                          T.C. Memo. 1998-228



                        UNITED STATES TAX COURT


           FIRST BLOOD ASSOCIATES, RICHARD M. GREENBERG,
             TAX MATTERS PARTNER, ET AL.,1 Petitioner v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos.     623-92, 13014-92,           Filed June 29, 1998.
                   15641-92, 12062-94.

     Sallie W. Gladney, for participants Joseph E. and Bernice L.

Goodwin.

     Gerald A. Thorpe, for respondent.


              MEMORANDUM FINDINGS OF FACT AND OPINION

     POWELL, Special Trial Judge:        These consolidated cases are

before the Court on participants Joseph E. and Bernice L.

Goodwin's (the Goodwins) motion to dismiss for lack of

     1
          Cases of the following petitioners are consolidated
herewith: First Blood Associates, Richard M. Greenberg, Tax
Matters Partner, docket No. 13014-92; First Blood Associates,
Richard M. Greenberg, Tax Matters Partner, docket No. 15641-92;
and First Blood Associates, Eugene C. Lipsky, A Partner Other
Than the Tax Matters Partner, docket No. 12062-94.
                                 - 2 -


jurisdiction.   The underlying dispute arises from the Goodwins'

interest in First Blood Associates (First Blood or the

partnership).   The parties agree that for the partnership taxable

years in issue the partnership is subject to the unified audit

and litigation procedures of sections 6221 through 62312 enacted

by the Tax Equity & Fiscal Responsibility Act of 1982 (TEFRA),

Pub. L. 97-248, sec. 402(a), 96 Stat. 648.   They further agree

that timely petitions were filed and, accordingly, this Court has

jurisdiction over these cases.    The Goodwins, however, argue that

they entered into a settlement agreement with respondent which

converted their partnership items to nonpartnership items and,

with respect to them, ousted this Court's jurisdiction pursuant

to sections 6226(d)(1)(A) and 6231(b)(1)(C).   The issue is

whether the Goodwins and respondent entered into a binding

settlement agreement with respect to adjustments relating to the

Goodwins' investment in First Blood for the 1983 through 1990

partnership taxable years.

                         FINDINGS OF FACT

     First Blood is one of a number of partnerships formed to

purchase and exploit the rights to certain films.   The general

partners of those partnerships were Richard M. Greenberg and/or


     2
          Unless otherwise indicated, all sections references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 3 -


A. Frederick Greenberg.3   Respondent began an examination of the

partnership at some point in the mid-1980's as part of a national

project focusing on the various partnerships of the Greenberg

Brothers (the Greenberg Brothers project).   Richard M. Greenberg,

who was then the tax matters partner (TMP) of the partnership,

retained Peter L. Faber (Mr. Faber) to represent the partners at

the partnership level during respondent's examination.4   Mr.

Faber also represented the partners at the partnership level upon

filing the petitions in the cases at docket Nos. 623-92, 13014-

92, and 15641-92.




     3
          On its partnership returns for the years in issue,
First Blood claimed loss deductions arising from the alleged
purchase of the film "First Blood" starring Sylvester Stallone.
We note that whether the partnership obtained the benefits and
burdens of ownership in the film is not here at issue, but has
formed the basis for considerable securities litigation. See,
e.g., Block v. First Blood Associates, 988 F.2d 344, 347 (2d Cir.
1993), and cases cited therein.
     4
          Richard M. Greenberg became disqualified from acting as
the TMP when an involuntary petition in bankruptcy was filed
against him in January 1994. See sec. 6231(c); sec.
301.6231(a)(7)-1(l)(1)(iv), Proced. & Admin. Regs.; sec.
301.6231(c)-7T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.
6793 (Mar. 5, 1987).
                                   - 4 -


     Respondent issued notices of final partnership

administrative adjustments (FPAA's)5 determining adjustments to

partnership items for the following partnership taxable years:

                                     Partnership
Docket No.6    FPAA Date             Taxable Year       Petition Date

623-92         Oct.   21,   1991     1983-1987          Jan.   8, 1992
13014-92       Mar.   24,   1992     1988               June   12, 1992
15641-92       Apr.   20,   1992     1989               July   10, 1992
12062-94       Mar.   14,   1994     1990               July   11, 1994

     At the time the petitions in docket Nos. 623-92, 13014-92,

and 15641-92 were filed the partnership's principal place of

business was located at Greenwich, Connecticut.        At the time the

petition in docket No. 12062-94 was filed the partnership was in

dissolution; the partnership's principal place of business during

its wind-down period was located in New York, New York.

     The Goodwins were limited partners in First Blood during the

partnership taxable years in issue.        The Goodwins were also


     5
          The FPAA is the notice provided to affected taxpayer-
partners of respondent's final administrative adjustment for
specific partnership tax years. The FPAA is to the litigation of
partnership items the equivalent of the statutory notice of
deficiency in other cases. Sirrine Bldg. No. 1 v. Commissioner,
T.C. Memo. 1995-185, affd. without published opinion 117 F.3d
1417 (5th Cir. 1997).
     6
          The petitions in docket Nos. 623-92, 13014-92, and
15641-92 were filed by the tax matters partner (TMP). The
petition in docket No. 12062-94 was filed by notice partner
Eugene C. Lipsky. Sec. 6226(b) provides in part that if the TMP
does not file a petition, then any notice partner may, within 60
days after the close of the 90-day period set forth in sec.
6226(a), file a petition for readjustment of partnership items
for the taxable year involved.
                                - 5 -


petitioners in a non-TEFRA proceeding before this Court at docket

No. 17752-85, which addressed a tax controversy arising from

their investment in First Blood for the 1982 partnership taxable

year.    Thomas E. Redding (Mr. Redding) was the Goodwins' counsel

of record in docket No. 17752-85 as well as in the cases now

before the Court.7

     Joseph F. Long (Mr. Long), an attorney in respondent's

District Counsel office in Hartford, Connecticut, represented

respondent in settlement negotiations for the Greenberg Brothers

project.    Mr. Long was also counsel of record for respondent in

docket No. 17752-85.    After Mr. Long was assigned to the

Greenberg Brothers project, he and Mr. Faber discussed the

possibility of settling the Greenberg Brothers partnership cases

by a settlement at the partnership level.

     On or about August 6, 1990, Mr. Long wrote to Mr. Faber

regarding the Greenberg Brothers project, listing First Blood in

the subject portion of the letter.      In the letter, Mr. Long

expressed respondent's willingness to settle both docketed and

nondocketed cases on the basis of an "at risk settlement" under

section 465.    In closing, the letter stated:    "This offer to

settle is open until September 28, 1990."



     7
          Mr. Redding, who was a witness in these cases, was
recused as the Goodwins' counsel of record. See Model Rules of
Professional Conduct rule 3.7.
                               - 6 -


     After receiving Mr. Long's letter, Mr. Faber contacted Mr.

Long to discuss whether investment tax credits would be allowed

under the settlement offer outlined in his letter.    In response

to this query, Mr. Long followed up with a letter dated November

1, 1990, to Mr. Faber.   This letter stated in relevant part:

          By letter dated August 6, 1990, we extended an offer to
     settle the above mentioned movie partnerships. We offered
     to settle these cases on the basis of and[sic] I.R.C. [sec.]
     465 "at risk" settlement. * * *

          We originally requested that you accept, or reject, the
     offer to settle by September 28, 1990. * * * Since we were
     unable to respond to your question within a reasonable time
     before the September 28, 1990, deadline, we advised you that
     we would tender a subsequent offer to you which would
     address the investment tax credit issue.

          The purpose of this letter is to extend a new offer to
     settle these cases on the basis of an "at risk" settlement
     under I.R.C. [sec.] 465.

In closing, Mr. Long wrote:   "This offer is open for fourty-

five[sic] days, after the date of this letter."    Mr. Faber

rejected this settlement offer on behalf of the partners.

     After the filing of the petitions in docket Nos. 623-92,

13014-92, and 15641-92 Mr. Long again wrote to Mr. Faber on the

subject of the Greenberg Brothers project, listing First Blood in

the subject portion of the letter.     The letter dated September 9,

1992, stated:

     We are offering to settle the above referenced movie tax
     shelters on the basis of an "at risk" settlement under
     I.R.C. [sec.] 465. For purposes of the settlement taxpayers
     are considered at risk to the extent of their initial cash
     investment in the movie, with no amounts allowed for notes
     executed by the partnership, or the assumption agreement
                                 - 7 -


     executed by the partners. After the cash is used up the
     amount at risk is zero. However, to the extent the
     partnership earns net income in later years, the amount at
     risk will be increased in accordance with I.R.C. [sec.] 465.

          For the purposes of settlement the respondent will
     concede all additions to tax, but respondent will not
     concede additional interest under I.R.C. [sec.] 6621(c).

          You have thirty days to accept this settlement offer.
     After said date it is withdrawn.

     The settlement offer made to Mr. Faber was intended as an

offer to settle at the partnership level and was not intended to

be made to the individual partners.

     By letter dated September 14, 1992, however, Mr. Long wrote

to Mr. Redding regarding docket No. 17752-85, indicating that

respondent was conceding the deficiency asserted for the 1982

partnership taxable year.8   Enclosed was a document titled

"Stipulation of Settlement" setting forth respondent's concession

of the 1982 year.   The letter also stated in pertinent part:

     We are willing to settle the First Blood Associates issue
     for years after 1982 on the basis of an "at risk" settlement
     under I.R.C. [sec.] 465. * * *

          *     *      *     *      *    *     *

          Please advise me within the next thirty days if you
     wish to accept the settlement offer to settle First Blood
     Associates for all years. If we have not heard from you in
     thirty days you should consider the settlement offer as
     withdrawn.

     8
          As of the date of the September 14, 1992, letter the
Goodwins were also parties to the cases at docket Nos. 623-92,
13014-92, and 15641-92 pursuant to sec. 6226(c)(1) and Rule
247(a). The Goodwins subsequently elected to participate in
these proceedings pursuant to sec. 6226(c)(2) and Rule 245(b).
                                - 8 -


          Even if you do not wish to settle First Blood
     Associates for all years, we still intend to concede 1982.
     We, therefore, request that you return the enclosed document
     at your earliest convenience.

The "at risk" terms were similar to those outlined in the

September 9, 1992, letter to Mr. Faber.

     Although the September 14, 1992, letter was addressed to Mr.

Redding, it was inadvertently mailed to Mr. Faber.    Mr. Faber

forwarded the letter to the Goodwins at their home in Montgomery,

Texas.    Upon receiving the letter on or about October 1, 1992,

Mr. Goodwin contacted Mr. Redding to arrange a meeting to discuss

its contents.    The two eventually met at Mr. Redding's office on

October 12, 1992, at which time Mr. Goodwin instructed Mr.

Redding to accept the settlement offer extended in Mr. Long's

letter.

     During this period of the settlement negotiations, and

subsequently, Mr. Long understood that either a closing agreement

or a Form 870 would be used, and Mr. Faber understood that to

effectuate a settlement some documents would have to be executed.

Mr. Redding had been in contact with Messrs. Faber and Long.

     In a letter to Mr. Long dated October 14, 1992, Mr. Redding

stated that he was accepting the settlement offer on behalf of

the Goodwins and wrote:    "I would appreciate it if you would

confirm to me that you are in receipt of a timely acceptance of

your settlement offer."    There is no indication that the executed
                                   - 9 -


Stipulation of Settlement referred to in Mr. Long's letter was

returned.

     Respondent received the October 14, 1992, letter on Monday,

October 19, 1992.       Neither Mr. Long nor any other representative

of respondent ever responded to Mr. Redding's request for

confirmation of the timely receipt of the Goodwins' acceptance of

the settlement.

     In late 1992, Mr. George J. Noumair (Mr. Noumair) began

settlement discussions with Mr. Long.          Mr. Noumair also

understood that other documents were needed to effectuate a

settlement between the partners and respondent.          See Greenberg

Brothers Partnership #12, a.k.a. Lone Wolf McQuade Associates v.

Commissioner, T.C. Memo. 1998-198.

     By letter dated November 15, 1994, Mr. Long wrote to the

Goodwins at Montgomery, Texas, offering to settle the instant

cases.   That letter stated, inter alia:

     Your partnership liabilities are not settled until both you
     and the IRS properly execute the enclosed closing agreement.

            *       *       *      *       *       *     *

          If your case is settled, the IRS will calculate your
     tax liabilities for the loss years. You will have to file
     amended tax returns (Forms 1040X) for the gain years to
     offset losses suspended under the settlement against income
     reported from the partnership.

Enclosed with the letter was a closing agreement (Form 906) that

set forth the basis of the at risk settlement.          On instructions
                               - 10 -


from Mr. Redding, the Goodwins did not sign and return the

closing agreement by the deadline set forth in the letter.

                               OPINION

     The Tax Court is a Court of limited jurisdiction and may

exercise jurisdiction only to the extent expressly permitted by

statute.    See sec. 7442; Trost v. Commissioner, 95 T.C. 560, 565

(1990).    We have jurisdiction to decide whether we have

jurisdiction.    Pyo v. Commissioner, 83 T.C. 626, 632 (1984).

Section 6226(f) vests this Court with subject matter jurisdiction

to determine all partnership items of the partnership for the

partnership taxable year to which the FPAA relates and the proper

allocation of such items among the partners.9   This Court's

jurisdiction over a partnership action is predicated upon the

mailing of a valid FPAA by the Commissioner to the TMP and the

timely filing by the TMP or other eligible partner of a petition

seeking a readjustment of partnership items.    Rule 240(c);

Seneca, Ltd. v. Commissioner, 92 T.C. 363, 365 (1989), affd.

without published opinion 899 F.2d 1225 (9th Cir. 1990).       Neither


     9
          Partnership items include each partner's proportionate
share of the partnership's aggregate items of income, gain, loss,
deduction, or credit. Sec. 6231(a)(3); sec. 301.6231(a)(3)-
1(a)(1)(i), Proced. & Admin. Regs. Nonpartnership items are
items that are not partnership items. Sec. 6231(a)(4). An
affected item is any item to the extent such item is affected by
a partnership item. Sec. 6231(a)(5); sec. 301.6231(a)(5)-1T(a),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6790 (Mar. 5,
1987). Some affected items are subject to the deficiency
procedures contained in secs. 6211 through 6215.
                               - 11 -


the Goodwins nor respondent disputes that the FPAA's were valid

and that the petitions were timely filed in these cases.

     Pursuant to the TEFRA provisions the tax treatment of

partnership items generally is to be determined at the

partnership level.    See Maxwell v. Commissioner, 87 T.C. 783, 788

(1986).   Section 6226(c)(1) provides that if a partnership action

is brought under either section 6226(a) or (b) each person who

was a partner in such partnership at any time during the year in

issue shall be treated as a party to such action.    However,

section 6226(d)(1)(A) provides, in pertinent part, that section

6226(c) shall not apply to a partner "after the day" on which the

partnership items of such partner for the particular partnership

taxable year become nonpartnership items by reason of one of the

events described in section 6231(b).    A settlement agreement

between the Secretary and a partner is among the events causing

the conversion of partnership items into nonpartnership items.

Sec. 6231(b)(1)(C).    Section 6224(c) provides that in the absence

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

a settlement agreement between the Secretary and a partner with

respect to the determination of partnership items for any

partnership taxable year shall be binding on all parties to such

agreement.

     Whether, with respect to the Goodwins, we have jurisdiction

over their partnership items depends upon whether they entered
                               - 12 -


into a binding settlement agreement with respondent.     Underlying

that question is whether the period of limitations for making an

assessment may have run.

Settlement Agreements in TEFRA Proceedings

     General principles of contract law govern the settlement of

tax cases.    Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320,

329-330 (1997).   A prerequisite to the formation of a contract is

an objective manifestation of mutual assent to its essential

terms.    Manko v. Commissioner, T.C. Memo. 1995-10.    Mutual assent

generally requires an offer and an acceptance.    Id.    "'An offer

is the manifestation of willingness to enter into a bargain, so

made as to justify another person in understanding that his

assent to that bargain is invited and will conclude it.'"

Dorchester Indus. Inc. v. Commissioner, supra at 330 (quoting 1

Restatement, Contracts 2d, sec. 24 (1981)).   Settlements offers

made and accepted by letters are enforced as binding agreements.

Dorchester Indus. Inc. v. Commissioner, supra at 330-333; Haiduk

v. Commissioner, T.C. Memo. 1990-506.

     Respondent argues that only a properly executed Form 870-P

or a closing agreement (Form 906) constitutes a settlement

agreement for purposes of sections 6224(c) and 6231(b)(1)(C).10

     10
          Neither the Code nor respondent's regulations define
what constitutes a "settlement agreement" for purposes of secs.
6224(c) and 6231(b)(1)(C). A closing agreement (Form 906),
statutorily authorized by secs. 7121 and 7122 has been used to
                                                   (continued...)
                              - 13 -


Without the requirement of a formal written agreement, respondent

anticipates confusion and judicial inefficiency: disputes will

arise over whether there was a settlement and will necessitate

judicial review as to whether there was a settlement and the

terms thereof.   Since respondent and the Goodwins have not

executed either form, respondent contends that they have not

entered into a settlement agreement.

     While respondent's position may have the advantages

respondent attributes to it, we believe that it is unnecessary to

decide that issue in the circumstances presented here.11   Where

settlement is conditioned upon the execution of respondent's

forms, the execution of such forms controls resolution of whether

a settlement agreement was in fact made.   See, e.g., Estate of

Ray v. Commissioner, T.C. Memo. 1995-561, affd. 112 F.3d 194 (5th

Cir. 1997); see also Brookstone Corp. v. United States, 74 AFTR

2d 94-6025, 94-2 USTC par. 50,474 (S.D. Tex. 1994), affd. per




     10
      (...continued)
settle TEFRA cases. See, e.g., Pack v. United States, 992 F.2d
955, 956 (9th Cir. 1993); Monge v. United States, 27 Fed. Cl.
720, 722 n.3 (1993). In addition, we have held that a Form 870-P
qualifies as a settlement agreement under sec. 6224(c). Korff v.
Commissioner, T.C. Memo. 1993-33.
     11
          Respondent also argues that even if there were a
binding settlement offer the Goodwins' acceptance was not timely.
Given our disposition of the issue, we see no reason to resolve
that question, and for our purposes here we assume that Mr.
Redding's letter was timely.
                               - 14 -


curiam without published opinion 58 F.3d 637 (5th Cir. 1995).     We

turn to the question whether the settlement was so conditioned.

     The negotiations concerning the settlement of the Greenberg

Brothers partnerships during this time were primarily conducted

by Messrs. Long and Faber.    Mr. Long testified that he intended

that in order to consummate any settlement with the partners, a

Form 870-P and/or a closing agreement would be executed by the

partner or the partner's representative.   This was consistent

with Mr. Faber's understanding when he was involved with these

cases that further documents would have to be executed.   The only

other person with direct knowledge of what happened during this

time was Mr. Noumair, and he did not testify.   We have no reason

to believe, however, that his testimony would have been

different.

     Furthermore, all the parties understood that the settlement

terms were not limited to the Greenberg Brothers cases that were

currently before the Court.   It also included issues involving

the additions to tax that are affected items and the applicable

interest, issues that were not before the Court.   Moreover, the

settlement terms dealt with the tax effects of the Greenberg

Brothers partnerships in future years.   At that time, Mr. Long

was of the opinion that either a closing agreement or a Form 870
                               - 15 -


was necessary to effect a settlement of a partner's various

liabilitiies.12

     Although there may have been a general understanding of the

terms of the settlement, to effectuate the settlement it was

understood that the partner would execute either a Form 870 or a

closing agreement.    Mr. Redding testified that he had been in

contact with both Mr. Long and Mr. Faber concerning the

settlement of these cases during this period.    Mr. Redding, with

his experience in TEFRA proceedings, surely was aware of the

circumstances, and we find it improbable that, given the

complexity of the settlement, at some time, there had not been

some discussion on how the settlements were to be consummated.

While as a general rule neither document may be required to

settle pecuniary items, all parties understood that one or the

other was necessary to give effect to the settlement of the

instant cases.

     In sum, the Goodwins may have attempted to settle their

cases.    It is clear, however, that all the parties directly

connected with the settlement negotiations understood that to

effectuate the settlement either a closing agreement or a Form

870 had to be executed.    It is also clear that the Goodwins never




     12
            Whether this opinion was correct or not is beside the
point.
                             - 16 -


executed either, and, consequently, there was no settlement of

their cases.13

     To reflect the foregoing,

                                 An appropriate order will be

                         issued denying the Goodwins' motion

                         to dismiss for lack of jurisdiction.




     13
          We leave for a subsequent opinion the question whether
the Goodwins may be entitled to consistent settlement terms
pursuant to sec. 6224(c)(2) and sec. 301.6224(c)-3T, Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 6787 (Mar. 5, 1987).
