                         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     expense     on    straddles        and       Government     security

repurchase     agreements       entered        into     by       Bernhard     F.   Manko

(petitioner)       both    directly    and     through       Arbitrage        Management

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.              Manko I involved tax year 1978.

II.   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:

                                       Additions to Tax and Additional Interest
                     Sec.         Sec.           Sec.         Sec.        Sec.        Sec.       Sec.
Year   Deficiency   6653(a)     6653(a)(1)    6653(a)(2)   6653(b)(1)   6653(b)(2)    6661      6621(c)
                                                                                                  2
1979   $2,676,752   $133,838       ---          ---           ---         ---         ---
                                                                                                  2
1980    1,926,696     96,335       ---          ---           ---          ---         ---
                                                 1                                                2
1981    2,284,248      ---      $114,212                      ---         ---         ---
                                                 1                           1                    2
1982    1,794,143      ---        89,707                   $897,072                  $448,536
                                                  1                          1                    2
1983    1,649,568      ---        82,478                    824,784                   412,392


  1
      50 percent of the interest due on the deficiency.
 2
      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).

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     the       years    under         consideration,       unless        otherwise

indicated.          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     the   facts    have    been   stipulated      and    are   found

accordingly.       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     Management     began     operations    in    the    mid-to-late

1970's.       From    1978    through      1981,   Arbitrage     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    partner       of   limited    partnerships      that     invested   in

Government     securities         acquired    through    Arbitrage       Management

(Arbitrage Management partnerships).                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   assigned      the    negotiators     the      task   of   either

negotiating      a    settlement     for     Arbitrage     Management       cases    or

selecting      one    or   more    Arbitrage       Management       test   cases    for

litigation.      Negotiations began in the spring of 1987.

       D.    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    issued   by   the   Office   of    Chief    Counsel   in

Washington, D.C."       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   the   criminal   charges.      Petitioner   asserted   that   the

settlement      constituted      an   admission    by   the   Government      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.     United States v. Manko, 979 F.2d 900 (2d

Cir. 1992).    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   petitioner,   this   evidence   was   relevant   to   prove   that   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   partnership   loss

deductions.   It was a package settlement.    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               Assuming Mr.


       2
               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.    And you have reason to
          believe it wasn't?

          MR. BLAGG:   No, I do not.

     3
          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   disallowed    losses;    and   no    assertion   of

penalties).    The concept of "netting" was also agreed to by the

parties.   Respondent,   however,   contends    that      the   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.         The parties intended to and did in fact reach

agreement     on    all    essential     terms      for     multiple     years    when

petitioners     accepted        respondent's      blanket    settlement     offer   in

January 1988. The settlement terms were clear.                    Cf. Nelson Bros.,

Inc. v. Commissioner, T.C. Memo. 1991-52.                   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    pay   earlier   year

deficiencies and wait for later year refunds.                    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,   including        the   agreement    to    apply    overpayments     against


     4
          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   years   were     not    docketed   at   the   time    of   settlement,    the

deficiencies for those years related to the same investment to

which the deficiency for 1978 related. Moreover, section 301.7121-

1(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. 150-
36, 1954-2 C.B. 733.
                                         - 26 -


authorizes Regional Counsels in nondocketed cases to enter into

agreements with taxpayers.               Paragraph 5 of the Delegation Order

authorizes      Regional      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     thereof      were    authorized         by    respondent's

National Office.        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     to     this    Court    in    the    name   and    on     behalf       of   Ms.

Vorsanger.6          Pursuant    to    Delegation      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.               The letter expressly stated

that       it    was   on   authority   of   "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 so-
            called 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 give full effect to this specific settlement term.

     We    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.             We

disagree.     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.   United States v. Mendoza,

464 U.S. 154, 158 (1984).   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   evidence   of   the

settlement was inadmissible as a matter of law.                 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.      See Hudson v. Commissioner, supra at

593-594.    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.
