# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 1997-510

UNITED STATES TAX COURT

BERNHARD F. AND CYNTHIA G. MANKO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 26025-93.

Filed November 12, 1997.

Irwin S. Meyer and Herbert Stoller, for petitioners.
Lawrence L. Davidow, Roland Barral, Kevin M. Curran, and
Louis A. Ramunno, for respondent.

MEMORANDUM OPINION
JACOBS, Judge:

This case is presently before this Court on

petitioners' motion for partial summary judgment.
This

case

involves

deficiencies,

additions

to

tax,

and

additional interest with regard to petitioners' Federal income

- 2 taxes for 1979 through 1983.

Respondent's principal basis for the

deficiencies is the disallowance of claimed deductions for losses
and

interest

repurchase

expense

agreements

(petitioner)

both

on

straddles

entered

directly

and

and

Government

by

Bernhard

F.

through

Arbitrage

Management

into

security
Manko

Investment Co. (Arbitrage Management) and related entities.
I.

Background
In Manko v. Commissioner, T.C. Memo. 1995-10 (Manko I), we

held that: (1) Respondent made a blanket settlement offer to all
Arbitrage Management investors; (2) petitioners accepted the offer;
and (3) respondent and petitioners reached a binding settlement
agreement

no

later

than

January

21,

1988.

In

reaching

this

conclusion, we found that pursuant to this settlement agreement,
the Internal Revenue Service (IRS) would: (1)

Allow the deduction

of 20 percent of the challenged losses (or, at the taxpayer's
option, out-of-pocket cost plus 15 percent); (2) eliminate capital
gains in an amount commensurate with the disallowed losses; and (3)
forgo the assertion of penalties.
II.

Manko I involved tax year 1978.

The Parties' Pleadings
Petitioners filed the petition herein on December 10, 1993,

and, except for further pleadings, the case was held in abeyance
pending the Court's decision in Manko I.

On February 22, 1996,

petitioners filed a motion for partial summary judgment requesting
the

Court

to

determine

that

there

was

a

binding

settlement

- 3 agreement

between

respondent

and

petitioners,

and

that

the

settlement terms (1) allowed them to deduct 20 percent of the
Arbitrage Management losses and expenses and to exclude 80 percent
of the Arbitrage Management gains they reported on their 1979-83
returns, and (2) precluded respondent from imposing any additions
to tax (including fraud), other than additional interest.
On April 25, 1996, respondent filed a notice of objection
contending that this Court's findings in Manko I related only to
petitioners' 1978 tax year and not to the years involved herein,
which were not docketed at the time of the settlement.

Respondent

also contended that Manko I did not affect the applicability of the
fraud additions to tax herein because respondent had not determined
fraud for 1978 (and the Court in Manko I could not have intended to
eliminate

the

fraud

additions

for

1982

and

1983).

On

brief,

respondent further argued that: (1) Respondent did not authorize
his

representatives

to

settle

nondocketed

years;

and

(2)

petitioners are bound by the finding of the U.S. District Court for
the Southern District of New York in a 1991 criminal case involving
petitioner, which stated that there was no settlement between
petitioners and respondent for petitioners' 1982 or 1983 tax years.
On May 1, 1996, petitioners filed a reply to respondent's notice of
objection.
The Court held a hearing on September 9 and 10, 1996, with
regard to petitioners' motion for partial summary judgment.

- 4 III. The Case Herein (Manko II)
Respondent determined deficiencies in petitioners' Federal
income taxes, additions to tax, and additional interest as follows:

Year

Deficiency

Sec.
6653(a)

1979
1980
1981
1982
1983

$2,676,752
1,926,696
2,284,248
1,794,143
1,649,568

$133,838
96,335
-------

Additions to Tax and Additional Interest
Sec.
Sec.
Sec.
Sec.
6653(a)(1)
6653(a)(2)
6653(b)(1)
6653(b)(2)

Sec.
6661

----$114,212
89,707
82,478

------$448,536
412,392

----1
1
1

------$897,072
824,784

------1
1

Sec.
6621(c)
2
2
2
2
2

1

50 percent of the interest due on the deficiency.
120 percent of the interest due on the entire deficiency. Pursuant to the
Tax Reform Act of 1986, Pub. L. 99-514, sec. 1511(c)(1), 100 Stat. 2744, former
sec. 6621(d) was redesignated as sec. 6621(c).
2

For 1982 and 1983, the negligence additions to tax were imposed
with respect to the liability of Cynthia G. Manko, and the fraud
additions to tax were imposed with respect to the liability of
petitioner.1
All section references are to the Internal Revenue Code in
effect

for

indicated.

the

years

under

consideration,

unless

otherwise

All Rule references are to the Tax Court Rules of

Practice and Procedure.
The primary issue for decision is whether the settlement
agreement applicable to petitioner's Arbitrage Management gains and
losses in 1978 (Manko I) is likewise applicable to his Arbitrage
Management gains and losses for the years in issue, 1979 through

1

The notice of deficiency also made adjustments for
items unrelated to petitioner's interest in the partnerships,
including an adjustment for unreported interest income for 1980.
These unrelated issues have not been resolved.

- 5 1983.

In other words, we must determine whether the blanket

settlement offer that petitioners accepted was an offer to settle
an issue (i.e., the deductibility of Arbitrage Management losses)
or a specific taxable year.
Some

of

accordingly.

the

facts

have

been

stipulated

and

are

found

The stipulation of facts and the attached exhibits

are incorporated herein by this reference.

We also incorporate

herein the facts enumerated in Manko I. For a better understanding
of this case, we repeat a portion of those facts.
Petitioners resided in Lighthouse Point, Florida, at the time
they filed their petition. They timely filed joint Federal income
tax returns for 1979 through 1983.
A.

Arbitrage Management

Arbitrage
1970's.

From

Management
1978

began

through

operations

1981,

in

Arbitrage

the

mid-to-late

Management

dealt

primarily in the acquisition of straddle positions in U.S. Treasury
bill

options.

Beginning

in

1982,

Arbitrage

Management

dealt

primarily in the acquisition of U.S. Government securities financed
by repurchase agreements.
Petitioner served as a principal of Arbitrage Management and
a

general

Government

partner

of

limited

securities

acquired

partnerships
through

(Arbitrage Management partnerships).

that

Arbitrage

invested

in

Management

On their 1978 through 1983

tax returns, petitioners deducted petitioner's distributive shares

- 6 of losses from Arbitrage Management partnerships. The deductions
regarding 1978

through

1983

played

a

role

in

the

settlement

negotiations.
B.

Arbitrage Management Negotiators

Theodore Kletnick, an attorney in respondent's North Atlantic
Regional Counsel Office, served as respondent's lead counsel in
Arbitrage Management settlement negotiations.

Howard Berman, an

attorney in respondent's New York City District Counsel Office,
assisted

Mr.

Kletnick

in

Arbitrage

Management

settlement

negotiations from 1987 through 1990.
On January 15, 1987, this Court held a pretrial conference
with respect to Arbitrage Management cases.

At that conference,

the Court designated John S. Nolan, Barbara T. Kaplan, and Hugh
Janow to serve as lead counsel for Arbitrage Management partners in
subsequent Arbitrage Management settlement negotiations.
C.

Arbitrage Management Negotiations

The

Court

negotiating
selecting
litigation.
D.

a

one

assigned
settlement
or

more

the
for

negotiators
Arbitrage

Arbitrage

the

task

Management

Management

test

of

either

cases

or

cases

for

Negotiations began in the spring of 1987.

Settlement Agreement

On January 6, 1988, the negotiators informed the Court that
they

had

reached

a

"tentative

settlement

agreement".

The

negotiators advised the Court that a few of the individual partners

- 7 would litigate their cases.

A letter from Mr. Kletnick to Mr.

Nolan dated January 12, 1988, states:
On December 22, 1987 we met and reached an
agreement as to a method of resolving the cases
involved in this project.
This settlement
methodology is operative so long as there is no
material deviation from our understanding that
we are splitting the tax stakes on an 80-20
basis (or cash plus 15 percent). Your letter
dated December 29, 1987 accurately reflects the
settlement methodology, except for the basis
adjustment and limit.
Pursuant to this agreement, the IRS would: (1) Allow the deduction
of 20 percent of the challenged losses (or, at the taxpayer's
option, out-of-pocket cost plus 15 percent); (2) eliminate capital
gains in an amount commensurate with the disallowed losses; and (3)
forgo the assertion of penalties.
On January 15, 1988, Mr. Kaplan hand-delivered to Mr. Kletnick
a letter that states:
The following named Tax Court petitioners have
agreed to accept the settlement offered by the
Internal Revenue Service to partners in
Arbitrage Management Project partnerships and
as described in letters to you from John S.
Nolan, Esq. of Miller & Chevalier, dated
December 29, 1987 and January 7, 1988,
respectively (copies attached).
The letter lists approximately 135 Arbitrage Management partners,
including petitioner, by name and docket number. The docket number
listed for petitioner covers tax year 1978 only.

The letter

further states: "we understand that a petitioner's acceptance of
this settlement offer also constitutes an acceptance of the same

- 8 settlement terms for any Arbitrage Management partnership in which
the petitioner invested for all partnership years." (Emphasis
added.) The January 15, 1988, letter essentially covered taxpayers
who had only docketed cases as well as taxpayers who had both
docketed and nondocketed cases.

Ms. Kaplan included with this

letter a copy of a letter from Mr. Nolan to Mr. Kletnick, dated
December 29, 1987, that describes the blanket settlement offer that
the partners accepted.
On January 21, 1988, Mr. Kletnick sent the Court a letter that
states:

"Enclosed

herewith

are

copies

of

listings

of

cases

forwarded to this office reflecting acceptance of the Service's
settlement offer."

Petitioner's name and 1978 docket number are

included on that list.

The January 21, 1988, letter was signed by

Mr. Kletnick on behalf of Agatha L. Vorsanger, Regional Counsel.
On February 25, 1988, Messrs. Kletnick and Nolan and Ms.
Kaplan attended another pretrial conference before the Court.

At

that conference, Mr. Nolan stated that "we were able to reach a
basis of settlement with Mr. Kletnick, and we have communicated
that

to

all

of

the

partners

in

the

Arbitrage

Management

partnerships." The parties advised the Court that they had settled
all or virtually all of the Arbitrage Management partnership cases,
and that they believed it unlikely that they would require a trial.
Messrs. Nolan and Janow and Ms. Kaplan understood that their jobs
were done and asked to be relieved of their responsibilities as

- 9 lead

counsel.

The

Court

then

discharged

them

from

their

responsibilities as lead counsel.
A letter from Mr. Berman to Ms. Kaplan dated April 21, 1988,
states:
Enclosed please find a copy of an Internal
Revenue Service Memorandum, dated April 1,
1988, concerning the Arbitrage Management
("AMIC") settlement position. Mr. Kletnick has
agreed that you or any taxpayer who invested
through AMIC may use this memo when attempting
to have an Arbitrage Management statutory
notice rescinded.
The attached Internal Revenue Memorandum, dated April 1, 1988, sent
to all IRS offices from Regional Counsel, North Atlantic Region (Ms.
Vorsanger), states in pertinent part:
We have received authorization to disseminate settlement
guidelines
with
respect
to
Arbitrage
Management
Investment Company cases. The basic agreement is that
the taxpayers are entitled to 20 percent of the tax
stake, or cash + 15 percent if greater. The Service is
entitled to 80 percent. A proper allocation by year is
required. Within this basic agreement, we have devised
the methodology, outlined below, which is different for
individual investor and partnership case.
*

*

*

*

*

*

*

Penalties described in I.R.C. Sections 6653, 6659 will
not be imposed.
E.

Implementation of the Settlements

Although the parties had settled the issue of the deductibility
of the Arbitrage Management losses, the settlements still needed to
be

implemented.

Under

the

settlements,

most

taxpayers

had

deficiencies in earlier years and overpayments in later years.

- 10 Arbitrage Management partners emphasized that they wanted respondent
to

establish

a

procedure

whereby

the

IRS

could

process

the

deficiency and overpayment years at the same time, so that the
taxpayers could pay a net amount.
After the February 25, 1988, pretrial conference, Mr. Kletnick
sent the Court quarterly status reports of the Arbitrage Management
cases.

The reports described the progress of the IRS in developing

settlement

implementation

procedures

regarding

all

tax

years

individuals invested in Arbitrage Management. For instance, an
October 24, 1988, status report sent to the Court states in
pertinent part:
The settlement implementation procedures,
with respect to individuals who were partners
in TEFRA partnerships, are currently being
considered by the Office of Chief Counsel in
Washington, D.C. As you well know, the parties
had agreed to resolve all of the years which
were in dispute as a result of an individuals
[sic] "investment" in AMIC. In many cases this
involves settling a taxpayer's 1978 through
1987 years.
It has been estimated by the
Examination Division of the Internal Revenue
Service that this settlement will affect over
800 partnerships and 9,000 individual tax
returns. [Emphasis added.]
Moreover, in a January 30, 1989, status report, the Court was
notified that: "the settlement implementation procedures, with
respect to individuals who were partners in TEFRA partnerships, have
been

approved

and

Washington, D.C."

issued

by

the

Office

of

Chief

Counsel

in

The status reports did not suggest that the IRS

- 11 was continuing to contemplate the preliminary question of whether
to permit deductions for Arbitrage Management losses.
Respondent's counsel and Arbitrage Management partners' counsel
eventually agreed upon a form of closing agreement to settle the
cases.

A December 21, 1989, letter from Mr. Nolan to Mr. Kletnick

states:
I am writing to you on behalf of two
groups of partners that retained Miller &
Chevalier and Saltzman & Holloran to negotiate
a settlement for their Tax Court cases. At
long last, it is my pleasure to enclose with
this letter a copy of the standard language
for Form 906 closing agreements that we
anticipate the Internal Revenue Service will
offer to all of the partners in the following
Arbitrage Management partnerships
*

*

*

*

*

*

*

It is our understanding that the attached
language will be used to resolve the Arbitrage
Management issues for all partners (whether or
not they belong to one of the two groups we
represent) and for all years (whether or not
they are docketed in the Tax Court).
*

*

*

*

*

*

*

As you know, a Form 906 closing agreement
is a final determination covering specific
matters, and has no effect on matters that are
not
discussed
in
the
language
of
the
agreement. This is particularly important in
this case because the settlement we reached
for Arbitrage partners resolves the amount of
taxable income, deductions, gains and losses
from the Arbitrage partnerships for all
taxable years (past, present and future).
[Emphasis added.]

- 12 Attached to the December 21, 1989, letter is a Sample Language for
Closing Agreement (Form 906) which states in relevant part:
WHEREAS,
the
taxpayer(s)
and
the
Commissioner wish to determine with finality
all of the federal income tax consequences of
the
taxpayer's(s')
interest
in
the
partnership(s) for all taxable years;
NOW IT IS HEREBY DETERMINED AND AGREED
for Federal income tax purposes that:
*

*

*

*

*

*

*

10.
* * * no additions to the tax or
penalties shall be imposed with respect to the
taxpayers' interest in the partnership(s),
including
the
additions
and
penalties
described in I.R.C. sections 6653, 6659, and
6661.
A "netting" provision was also included in the sample closing
agreement.
On December 22, 1989, Mr. Kletnick replied to Mr. Nolan's
letter, stating: "With respect to your letter dated December 21,
1989, as we discussed, our office has forwarded the proposed revised
closing

agreement

to

the

National

Office

and,

subject

to

administrative approval, we expect its issuance in the next few
days."
Respondent entered into closing agreements with many Arbitrage
Management partners.

Respondent, however, refused to enter into a

closing agreement with petitioner with regard to any relevant year
(i.e., 1978, 1979, 1980, 1981, 1982, or 1983).

- 13 F.

Petitioner's Criminal Proceedings

In 1986, approximately 2 years before Mr. Kletnick drafted the
letter confirming the settlement, a criminal investigation into
petitioner's Arbitrage Management activities was in progress.

Mr.

Kletnick is unsure of when he learned of the criminal investigation,
but believes it to be early 1987.

Petitioners' negotiators knew of

the possibility of a criminal investigation as of December 1987.
The criminal charges against petitioner related to the repurchase
(repo) transactions entered into by certain Arbitrage Management
partnerships during 1982 and 1983. The primary issue in the criminal
trial was whether the repo transactions were fraudulent.
During the criminal trial in the U.S. District Court for the
Southern District of New York, petitioner sought to introduce
evidence that respondent had settled the civil tax claims against
petitioner and that these claims were based on the same facts and
theory

as

settlement

the

criminal

constituted

charges.
an

Petitioner

admission

by

asserted

the

that

Government

the
that

petitioner was at least partially justified in deducting the losses
that were claimed to be fraudulent in petitioner's criminal trial.
The

Government

objected

to

the

admission

of

evidence

of

the

settlement on the grounds that: (1) Respondent had not in fact
settled his civil tax claims against petitioner; and (2) even if
respondent had entered into such a settlement, evidence of the

- 14 settlement was inadmissible under rule 408 of the Federal Rules of
Evidence.
Following argument on the relevance and admissibility of
evidence of the alleged settlement, the District Court, relying on
Ecklund v. United States, 159 F.2d 81 (6th Cir. 1947), held that
even if the evidence showed that the Government had settled its
civil

claims

with

petitioner,

proof

of

the

settlement

was

inadmissible under rule 408 of the Federal Rules of Evidence.
Nevertheless, the District Court held a hearing on December 20,
1990, in the absence of the jury for the purpose of determining
whether the civil tax case of petitioner had been settled with
respondent. Mr. Nolan and Ms. Kaplan testified at the criminal
hearing on behalf of petitioner, and Mr. Kletnick testified on
behalf of the Government, offering contradicting testimony.

The

record in the criminal hearing included Mr. Nolan's letters of
December 29, 1987, and January 7, 1988, Ms. Kaplan's letter of
January 15, 1988, and a transcript of the Tax Court pretrial
conference of February 25, 1988.

At the conclusion of the hearing,

the District Court, crediting Mr. Kletnick's testimony, found that
no settlement had occurred between respondent and petitioner for
1982 or 1983.

In sum, the District Court precluded petitioner from

presenting to the jury evidence that respondent had agreed that
petitioner could deduct 20 percent of his partnership losses both

- 15 as a matter of fact (the settlement did not exist) and as a matter
of law (if it did, rule 408 barred its admission).
On February 4, 1991, petitioner was convicted on multiple
counts of Federal income tax offenses for years 1982 and 1983 in
violation of section 7206(1) and (2), and conspiracy to defraud the
United States in violation of 18 U.S.C. section 371.

Petitioner's

conviction and sentence were affirmed by the U.S. Court of Appeals
for the Second Circuit.
Cir. 1992).

United States v. Manko, 979 F.2d 900 (2d

The Supreme Court denied certiorari.

509 U.S. 903

(1993).
In August 1995, petitioner filed a petition to the District
Court to vacate his conviction, presenting newly discovered evidence
of the settlement; namely, the January 21, 1988, letter.

According

to

that

petitioner,

this

evidence

was

relevant

to

prove

the

Government had allowed the deduction of a substantial portion of the
losses that were the subject of the criminal proceeding.
The District Court denied petitioner's motion without a hearing
and affirmed its earlier conclusion that any evidence of the
purported civil settlements was inadmissible. Manko v. United
States, 95 Civ. 1611 (S.D.N.Y., Aug. 18, 1995). Petitioner appealed
the District Court's decision.

The U.S. Court of Appeals for the

Second Circuit vacated the District Court's denial of petitioner's
motion, and stated:

- 16 In the present case, we conclude that the
district court abused its discretion insofar
as it based its decision to exclude the IRS
settlement upon its conclusion that Rule 408
barred the evidence of the IRS settlement from
Manko's
criminal
trial.
Despite
Manko's
assertions to the contrary, however, we cannot
conclusively determine on this record that a
new trial is warranted. On remand, the
district court must first determine whether,
but for its misinterpretation of Rule 408, it
would have admitted the relevant evidence of
the settlement. In this regard, the district
court should consider whether it would have
admitted or excluded the evidence under Rule
403 of the Federal Rules of Evidence, taking
into account any need by the government to
explain how a settlement for less than the
full amount of the claim might be consistent
with
its
view
that
the
defendant
was
criminally responsible for the amount of the
fraud alleged in the criminal prosecution.
Thus, if the district court determines that
the government knew, or should have known, of
Kletnick's January 21, 1988 letter that
indicated the falsity of his testimony, the
suppression of the letter by the government
was constitutional error if there is a
"reasonable probability" that, had the letter
been disclosed to the defense, the result of
the proceedings would have been different.
Kyles v. Whitley, ___ U.S. ___, ___, 115 S.Ct.
1555, 1566, 131 L.Ed.2d 490 (1995); see
Wallach, 935 F.2d at 456. To this end, the
district
court
must
ask
whether
"the
Government's
evidentiary
suppression
'undermines confidence in the outcome of the
trial.'" Kyles, ___ U.S. at ___, 115 S.Ct. at
1566 (quoting United States v.
Bagley, 473
U.S. 667, 678, 105 S.Ct. 3375, 3381, 87
L.Ed.2d 481 (1985)). If, on the other hand,
the
district
court
concludes
that
the
prosecution was unaware of the letter and its
failure to disclose it was inadvertent, a new

- 17 trial is required only if "'the court [is
left] with a firm belief that but for [the
erroneous exclusion], the defendant would most
likely not have been convicted.'"
Wallach,
935 F.2d at 456 (quoting Sanders v. Sullivan,
863 F.2d 218, 226 (2d Cir. 1988)). We leave
this, and any other remaining issues as to the
effect of nondisclosure, to the judgment of
the district court.
Manko v. United States, 87 F.3d 50, 55 (2d Cir. 1996).

As of the

release date of the opinion in this case, the District Court has not
rendered its decision.
G.

Respondent's Suspension Letter

On June 22, 1988, Mr. Kletnick sent petitioner a letter
(suspension letter) stating that, at the request of the U.S.
Attorney's Office, the IRS was "suspending consideration of the
settlement"

of

petitioner's

case

until

September

30,

1988.

Petitioner's counsel understood this letter only to mean that the
implementation of the settlement was deferred.

Mr. Kletnick never

received a response to the suspension letter.
Prior to the issuance of the suspension letter, the IRS had
never treated the settlement of petitioner's case any differently
than the settlement of cases of the other Arbitrage Management
partners.

Nor did the IRS ever advise petitioner that respondent

would treat petitioner's distributive share of Arbitrage Management
partnership losses as a nonpartnership item.

At no time during the

settlement negotiations that preceded Ms. Kaplan's January 15, 1988,

- 18 acceptance letter did any IRS representative inform Mr. Nolan, Mr.
Janow, or Ms. Kaplan that respondent's settlement offer to the
Arbitrage Management partners excluded petitioner.
IV.

Discussion
The

main

issue

we

must

herein

determine

is

whether

the

settlement terms were intended to apply to Arbitrage Management
transactions for petitioners' 1979 through 1983 tax years.
Rule 121 provides for summary judgment on legal issues in
controversies where there is no genuine issue of material fact.
Commercial Union Ins. Co. v. McKinnon, 10 F.3d 1352, 1354 (8th Cir.
1993); Sundstrand Corp. & Consol. Subs. v. Commissioner, 98 T.C.
518, 520 (1992), affd. 17 F.3d 965 (7th Cir. 1994); Naftel v.
Commissioner, 85 T.C. 527, 528-529 (1985); Jacklin v. Commissioner,
79 T.C. 340, 344 (1982).

A fact is material if it "'tends to

resolve any of the issues that have been properly raised by the
parties.'"

Boyd Gaming Corp. v. Commissioner, 106 T.C. 343, 347

(1996) (quoting 10A Wright et al., Federal Practice and Procedure:
Civil, sec. 2725, at 93 (2d ed. 1983)).

Partial summary judgment

that does not dispose of all issues may be sought and granted.
Elkins v. Commissioner, 81 T.C. 669, 674 (1983).

The burden is on

the moving party to show that it is entitled to summary judgment and
that the matter may be decided on the basis of the evidence before
this Court.

Espinoza v. Commissioner, 78 T.C. 412, 416 (1982);

- 19 Gulfstream Land & Dev. Corp. & Subs. v. Commissioner, 71 T.C. 587,
596 (1979). Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials.

Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).
We discussed in Manko I the nature of, and requirements for,
binding settlement agreements.

Essentially, the compromise and

settlement of tax cases is governed by general principles of
contract law.

Dorchester Indus., Inc. v. Commissioner, 108 T.C.

320, 330 (1997).
A.

Scope of the Settlement Agreement

The evidence clearly establishes that there was one blanket
settlement between respondent and petitioners (that respondent
offered to all Arbitrage Management investors in December 1987)
encompassing all years (both docketed and nondocketed) in which
petitioners

claimed

Arbitrage

Management

deductions.

It was a package settlement.

partnership

loss

The settlement resolved

an issue (i.e, the deductibility of Arbitrage Management losses)
rather than a specific taxable year.

Moreover, the offer was

available to petitioners, who were members of a class to whom the
offer was extended, on the same terms that were available to all
other Arbitrage Management investors.

Petitioners accepted the

blanket settlement offer referred to in Ms. Kaplan's January 15,
1988, acceptance letter.

That letter clearly stated that the

- 20 acceptances were based on the understanding that the settlement
offer was applicable as a package to all years in which taxpayers
had Arbitrage Management investments.

Settlement offers made and

accepted by letters have been enforced as binding agreements. See,
e.g., Haiduk v. Commissioner, T.C. Memo. 1990-506.

Petitioners

reached the settlement agreement, which we conclude under the
circumstances of this case is a binding contract, no later than
January 21, 1988.

See, e.g.,

Robbins Tire & Rubber Co. v.

Commissioner, 52 T.C. 420, 435-436 (1969).
The joint status reports to the Court after the January 1988
settlement confirmed the parties' understanding that the settlement
offer applied to both docketed and nondocketed years.

In addition

to the documentary evidence, Mr. Nolan, Ms. Kaplan, and Mr. Janow
also

testified

that

the

Arbitrage

Management

settlement

was

intended to apply to all years in which there were Arbitrage
Management investments, both docketed and nondocketed. Messrs.
Kletnick and Berman also testified to this effect ("we agreed to
structure the settlement to encompass all years."

"The basis for

settlement acceded to Mr. Nolan's request that it cover all years.
* * * What the negotiators wanted was a general framework that
encompassed all years and we agreed to that.").2

2

Assuming Mr.

We note that even respondent's counsel conceded that
(continued...)

- 21 Kletnick did not believe that petitioners were covered under the
settlement agreement for all years in which they claimed Arbitrage
Management partnership loss deductions, this is nowhere reflected
in the terms of the agreement.

In sum, the blanket settlement

offer that petitioners accepted3 was an offer to settle all years
2

(...continued)
the Arbitrage Management settlements were intended to apply to
all years in which there were Arbitrage Management investments.
William L. Blagg, one of respondent's counsel in Manko v.
Commissioner, T.C. Memo. 1995-10, made the following comments
during that trial:
MR. BLAGG: All that we wish to clarify is
that the hearing only covered the years 1982
and 1983 and the letter that is -- the
January 21st letter only deals with the
docketed cases, which did not include the
years 1982 and 1983.
*

*

*

*

*

*

*

THE COURT: But the settlement, as I
understand it, relates to all the years,
docketed and nondocketed, for everybody else.
Is that not correct?
MR. BLAGG: But the settlement is negotiated
on -- the testimony has been that the
settlement was negotiated on that basis;
that's correct.
THE COURT: Right.
believe it wasn't?
MR. BLAGG:
3

And you have reason to

No, I do not.

Mr. Kletnick testified that he was unaware that the
list enclosed with his Jan. 21, 1988, letter to the Court
(continued...)

- 22 in which petitioner had Arbitrage Management investments, whether
or not those years were docketed. (We note that if the offer
applied only to the docketed years, the parties could have simply
filed a decision document.

They did not do so.)

Moreover, all essential settlement terms were agreed upon no
later than January 1988 (i.e., deduction of 20 percent of the
challenged losses allowed; capital gains eliminated in amounts
commensurate

with

penalties).

The concept of "netting" was also agreed to by the

parties.

disallowed

Respondent,

however,

losses;

contends

and

no

that

assertion

the

of

settlement

negotiations vis-a-vis petitioners were suspended before agreement
was reached on the netting issue, an essential term.

Respondent

argues that the suspension letter was sent to petitioners in June
1988 and final agreement on language of a netting provision to be
included in a closing agreement was not reached until December
1989.

3

(...continued)
included all of the Arbitrage Management investors referred to in
Ms. Kaplan's Jan. 15, 1988, acceptance letter. He testified that
he mistakenly believed that the list included only Arbitrage
Management investors who had accepted guideline settlement offers
sent to them individually. We are not persuaded. There is no
suggestion that Mr. Kletnick was misled in any way, and a
unilateral error of counsel, in the absence of misrepresentation
by the adverse party, is not a sufficient ground to vacate a
settlement agreement. See Stamm Intl. Corp. v. Commissioner, 90
T.C. 315 (1988).

- 23 We disagree.
agreement

on

petitioners

all

The parties intended to and did in fact reach
essential

accepted

terms

respondent's

for

multiple

blanket

settlement

January 1988. The settlement terms were clear.
Inc. v. Commissioner, T.C. Memo. 1991-52.

years

when

offer

in

Cf. Nelson Bros.,

The offer included an

understanding that netting would be allowed, whereby taxpayers who
accepted the offer would be allowed to make one payment of the net
amount

owed

instead

of

being

required

to

deficiencies and wait for later year refunds.

pay

earlier

year

Although the manner

in which the netting would be accomplished was not finally reduced
to writing until December 1989 (as we held in Manko I), that was
only a matter of implementing the settlement that had been reached
when the blanket settlement offer was accepted in January 1988.4
In sum, we hold that all of the evidence before us indicates
that: (1) The settlement covered all years in which petitioner had
Arbitrage

Management

investments,

docketed

and

nondocketed,

including the years in issue; and (2) all essential settlement
terms,

4

including

the

agreement

to

apply

overpayments

against

The reports Mr. Kletnick sent to the Court after the
Feb. 25, 1988, pretrial conference confirmed his understanding
that settlements had been reached. And Mr. Nolan's letters to
Mr. Kletnick reflected the same understanding. For example, one
letter stated: "Thank you for meeting with us yesterday to
discuss the procedural difficulties that are delaying
implementation of the settlement agreement that we reached in
January and announced to Judge Jacobs in February."

- 24 deficiencies (netting), were agreed upon no later than January
1988.

Accordingly,

the

parties

are

bound

by

the

settlement

agreement.
B.

Absence of Closing Agreement Inconsequential

Respondent contends that a closing agreement is necessary for
settling nondocketed years. Accordingly, respondent continues, the
absence of a properly executed closing agreement herein indicates
that a settlement of petitioners' 1979-83 tax years (which were not
docketed at the time the settlement was made) did not occur.
We disagree.

Sections 7121 and 7122 do not require a closing

agreement form to settle a case pending before this Court.

See,

e.g., Lamborn v. Commissioner, T.C. Memo. 1994-515; Haiduk v.
Commissioner, T.C. Memo. 1990-506.

Petitioners' 1978 tax year was

docketed at the time of settlement.

Although petitioners' 1979-83

tax

the

years

were

not

docketed

at

time

of

settlement,

the

deficiencies for those years related to the same investment to
which the deficiency for 1978 related. Moreover, section 301.71211(d)(1), Proced. & Admin. Regs., provides that a request for a
closing agreement may be made at any time "before a case with
respect to the tax liability involved is docketed in the Tax Court
of the United States."

However, a closing agreement is not a

prerequisite for a valid settlement. Although we believe the
settlement for the years involved in this case should have been

- 25 implemented

by

a

closing

agreement,

respondent

refused.

Nevertheless, a binding settlement existed because the parties
intended such an agreement.
C. Settlement Offer That Petitioners Accepted in January 1988
Was Properly Authorized
Respondent argues that the settlement with petitioners is not
binding

because

Mr.

Kletnick

was

not

authorized

to

settle

nondocketed years. Under section 7121 a taxpayer may enter into an
agreement with the Secretary relating to the taxpayer's liability
for any internal revenue tax for any period, and such a closing
agreement will be final and conclusive in the absence of fraud,
malfeasance,

or

misrepresentation

of

a

material

fact.

The

Secretary has delegated to the Commissioner the authority to enter
into such closing agreements.5

Paragraph 2 of Delegation Order No.

97 (Rev. 27), effective October 31, 1987, Handbook of Delegation
Orders,

Internal

Revenue

Manual,

amended

and

supplemented

by

Delegation Order No. 225 (Rev. 1), 52 Fed. Reg. 13008 (Apr. 20,
1987), authorizes Associate Chief Counsels to enter into and
approve agreements "with any person * * * for a taxable period or
periods ended prior to the date of agreement".

That authority is

not limited to docketed years. Paragraph 4 of the Delegation Order

5

Sec. 7851(b)(3); Treas. Dept. Order No. 150-32, 1953
CCH par. 3592, 1953 P-H par. 76,756; Treas. Dept. Order No. 15036, 1954-2 C.B. 733.

- 26 authorizes Regional Counsels in nondocketed cases to enter into
agreements with taxpayers.
authorizes

Regional

Paragraph 5 of the Delegation Order

Counsels

in

docketed

cases

under

their

jurisdiction "to enter into and approve written agreements with any
person relating to the Internal Revenue tax liability of such
person * * * in respect to related specific items affecting other
taxable periods." (Emphasis added.)
It

is

clear

from

both

the

documentary

evidence

and

the

testimony of Messrs. Kletnick and Berman that the settlement
agreement

and

terms

National Office.

thereof

were

authorized

by

respondent's

The decision to make a blanket settlement offer

was made by James J. Keightley, respondent's Associate Chief
Counsel

(Litigation),

who

instructed

that

it

be

made.

His

instruction was "flown through" Agatha Vorsanger, respondent's
North Atlantic Regional Counsel, and Mr. Kletnick confirmed the
settlement
Vorsanger.6

to

this

Court

Pursuant

to

in

the

name

Delegation

and

on

behalf

of

Ms.

Order

No.

97,

both

Ms.

6

The following colloquy took place between the Court and
Mr. Berman during the trial of the case herein:
THE COURT:
And how did that breakthrough
come about? Did the national office,
specifically Mr. Keightley, in any way
influence the breakthrough?
THE WITNESS (Berman):

My recollection, your
(continued...)

- 27 Vorsanger and Mr. Keightley were authorized to settle with all
Arbitrage Management investors, including petitioners.
Mr. Kletnick's role was to advise the Arbitrage Management
taxpayers' lead counsel of the blanket settlement offer and its
terms.

Similarly, Mr. Kletnick's January 21, 1988, letter to this

Court confirming acceptance of the blanket settlement offer did not
purport to be on his own authority.
that

it

was

on

authority

of

The letter expressly stated

"Agatha

L.

Vorsanger,

Regional

Counsel".
The testimony before us supports our conclusion that the
settlement offer was properly authorized.

Mr. Kletnick testified

6

(...continued)
Honor, is that neither Mr. Kletnick nor I
were particularly fond of settling the socalled repo years, but that the decision was
made in Washington, I believe by Mr.
Keightley, that it would be in the
government's interest, for whatever reason,
to enter into that settlement and we were -would enter into a settlement with respect to
those years, that we were instructed,
accordingly, to do so.
THE COURT:
And you were instructed by your
supervisors?
THE WITNESS:
We were instructed by the
national office, again, I believe by Mr.
Keightley, and that would have then flown
through the regional office to Mr. Kletnick
and then down to myself.

- 28 that "the basis for settlement was ultimately approved by the
National

Office",

and

Mr.

Berman

testified

that

"I

believe

authority was received [from the National Office] sometime in
December of 1987."

Mr. Kletnick also testified that he was

instructed by Mr. Keightley to make the settlement offer.
In sum, the blanket settlement offer was properly authorized
by officials of the IRS who we note also had authority to enter
into closing agreements.

It was made on instructions of Associate

Chief Counsel Keightley.

Petitioners' acceptance was confirmed to

this Court by Regional Counsel Vorsanger.
D. Settlement Agreement Terms Included Respondent's Agreement
To Forgo Fraud Additions to Tax
Respondent argues that he may assert the fraud additions to
tax against petitioner because the imposition of these additions is
simply an "outgrowth" of petitioner's criminal conviction. We
disagree. Respondent agreed as part of the settlement to forgo the
assertion of penalties and additions to tax.

The settlement terms

clearly included an agreement that respondent would not assert
additions to tax under "IRC section 6653"; that is the only section
under which the fraud additions could be imposed for the years in
issue.
We

We give full effect to this specific settlement term.
further

believe

that

at

the

time

of

the

settlement,

respondent did not intend to treat petitioner's case differently

- 29 from

the

cases

of

other

Arbitrage

Management

partners,

and

respondent did not impose fraud additions on the other Arbitrage
Management partners.

Moreover, Mr. Kletnick acknowledged that he

was aware of the Arbitrage Management criminal investigation at the
time of the settlement; nevertheless, respondent chose to settle
with petitioners.

As part of the settlement, respondent agreed to

forgo the section 6653 additions to tax.

This was a valid

settlement, and once reached, cannot be repudiated by either party.
See Stamm Intl. Corp. v. Commissioner, 90 T.C. 315 (1988).

Thus,

we hold that respondent may not assert the fraud additions against
petitioner.
E.

District Court's Determination Irrelevant Herein

We reject respondent's contention that petitioners are bound
by the District Court's finding that no settlement was entered into
between respondent and petitioners for 1982 and 1983. The District
Court's decision was superseded by the decision of the U.S. Court
of Appeals for the Second Circuit in Manko v. United States, 87
F.3d 50 (1996), which remanded the case for the District Court to
determine whether the exclusion of settlement evidence deprived
petitioner of a fair trial.

The District Court's finding as to the

nonexistence of a settlement has no preclusive effect at this time.
Respondent contends that collateral estoppel applies.
disagree.

We

Collateral estoppel precludes litigation by parties or

- 30 their privies, in a later suit on a different cause of action, of
issues of fact and law actually litigated and necessarily decided
by a court in reaching a prior judgment.
464 U.S. 154, 158 (1984).

United States v. Mendoza,

As we stated in Hudson v. Commissioner,

100 T.C. 590, 593-594 (1993):
For obvious reasons, where a trial
court's judgment is vacated, reversed, or set
aside by an appellate court, collateral
estoppel will not apply to the trial court's
conclusions of law or findings of fact. * * *
where a trial court's conclusions of law or
its findings of fact are challenged on appeal
and where the appellate court affirms the
trial court's judgment on grounds different
from those relied upon by the trial court and
does not pass on the trial court's conclusions
of law or findings of fact, collateral
estoppel will not apply to the trial court's
conclusions of law or findings of fact. * * *
The
underlying
rationale
for
this
limitation on collateral estoppel is that,
where an appellate court does not pass on a
trial court's conclusions of law or findings
of fact with regard to a particular issue that
is appealed, the party who lost before the
trial court has not had a full and fair
opportunity to litigate, at the appellate
level, the trial court's conclusions of law or
findings of fact. * * * Under this limitation,
where a trial court's conclusions of law or
findings of fact are not passed on by the
appellate court, the trial court's conclusions
of law or findings of fact are effectively set
aside, and the trial court's conclusions of
law or findings of fact cannot be used as the
basis for collateral estoppel in a subsequent
proceeding between the same parties. * * *

- 31 Here, the District Court's judgment was vacated. Accordingly,
following Hudson v. Commissioner, supra at 593, collateral estoppel
does not apply to the District Court's conclusions.

Moreover, in

vacating the District Court's judgment, the Court of Appeals cast
doubt in particular on the finding that no settlement was reached.
See Manko v. United States, 87 F.3d at 53.
The Court of Appeals concluded that rule 408 of the Federal
Rules of Evidence does not require exclusion of evidence relating
to a civil settlement in a criminal trial, and that the District
Court abused

its

discretion

in

holding

that

settlement was inadmissible as a matter of law.

evidence

of

the

Id. at 55. The

Court of Appeals did not rule on whether a settlement between
petitioner

and

respondent

existed.

To

a

certain

extent,

the

District Court's finding on this matter was insulated from review,
owing to the court's reliance on rule 408 of the Federal Rules of
Evidence and the fact that even if such a finding were erroneous,
it might not entitle petitioner to a new trial in the criminal
case.

Thus, because the Court of Appeals did not rule on the

District Court's finding that no settlement took place, that
finding by the District Court cannot be used as the basis for
collateral estoppel herein.
593-594.

See Hudson v. Commissioner, supra at

Consequently, for the aforementioned reasons, we reject

respondent's collateral estoppel argument.

- 32 Accordingly, we shall grant petitioners' motion for partial
summary judgment.
To reflect the foregoing,

An appropriate order will
be issued.

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A82bafc3449667737. Public record. Not legal advice.