                         T.C. Memo. 1998-198



                       UNITED STATES TAX COURT


                GREENBERG BROTHERS PARTNERSHIP #12,
             a.k.a. LONE WOLF MCQUADE ASSOCIATES, AND
     RICHARD M. GREENBERG, TAX MATTERS PARTNER, Petitioner
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent

     Docket No. 22780-91.                         Filed May 28, 1998.


     Thomas E. Redding and Sallie W. Gladney, for participants

Herman M. and Gloria R. Nirschl.

     Joseph F. Long and Gerald A. Thorpe, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION

     POWELL, Special Trial Judge:    This case is before the Court

on participants Herman M. and Gloria R. Nirschl's (the Nirschls)

motion to dismiss for lack of jurisdiction.      The underlying

dispute arises from the Nirschls' interest in Greenberg Brothers

Partnership #12, a.k.a. Lone Wolf McQuade Associates (Lone Wolf

or the partnership).   The parties agree that for the partnership
                                - 2 -


taxable years in issue Lone Wolf is subject to the unified audit

and litigation procedures of sections 6221 through 62311 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 a timely petition was filed and, accordingly, this Court has

jurisdiction over this case.    The Nirschls, 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 Nirschls and respondent entered into a binding

settlement agreement with respect to adjustments relating to the

Nirschls' investment in Lone Wolf for the 1983 through 1986

partnership taxable years.

                           FINDINGS OF FACT

     Lone Wolf 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

A. Frederick Greenberg.2    Respondent began an examination of the

     1
          Unless otherwise indicated, all section 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.
     2
          On its partnership returns for the years in issue, Lone
Wolf claimed loss deductions based on the alleged purchase of the
films "Lone Wolf McQuade" starring Chuck Norris, and "Strange
                                                   (continued...)
                               - 3 -


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 Lone Wolf, retained

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

the partnership level during respondent's examination.3   Mr.

Faber also represented the partners at the partnership level upon

filing the petition in this case.

     The Nirschls were limited partners in Lone Wolf during the

partnership taxable years in issue.    The Nirschls have elected to

participate in these proceedings pursuant to section 6226(c)(2)

and Rule 245(b).

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

District Counsel office in Hartford, Connecticut, represented

respondent in the settlement negotiations for the Greenberg

Brothers project.   After Mr. Long was assigned to the project, he

and Mr. Faber discussed the possibility of settling the Greenberg

Brothers partnership cases by a settlement at the partnership

level.

     2
      (...continued)
Invaders".
     3
          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 -


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

regarding the Greenberg Brothers project, listing Lone Wolf 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."

     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 that:   "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.
                               - 5 -


     On July 8, 1991, respondent issued notices of final

partnership administrative adjustment (FPAA's)4 to the TMP,

determining adjustments to partnership items for the 1983 through

1986 partnership taxable years.   On October 7, 1991, the TMP

timely filed a petition with this Court on behalf of the

partnership for a readjustment of the partnership items.    At the

time the petition in this case was filed, the partnership's

principal place of business was located at Greenwich,

Connecticut.

     Almost 1 year after the filing of the petition in this case,

Mr. Long again wrote to Mr. Faber on the subject of the Greenberg

Brothers project, listing Lone Wolf in the subject portion of the

letter.   The letter dated September 9, 1992, stated that

          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
     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.




     4
          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 -


          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.    Mr. Faber was of the opinion

that during this time there were continuing settlement

negotiations going on that may have produced better terms.

Shortly thereafter, Mr. Faber withdrew as counsel of record.

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

settlement discussions with Mr. Long on behalf of partners who

wanted to settle.   Pursuant to inquiries from Mr. Noumair

concerning settlement, Mr. Long wrote to Mr. Noumair on April 22,

1993, with regard to Lone Wolf.    The letter stated that

          A number of the limited partners have contacted the
     respondent and indicated their interest in accepting
     respondent's settlement offer. We are, therefore, going to
     have the Service Center make the settlement offer directly
     to the limited partners, so that those interested in
     settling can close out their interest in this partnership.

In the course of ongoing discussions with Mr. Long, Mr. Noumair

indicated that he would survey the partners in order to ascertain

who desired to settle.   On June 24, 1993, Mr. Noumair sent a

memorandum to the Lone Wolf limited partners in which he stated:

"If you wish to 'opt out' and settle individually at this time,
                                 - 7 -


please advise us * * *.    We will then arrange for the appropriate

documents to be sent to you."

     By letter dated November 30, 1993, Mr. Noumair wrote to Mr.

Long with regard to partners in Lone Wolf and seven other

Greenberg Brothers partnerships who desired "to accept the IRS

settlement offer and opt out of the TEFRA proceeding".    The

letter also stated:    "I would appreciate it if, with respect to

the partners who wish to opt out, you would send to me the

documents you will require to be executed for filing in the Tax

Court."    Attached to the letter was a separate list for each

partnership, indicating the names and interests of the partners

wishing to opt out of the TEFRA proceeding; the Nirschls are

listed on an attachment titled "Limited Partners in Lone Wolf

McQuade Associates Who Want to Opt Out and Settle as of

11/30/93".    According to Mr. Long, at that time, settlement would

be "achieved" by signing a Form 870 or entering into a closing

agreement.    Mr. Faber also had understood "that there would be

some documents that would have to be executed to implement * * *

[a settlement]."    The Nirschls never executed either a Form 870

or a closing agreement.

                                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
                               - 8 -


(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.5   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

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

and that the petition was timely filed in this case.

     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


     5
          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.
                               - 9 -


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.   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 Nirschls, we have jurisdiction

over their partnership items depends upon whether they entered

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,
                              - 10 -


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).6

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

     6
          Neither the Code nor respondent's regulations defines
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
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 -


terms thereof.   Since respondent and the Nirschls have not

executed either form, respondent contends that they have not

entered into a settlement agreement.

     While respondent's position may have the advantages that

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

decide that issue in the circumstances presented here.    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

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

turn to the question whether the settlement was so conditioned.

     The Nirschls were never involved directly in the settlement

negotiations.    Those negotiations were done by Messrs. Long,

Faber, and Noumair.    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 taxpayer or

the taxpayer's representative.    This was consistent with Mr.

Faber's understanding when he was involved with the case 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
                              - 12 -


believe, however, that his testimony would have been different

and, indeed, his June 24, 1993, memorandum to the limited

partners and his November 30, 1993, letter to Mr. Long recognized

that further documents were required.    Although there may have

been a general understanding of the terms of settlement, to

effectuate the settlement it was understood that the taxpayer

would execute either a Form 870 or a closing agreement.

     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

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

liabilities.7

     The Nirschls may have attempted to accept an offer from

respondent to settle the case.   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


     7
         Whether this opinion was correct or not is beside the
point.
                             - 13 -


that the Nirschls never executed either, and, consequently, there

was no settlement of their case.8

     To reflect the foregoing,

                                      An appropriate order will be

                                 issued denying the Nirschls'

                                 motion to dismiss for lack of

                                 jurisdiction.




     8
          We leave for a subsequent opinion the question whether
the Nirschls 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).
