                        T.C. Memo. 1998-94



                      UNITED STATES TAX COURT



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



     Docket No. 17775-87.                       Filed March 4, 1998.




     Hugh Janow, for petitioners.

     Lawrence L. Davidow, for respondent.




                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge John J. Pajak, pursuant to the provisions of section

7443A(b)(4) of the Internal Revenue Code of 1986, as amended, and
                                       - 2 -

Rules 180, 181, and 183.1           The Court agrees with and adopts the

Opinion of the Special Trial Judge, which is set forth below.

                      OPINION OF THE SPECIAL TRIAL JUDGE

       PAJAK, Special Trial Judge:         Respondent determined

deficiencies in, additions to tax, and increased interest in

petitioners' Federal income taxes as follows:

                              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,
       the portion of the underpayment attributable to negligence.

       This case was submitted fully stipulated under Rule 122.

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 Federal

Arbitrage Company in 1980.           (An issue with respect to Securities

Arbitrage Co., another partnership, was resolved in an opinion of




       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

this Court in Janow v. Commissioner, T.C. Memo. 1996-289 (Janow

I).)

       Petitioners resided in West Nyack, New York, when their

petition was filed.

       During 1980, Hugh Janow (petitioner) was a general partner

in a limited partnership, Federal Arbitrage Company (Federal).

Federal is one of several partnerships that comprise respondent's

Arbitrage Management National Tax Litigation Project.    Petitioner

is also a practicing member of the Bar of this Court.

       For taxable year 1980, petitioner received a Schedule K-1

from Federal reflecting his distributive share of items of

partnership income and loss, reported by Federal.    The Schedule

K-1 shows that petitioner received $20,000 as a guaranteed

payment in that year.

       On Schedule E of their 1980 Federal income tax return,

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

amount of $130,260.    Petitioners also reported the $20,000

guaranteed payment received by petitioner in that year.

       In the explanation of adjustments attached to the notice of

deficiency, respondent used petitioners' partnership loss as

reported on their 1980 return to make an adjustment.    Respondent

did not make any determinations or adjustments with regard to the

guaranteed payment petitioner received from Federal in 1980 and

reported on petitioners' return for that year.
                               - 4 -

     After reviewing the record, we find that petitioners

correctly reported the guaranteed payment on their 1980 return,

that respondent made no adjustments with respect to the

guaranteed payment, that the petition does not raise any issue as

to the guaranteed payment, and that the answer does not raise

such an issue.   In sum, the guaranteed payment 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 (Computations).    Over a

period of months, the parties revised the Computations.    The

Computations did not reflect any adjustments to the guaranteed

payment reported as income by petitioners on their 1980 return.

     In the Form 906, Closing Agreement On Final Determination

Covering Specific Matters (the Closing Agreement), the parties

agreed to the following pertinent matters:

          WHEREAS, there now exists a dispute between the
     taxpayer(s) and the Commissioner of the Internal
     Revenue with respect to the taxability of the
     taxpayers' distributive share of gains and losses from
     listed entity(ies) [hereinafter "the partnership(s)"]
     arising from securities trading transactions conducted
     through Arbitrage Management for all taxable years and;

          WHEREAS, the taxpayer and the Commissioner wish to
     determine with finality all of the federal income tax
     consequences of the taxpayers' interest in the
     partnerships for all taxable years (listed below);
                              - 5 -

     Name of First Tier               First Tier
     Partnership                         TIN         Years

     Federal Arbitrage                XX-XXXXXXX   1978-1988

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

     1.   In each year they had an interest in the
partnerships, the taxpayers will recognize their
distributive share of the partnerships' net trading
gain or loss from the Arbitrage Management securities
trading transactions. The net trading gain or loss
equals the annual increase or reduction in the
taxpayers' K-1 capital account, plus any capital
distributions received from the partnerships during the
year. The taxpayers will recognize income to the
extent of such capital distribution.

               *   *      *    *      *   *   *

     7.   In accordance with paragraphs 1 through 6,
the attached TABLE 1, which is incorporated into this
agreement by this reference, represents all of the
taxpayers' taxable income, deductions, gains and losses
from their interest in the partnerships.

     8.   The annual tax underpayments and overpayments
attributable to the taxpayers' interest in the
partnership shall be calculated by comparing the
amounts in TABLE 1 to the partnerships items reported
by the taxpayer(s) on their original returns. * * *

               *   *      *    *      *   *   *

     10. Other than as provided in paragraph 8, no
additions to the tax or penalties shall be imposed with
respect to the taxpayers' interest in the partnership,
including the additions and penalties described in
I.R.C. Section 6653, 6659, and 6661.

               *   *      *    *      *   *   *

     13. The taxpayers' taxable income for any taxable year
shall not be increased at any time after the execution of
this agreement due to the taxpayers' interest in the
partnerships, except to the extent that the taxpayer receive
actual distributions of cash and/or property from the
partnerships after the execution of this agreement.
                                 - 6 -

                     *   *   *    *      *   *   *

                    TABLE 1 (In pertinent part)

                     TOTAL
                     ORDINARY    SHORT TERM          LONG TERM
           YEAR      ALLOWED     GAIN (LOSS)         GAIN (LOSS)
           1980      (21,822)       22,966              3,104

     After the parties executed the Closing Agreement, 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 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 payment petitioner actually received

in 1980.

     Section 7121(a) authorizes respondent to enter into an

agreement in writing with any person relating to the liability of

such person 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 may not be annulled, modified, set

aside, or disregarded in any suit, action, or proceeding, except
                                - 7 -

upon a showing of fraud, malfeasance, or misrepresentation of a

material fact.   Sec. 7121(b); Zaentz v. Commissioner, 90 T.C.

753, 760 (1988).

     Neither respondent nor petitioners ask us to set aside the

Closing Agreement.   Moreover, they do not contend that there

exists any fraud, malfeasance, or misrepresentation of a material

fact.   Both parties assert that the Closing Agreement is

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

interpretation of the Closing 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

"four corners" of the Closing Agreement, unless it is ambiguous

as to essential terms.   Id.   at 325.

     The parties chose Form 906 as their Closing Agreement.     Form

906 is used where there is an agreement with respect to the

closing of specific matters affecting tax liability.    Estate of

Magarian v. Commissioner, 97 T.C. 1, 5 (1991).   A Form 906

Closing Agreement is a final and conclusive agreement that is

binding as to the matters agreed upon for the stated taxable

year.   Qureshi v. Commissioner, T.C. Memo. 1996-169.

     We are again faced with construing a closing agreement

entered into by petitioners and respondent.   We start with

petitioners' 1980 Federal income tax return on which petitioners
                                - 8 -

reported a $20,000 guaranteed payment and a partnership ordinary

loss of $130,260.    Turning to the statutory notice of deficiency,

we find that respondent made a substantial adjustment to the

partnership ordinary loss claimed by petitioners.   No adjustment

was made to the $20,000 guaranteed payment.

     Ultimately, the parties executed a Form 906.   The first

"WHEREAS" clause refers to a dispute "with respect to the

taxability of the taxpayer's distributive share of gains or

losses from [Federal] arising from security trading transactions

* * *".   The second "WHEREAS" clause states, that the parties

wish to determine "all of the federal income tax consequences of

the taxpayers' interest in the partnerships".   Reading these

clauses, together with the remainder of the Closing Agreement,

leads us to conclude that the specific adjustments agreed upon

relate only to partnership adjustments.   Thus, the $21,822

allowable loss is to be deducted from the claimed $130,260, which

results in an adjustment of $108,438.   This is respondent's

position.

     Petitioners argue that the Closing Agreement should be

interpreted to exclude the $20,000 guaranteed payment which

petitioner received in 1980 and which petitioners reported on

their 1980 return.    Petitioners' arguments are based on the

premise that the absence of any specific provision in the Closing

Agreement covering the $20,000 guaranteed payment necessarily
                                - 9 -

means that such guaranteed payment must be excluded.    We

disagree.

       We find petitioners' arguments to be an incorrect reading of

the Closing Agreement.    Form 906 binds the parties only to

specific matters agreed upon.    Zaentz v. Commissioner, supra at

761.    As we read the Closing Agreement, the parties agreed to

settle with respect to petitioners' taxable income, gains, and

losses from their interest in Federal.    Nowhere in the Closing

Agreement is there a provision excluding the $20,000 guaranteed

payment.    In fact, the parties stipulated that the treatment to

be accorded to guaranteed payments was not expressly discussed by

either party during the settlement negotiations.    We reiterate

what we stated in Janow I.    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 is considered as made to one who is not a partner, to the

extent such payment is 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 income.    Pursuant to section 707, a partner

shall include in his income for a taxable year guaranteed

payments which are made to him in a partnership taxable year
                               - 10 -

ending with or within that taxable year.    Sec. 1.706-1, Income

Tax Regs.

     We note that the guaranteed payment reported on petitioners'

1980 Federal income tax return was accepted by respondent and was

never in dispute until after the execution of the Closing

Agreement.   In the 2 years in which the parties negotiated the

Computations, petitioners never raised any objections to either

the original or the revised Computations with respect to the

failure to exclude the $20,000 guaranteed payment.     Clearly,

petitioners had ample time to review the Computations and to

request the necessary changes.

     In any event, if the parties had intended to settle with

respect to the exclusion of the $20,000 guaranteed payment, they

would have included specific language to that effect.     They did

not do so.   Absent specific language excluding the $20,000

guaranteed payment, the Closing Agreement must not be read to

imply its exclusion.    Accordingly, we hold that the Closing

Agreement does not require the $20,000 guaranteed payment to be

excluded from income.

     To the extent we have not addressed petitioners' other

arguments, the Court finds them to be without merit.



                                           Decision will be entered

                                     under Rule 155.
