                       T.C. Memo. 1996-289



                     UNITED STATES TAX COURT



              HUGH AND LINDA JANOW, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17775-87.                      Filed June 20, 1996.



     Hugh Janow, pro se.

     Bernard S. Mark, for petitioner Linda Janow.

     Lawrence L. Davidow, for respondent.




                       MEMORANDUM OPINION


     PAJAK, Special Trial Judge:   Respondent determined

deficiencies in, additions to tax, and increased interest in

petitioners' Federal income taxes as follows:
                                      - 2 -

                            Additions to Tax and Increased Interest
                         Sec.      Sec.        Sec.      Sec.    Sec.
Year    Deficiency     6653(a) 6653(a)(1) 6653(a)(2)     6659 6621(c)

1978     $39,133      $1,956.65       --              --          --         *
1979      34,365       1,718.25       --              --          --         *
1980      94,226       4,711.30       --              --          --         *
1981      34,181         --        $1,709.05          **       $1,910.70     *

             * Amount equal to 120 percent of the interest payable under
       sec. 6601 with respect to any substantial underpayment attributable
       to tax-motivated transactions.
             ** Amount equal to 50 percent of the interest due on $34,181
       on the portion of the underpayment attributable to negligence.


       This case was submitted fully stipulated as to the

Securities Arbitrage Company issue.            The stipulated facts are so

found.    For clarity and convenience, the facts and opinion have

been combined.

       The Court must decide whether a Closing Agreement executed

by the parties entitles petitioners to exclude from income

guaranteed payments received by petitioner husband from

Securities Arbitrage Company in 1980 and 1981. (An issue with

respect to Federal Arbitrage Company, another partnership,

remains for resolution before a decision can be entered in this

case.)

       Petitioners resided in West Nyack, New York, when their

petition was filed.

       During the years in issue, Hugh Janow (petitioner) was a

general partner in a limited partnership, Securities Arbitrage

Company (Securities).        Securities is one of several partnerships

that comprise respondent's Cralin Commodity National Tax
                                - 3 -

Litigation Project.    Petitioner was general counsel of Securities

for many years.    He is also a practicing member of the Bar of

this Court.

     For the years in issue, petitioner received Schedules K-1

from Securities reflecting his distributive share of items of

partnership income and loss, and cash distributions representing

guaranteed payments from Securities.    The Schedule K-1 for 1980

shows that petitioner received $39,024 as a guaranteed payment in

that year.    The Schedule K-1 for 1981 shows that petitioner

received $24,220 as a guaranteed payment in that year.

     On Schedule E of their 1980 Federal income tax return,

petitioners reported, with respect to Securities, a loss in the

amount of $97,669, and income in the amount of $39,024, which was

the guaranteed payment received by petitioner in that year.

     On Schedule E of their 1981 Federal income tax return,

petitioners reported, with respect to Securities, income in the

amount of $30,048.    This income was composed of the $24,220

guaranteed payment and petitioner's distributive share of

partnership income.

     In the explanation of adjustments attached to the notice of

deficiency, respondent used petitioners' partnership income/loss

(including guaranteed payments) as reported on their 1980 and

1981 returns to make the adjustments.    Respondent did not make

any determinations or adjustments with regard to the guaranteed
                               - 4 -

payments petitioners received from Securities in 1980 and 1981

and reported on their returns for those years.

     After reviewing the record, we find that petitioners

correctly reported the guaranteed payments on their 1980 and 1981

returns; that respondent made no adjustments with respect to

those guaranteed payments; that the petition does not raise any

issue as to the guaranteed payments; and that the answer does not

raise such an issue.   In short, the guaranteed payments should

not be an issue before this Court.     Nevertheless, inasmuch as the

parties have addressed the matter otherwise, we shall do

likewise.   We shall consider the issue as tried by consent.

Rule 41(b)(1).

     Respondent initially prepared computations, which included a

Statement of Account and Audit Statement (the Computations).

Over a period of months, the parties revised their Computations.

The Computations did not make any adjustments to the guaranteed

payments reported as income by petitioners in 1980 and 1981.

     Over a year later, the parties prepared a Stipulation of

Settled Issues with regard to the Securities issues

(Stipulation).   The Stipulation was filed by this Court and

provides, in pertinent part, that:

          1.   Attached hereto as Exhibit A is a copy of
     fully executed Forms 906, Closing Agreement on Final
     Determination Covering Specific Matters relating to the
     petitioners' interest and agreed treatment of items of
     income, gain, loss or deduction arising as a result of
     their direct or indirect investments in Securities
     Arbitrage Co. Exhibit A resolves the tax aspects of
                                - 5 -

     the petitioners' interest in Securities Arbitrage Co.
     for all years.

          2.   Adjustments to the petitioners' income tax
     liabilities for the taxable years involved herein which
     relate, directly or indirectly, to Securities Arbitrage
     Co. will be determined by the terms of the agreement in
     Exhibit A. Such adjustments will be incorporated in a
     final decision to be entered by this Court for Docket
     No. 17775-87.


     In the Form 906, Closing Agreement On Final Determination

Covering Specific Matters (the Closing Agreement), attached to

the Stipulation, the parties agreed to the following pertinent

matters:

          WHEREAS, an issue exists between the parties as to
     whether taxpayers are entitled to deduct losses as a
     result of their Securities Arbitrage Co. investment,

          WHEREAS, an issue exists between the parties as to
     whether taxpayers realized income or gains as a result
     of their investment,

          WHEREAS, the parties wish to determine with
     finality the treatment for Federal income tax purposes
     of any losses incurred and the amount, if any, of
     income and gains realized by taxpayers as a result of
     their investment in Securities Arbitrage Co.
     partnership.

          NOW IT IS HEREBY DETERMINED AND AGREED, for
     Federal income tax purposes that:

          1.   Taxpayers are not entitled to deductions,
     losses or credits nor are they required to report
     income or gains as a result of their investment in
     Securities Arbitrage Co. partnership except as provided
     herein.

                    *   *   *    *      *   *   *

          3.   As a result of the investment in Securities
     Arbitrage Co. partnership, taxpayers are entitled to
     deductions or losses as follows:

                    *   *   *    *      *   *   *
                                - 6 -


      c. 1980 $ 18,898.00       ($12,598,856 x 15% x taxpayers
                                interest in Securities Arbitrage
                                Co. partnership as an ordinary
                                deduction);

          d. 1980 $ 80,906.00 (180% of actual cash
                              investment in Securities
                              Arbitrage Co. partnership as
                              an ordinary deduction.)

                    *   *   *    *      *   *   *

          6.   During * * * 1980 * * * taxpayers realized
     and are required to report income as follows, as a
     result of the Securities Arbitrage Co. partnership
     investment:

                    *   *   *    *      *   *   *

          b. 1980 $ 38,305.00 ([$20,060,852 x 15% +
                              $821,457] x taxpayers'
                              interest in Securities
                              Arbitrage Co. partnership as
                              short-term gain);

                    *   *   *    *      *   *   *

          7.   Any money or other property received by the
     taxpayers, directly or indirectly, as a result of the
     investment in Securities Arbitrage Co. partnership
     shall constitute ordinary income in the year received.

          8.   The taxpayers have executed concurrently with
     this agreement an agreement as an investor in the
     Securities Arbitrage Co. partnership pursuant to I.R.C.
     Section 6224(c) agreeing that Securities Arbitrage Co.
     partnership had no gains, losses, deductions or credits
     for the taxable year 1981 through 1985, inclusive.


     After the Stipulation was filed, respondent mailed to

petitioners a proposed Decision and overpayment Stipulation,

together with the revised Computations.     Respondent, by letter,

twice asked petitioners to execute and return the proposed
                               - 7 -

Decision and overpayment Stipulation.   Petitioners did not sign

the proposed Decision and overpayment Stipulation.

     Nearly 2 years after the Computations had last been revised

by the parties, petitioner advised respondent by letter that he

believed the proposed Decision document and related Computations

did not accurately reflect the terms of the Closing Agreement and

consequently were unacceptable.    In essence, petitioner claimed

for the first time that the Closing Agreement did not mandate

inclusion of the guaranteed payments petitioners actually

received in 1980 and 1981.

     Section 7121(a) authorizes the Commissioner to enter into an

agreement in writing with any person relating to such person's

liability in respect of any internal revenue tax for any taxable

period.   A closing agreement is binding on the parties as to the

matters agreed upon, and the agreement may not be annulled,

modified, set aside, or disregarded in any suit, action, or

proceeding, except upon a showing of fraud, malfeasance, or

misrepresentation of a material fact.   Sec. 7121(b).

     Neither respondent nor petitioners ask us to set aside the

Closing Agreement.   Both assert that the Closing Agreement is

unambiguous.   They disagree, however, with respect to the proper

interpretation of the agreement.

     Ordinary principles of contract law govern the

interpretation of closing agreements.    Rink v. Commissioner, 100

T.C. 319, 325 (1993), affd. 47 F.3d 168 (6th Cir. 1995).

Contract law principles generally direct that we look within the
                                 - 8 -

"four corners" of the agreement, unless it is ambiguous as to

essential terms.     Rink v. Commissioner, supra.

     We agree with the parties that the Securities Closing

Agreement is unambiguous.    Paragraph 7 states that "Any money or

other property received by the taxpayers, directly or indirectly,

as a result of the investment in Securities * * * shall

constitute ordinary income in the year received."

     Despite this clear statement, petitioners argue that:

          Respondent may not require Petitioners to include
     cash distributions as income in years covered by
     paragraphs 3, 6 and 8 as a consequence of paragraph 7
     of the Agreement. Respondent's counsel correctly
     classified paragraph 7 as a 'catch-all provision' in
     his opening statement of October 25. As such, it must
     be regarded as a general provision which cannot be
     properly read to override the specific mandates of
     paragraphs 3, 6 and 8. William Higgins & Sons, Inc. v.
     New York, 20 NY.2d 425, 428 (1967); See Also John
     Hancock Mutual Life Ins., 717 F.2d at 669-70 n.8.

     We reject petitioners' argument.    There is no dispute with

respect to the proposition that when two contract provisions are

in apparent conflict, the specific provision overrides the more

general provision.    As stated by the Court of Appeals for the

Second Circuit (the circuit to which an appeal of this case would

lie) in John Hancock Mut. Life v. Carolina Power & Light, 717

F.2d 664, 669 n.8 (2d Cir. 1983):

          New York law recognizes that definitive,
     particularized contract language takes precedence over
     expressions of intent that are general, summary, or
     preliminary. As one New York Court has explained,
     "Thus, where the parties have particularized the terms
     of a contract an apparently inconsistent general
     statement to a different effect must yield."
     [Citations omitted.]
                                - 9 -

     In the Securities Closing Agreement, paragraph 7 is not in

conflict with paragraphs 3, 6, or 8, nor is it "general, summary,

or preliminary" language.   Paragraph 3 refers to petitioners'

distributive share of Securities' partnership ordinary deductions

and short-term losses for 1979 and 1980.   Paragraph 6 covers

petitioners' distributive share of Securities' partnership income

to be reported as short-term or long-term capital gain for 1979,

1980 and 1985.   Paragraph 8 deals with the gains, losses,

deductions, and credits of Securities as a partnership for the

years 1981 through 1985.    Paragraph 7 specifically deals with any

"money or other property" petitioners received, directly or

indirectly, as a result of their investment in Securities, and

states that such money or other property "shall constitute

ordinary income in the year received."   Rather than conflicting

with the other paragraphs, we find this paragraph supplements

those paragraphs and covers the guaranteed payments in issue.

     Moreover, the definition of a "guaranteed payment" to a

partner supports this interpretation of the Closing Agreement.     A

guaranteed payment is a payment made by a partnership to a

partner for services or for the use of capital and are considered

as made to one who is not a partner, to the extent such payments

are determined without regard to the income of the partnership.

Sec. 707(c); sec. 1.707-1(c), Income Tax Regs.   For the purposes

of sections 61(a) and 162(a), guaranteed payments are not

considered part of a partner's distributive share of partnership
                                - 10 -

income.   Pursuant to section 707, a partner shall include in his

taxable year guaranteed payments which are made to him in a

partnership taxable year ending with or within that taxable year.

Sec. 1.706-1, Income Tax Regs.

     An examination of paragraphs 3, 6, and 8 reveals that the

items in those paragraphs are calculated based on, or are a

reference to, Securities' partnership income and deductions for

the stated years.   Thus, these paragraphs do not specifically

cover the guaranteed payments petitioners received in 1980 and

1981 (except to the extent deduction of the guaranteed payment

resulted in a larger loss or a reduction in income for the

partnership in 1980 and 1981, respectively).

     In conclusion, we find that no ambiguity exists in the

Securities Closing Agreement.    The language of the agreement is

clear, and paragraph 7 requires petitioners to include the

guaranteed payments as ordinary income in the years received.

Consequently, we shall not look past the "four corners" of the

document to interpret paragraph 7 in the manner that petitioners

urge.

     To the extent we have not addressed petitioners' other

arguments, the Court finds them to be without merit.

     To reflect the foregoing,

                                               An appropriate order

                                          will be issued.
