty PC
attorneys, Messrs. Norman and Johnson, admitted that they knew these
facts. Accordingly, they knew or should have known that Natural
Aggregates did not have approximately $24,586,319 in out-of-pocket
costs and that respondent had made a mistake by referring to the
amount shown for cash capital contributions on Natural Aggregates’
Schedule M–2 as a proxy for investor out-of-pocket costs.
On the basis of the other evidence in the record and our
assessment of witness testimony, including the testimony of Welty PC
attorneys who communicated with Mr. Welty, we find that Mr. Welty
also knew that respondent had made a mistake. 11 Moreover, he should
have known that respondent had made a mistake from the simple fact
that he represented another one of Natural Aggregates’ entities, Kellum
10 If one party knows the meaning attached by the other party and manifests
its assent intending to insist on a different meaning, it may be guilty of
misrepresentation. Restatement § 20 cmt. d.
11 Ms. Joe testified that she learned that Natural Aggregates owned multiple
entities from Form 886–A. Mr. Welty had access to Form 886–A.
22
[*22] Resources, before this Court with respect to a $48.7 million
easement deduction for 2018.
However, Mr. Welty did not tell Mr. Schuler that respondent had
made a mistake. In fact, no one communicated respondent’s mistake to
Mr. Schuler. As stated above, Mr. Welty told Mr. Schuler the
$24,586,319 figure but did not tell him that respondent intended to
propose a deduction for the approximate amount of Natural Aggregates’
out-of-pocket costs for the Arden Row transaction. Finally, petitioner
has not established that Welty PC provided a copy of the settlement
proposal to Mr. Schuler before he accepted a $24,586,319 fixed
deduction. Mr. Schuler testified that he first saw the settlement
proposal in the first or second quarter of 2024. Thus, Mr. Schuler’s
knowledge of the terms of the settlement proposal was based entirely on
his conversation with Mr. Welty. There was no way for Mr. Schuler to
know that respondent had made a mistake.
Likewise, respondent was not aware that Mr. Schuler had only
approved a settlement for a fixed deduction of $24,586,319. There is no
reason for respondent to have known what Mr. Welty communicated to
his client. Accordingly, there was no mutual assent.
Petitioner argues that the actual amount of investor out-of-pocket
costs is irrelevant under the settlement proposal. We disagree. Clause 2
states a specific amount of the proposed deduction and also states that
the specified amount approximates investor out-of-pocket costs.
Petitioner’s argument would require us to ignore part of clause 2, which
we will not do. Contracts must be read as a whole and must be
interpreted in context. Analog Devices, Inc. v. Commissioner, 147 T.C.
429, 446 (2016). An interpretation that gives a reasonable meaning to
all parts of a writing is preferred to one that leaves parts of it
meaningless. Rink v. Commissioner, 100 T.C. 319 (1993), aff’d, 47 F.3d
168 (6th Cir. 1995). Accordingly, the actual amount of investor out-of-
pocket costs is material under clause 2 of the settlement proposal.
Since 2020 the Commissioner has settled easement cases by
allowing a deduction for investor out-of-pocket costs. While the
Commissioner was willing to agree not to require substantiation for
investor out-of-pocket costs as an administrative convenience, he
continued to maintain the settlement position to allow investors to
deduct their out-of-pocket costs for a concession of the easement
deduction in its entirety and a reduction or concession of penalties.
Throughout the course of this proceeding, Welty PC deliberately avoided
23
[*23] asking its client for substantiation of its out-of-pocket costs despite
respondent’s multiple requests for that information. Welty PC knew
that respondent made a mistake but did not communicate that mistake
to its client or respondent.
Petitioner contends that respondent meant to offer a $24,586,319
deduction, even though Natural Aggregates did not have approximately
$24,586,319 in out-of-pocket costs, because the IRS’s backdating of
penalty approval forms in easement cases had been exposed. 12 We are
not convinced by this argument. The investors in LakePoint did not
receive such a favorable settlement even though that case involved a
backdated penalty approval form and the Court had held that the
Commissioner was subject to sanctions. Moreover, even without the
mistake in the amount of the proposed deduction, the settlement
proposal was more favorable to petitioner and Natural Aggregates than
the 2020 settlement initiative, the IRS standard settlement proposals,
and the LakePoint settlement, which disallowed any deductions by
Category One partners such as Messrs. Ornstein and Schuler. Had
respondent followed the same approach in this case, respondent would
have offered a minimal deduction because Messrs. Ornstein and Schuler
and their related entities owned 98% of Arden Row. Rather than make
an offer for a highly advantageous deduction, respondent conceded
penalties of over $8.4 million because of the backdating. Furthermore,
we perceive no hazards of litigation to respondent concerning the
disallowance of the easement deduction because of the backdating issue.
III. BBA Partnership Rules
We next consider who had authority to enter into a settlement to
resolve partnership-related items under the BBA. 13 We have two
concerns: (1) whether the person with authority to enter into a
settlement for Arden Row approved the settlement and (2) whether an
individual partner of Arden Row may separately enter into a settlement
to resolve its tax liability attributable to partnership-related items.
12 Petitioner also argues that respondent was more concerned with a quick
settlement and wanted a response within three to four days and that he was not
concerned about the actual amount of investor out-of-pocket costs. This allegation is
not supported by evidence in the record. The settlement proposal does not specify a
deadline to respond. Ms. Joe willingly agreed to a 30-day extension when requested by
Welty PC attorney Lyle Press. Mr. Press testified that he requested 30 days as a
professional courtesy and to confirm receipt of the settlement proposal.
13 Neither party addressed whether Ms. Joe had authority to bind respondent.
24
[*24] With respect to the first question, under the BBA the partnership
representative “shall have the sole authority to act on behalf of the
partnership.” § 6223(a). The partnership and all its partners are bound
by the actions taken by the partnership and by a final decision in a
proceeding brought under the BBA with respect to the partnership.
§ 6223(b). Only the partnership representative has the power to bind the
partnership and its partners in an audit or judiciary proceedings.
Accordingly, only a settlement accepted by the partnership
representative is binding upon the partnership and the partners. When
the partnership representative is an entity, the designated individual
assumes the role of partnership representative and represents the
partnership and partners in the audit and litigation. Treas. Reg.
§ 301.6223-1(b)(3).
Mr. Schuler did not have the authority to act for Arden Row under
the BBA and did not have authority to enter a settlement on behalf of
Arden Row. There is no evidence in the record that Mr. Kaynard, the
designated individual, approved the settlement or was even consulted
about it. He did not testify. On the basis of the record, we find that Mr.
Kaynard had no role in reviewing and accepting respondent’s settlement
proposal. Accordingly, the individual with sole authority to bind Arden
Row under the BBA has not approved the purported settlement
agreement.
With respect to the second question, Natural Aggregates did not
have the right to settle its tax liability for its partnership-related items
from Arden Row under the BBA. There are no statutory provisions
under the BBA that expressly govern settlement agreements. The BBA
differs from the Tax Equity and Fiscal Responsibility Act of 1982, Pub.
L. No. 97-248, §§ 401–407, 96 Stat. 324, 648–71, which allowed an
individual partner to enter into a settlement agreement with the IRS
that converted its partnership items into nonpartnership items.
§ 6224(c)(1) (2012); H Graphics/Access Ltd. P’ship v. Commissioner, T.C.
Memo. 1992-345. There is no similar provision in the BBA. The BBA
does not expressly permit individual partners to settle their tax liability
attributable to partnership-related items. See § 6241(2)(A) (defining a
partnership adjustment); § 6241(2)(B) (defining a partnership-related
item). Thus, it seems that Mr. Schuler, the only person who approved
the settlement proposal, could not enter into an agreement to settle his
own or Natural Aggregates’ tax liability for partnership-related items
that was separate from a settlement applicable to all Arden Row
partners. Only Mr. Maynard had authority to resolve the partnership
adjustments for all partners.
25
[*25] In conclusion, the exchange of letters did not result in a binding
settlement agreement as the settlement proposal required the filing of
a decision document and there was no mutual assent. Each of these
reasons is sufficient to deny petitioner’s Motion to Enforce Settlement.
Moreover, there is no provision in the BBA that permits an individual
partner to settle the tax liability for partnership-related items, and the
designated individual for the partnership representative did not
authorize acceptance of the settlement proposal before respondent
realized that it was a mistake to use amounts on the investment-tier
partnership’s Schedule M–2 as the approximate investor out-of-pocket
costs in a nonsyndicated transaction.
We have considered all other arguments by the parties, and, to
the extent not addressed herein, we conclude that they are moot,
irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be issued.