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United States Court of Appeals,

Fifth Circuit.

No. 96-60322.

ESTATE OF Donald H. RAY, Deceased; Patricia G. Ray, Independent

Executrix, Petitioners-Appellants,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Cipriano DOMINGUEZ; Estate of Isabel Dominguez, PetitionersAppellants,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

May 8, 1997.

Appeal of Decisions of the United States Tax Court.

Before JONES, STEWART and DENNIS, Circuit Judges.

STEWART, Circuit Judge:

Taxpayers appeal the tax court's decision that the

Commissioner of Internal Revenue Service's (IRS) notices of

deficiency were not time-barred. The IRS assessed deficiencies in

income taxes as to appellants' taxable years 1983 and 1984, one

year after it executed a settlement agreement with taxpayers.

Taxpayers assert that the one-year statute of limitations was

triggered when they signed the settlement agreement, and thus the

IRS's assessment was time-barred. For the following reasons, we

affirm.

BACKGROUND

The facts are undisputed. During the relevant time period,

1983 and 1984 tax years, the taxpayers were partners in RDB Joint
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Venture ("RDB"), a Texas general partnership. RDB was a partner of

Valley Cable, Ltd. ("Valley Cable"), a Texas Limited Partnership.

Valley Cable was subject to the unified audit and litigation

procedures set forth in §§ 6221 through 6233 of the Tax Code.

Taxpayers were "indirect partners" of Valley Cable, as defined in

§ 6231(a)(10), due to their ownership interest in RDB.

The IRS audited Valley Cable. As a result of its

investigation, the IRS issued Valley Cable a Notice of Final

Partnership Administrative Adjustment disallowing deductions

claimed by Valley Cable for the 1983 and 1984 tax years (which

affected taxpayers' income tax for the 1983 and 1984 tax years).

RDB challenged this determination. Subsequently, an IRS

representative, Mr. Palka, mailed a letter ("Palka letter") and a

Form 870-L(AD), settlement agreement to Valley Cable's Partner for

tax matters, Mr. Wilder. A copy of the form and letter was sent to

RDB. The letter contained several mistakes which were detected by

RDB's attorney, Mr. Redding, and this was communicated to the IRS.

Form 870-L(AD), however, was correct. It provided in pertinent

part:

Under the provisions of section 6224(c) of the Internal

Revenue Code, the undersigned offers to enter into a

settlement agreement with respect to the determination of

partnership items of the partnership for the year shown on the

attached schedule of adjustments. The undersigned, in

accordance with the provisions of Section 6224(b) of the Code,

also offers to waive the restrictions on the assessment and

collection of any deficiency attributable to partnership items

(with interest as required by law) provided in Section

62255(a).

This offer is subject to acceptance for the Commissioner of

the Internal Revenue Service. It will take effect as a waiver

of restrictions on the date it is accepted. Unless and until
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it is accepted, it will have no force of effect. [Emphasis

added.]

Following these instructions were three lines bearing the label

"Signature of taxpayer"; below the taxpayers' signature line was

a blank space, and at the bottom of the page were lines labeled:

"Date accepted for the Commissioner" and "signature."

In an attempt to correct the errant Palka letter, the IRS's

attorney for the case, Mr. Balboni, sent a second letter ("Balboni

letter"). The letter provides in pertinent part:

In order to clear up any potential misunderstanding caused by

the [Palka] letter in these cases, I am willing to write and

send a letter to each of the partners of Valley Cable, Ltd.,

or their known representative, which clarifies the settlement

offer and the deadline for its acceptance.... [T]he

settlement offer can only be accepted by you if you ...

execute the Form 870-L(AD) ... [and send it] in an envelope

postmarked no later than May 6, 1991, which date is the final

deadline for accepting the offer.... The settlement agreement

between you and the government will be consummated only upon

the execution of the form 870-L(AD) by an authorized

representative of the government. [Emphasis added.]

After consultation with their CPA, RDB accepted the settlement

offer. Taxpayers' counsel, Mr. Redding, executed Form 870-L(AD) on

behalf of RDB and it was delivered to IRS representative Palka on

May 6, 1991, the due date. A cover letter executed by Redding

accompanied the Form 870-L(AD). It provided in pertinent part:

Pursuant to Mr. Balboni's letter of April 4, 1991, enclosed is

an executed Form 870-L(AD) on behalf of the above-referenced

taxpayers, accepting the Government's settlement offer....

Please send me a copy of the fully executed 870-L(AD) as soon

as it is signed on behalf of the Internal Revenue Service.

The IRS's authorized representative executed the Form 870-

L(AD) on December 6, 1991. Pursuant to the terms of the

settlement, the IRS assessed deficiencies in income taxes on
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December 3, 1992, as to the Rays' taxable years 1983 and 1984

attributable to the settlement of the Valley Cable Partnership

audit. The IRS did the same for the Dominguez's on the next day,

December 4, 1992.

The taxpayers responded by filing petitions for

redetermination of the assessed deficiencies, arguing that the one

year statute of limitations period set by § 6229(f) began to run

when their representative signed Form 870-L(AD) on May 6, 1991,

rather than on December 6, 1991 when an authorized representative

of the IRS executed the Form 870-L(AD). Thus, the argument follows

that the notices of deficiency mailed by the IRS on December 3-4,

1992, were not mailed within a year of the execution of the

agreement on May 6, 1991, and consequently are time-barred.

After a trial, the Tax Court held that the notices of

deficiency were not time-barred. The Tax Court correctly observed

at the outset that the dispositive issue was "when the parties

entered into a settlement agreement." The court noted that

contract principles govern the settlement of tax cases. One of

those principles is that an unambiguous document should be

interpreted within its four corners. The Tax Court rejected the

taxpayers' arguments, finding Form 870-L(AD) unambiguous. The Tax

Court also concluded that when the Balboni letter and Form 870-

L(AD) are read together, it is clear that the settlement was not

effective until it was accepted by the IRS.

STANDARD OF REVIEW

 "Interpretation of a contract and the determination of
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ambiguity are questions of law, which this Court reviews de novo."

F.D.I.C. v. McFarland, 33 F.3d 532 (5th Cir.1994). When the trial

court considers extrinsic evidence in interpreting a contract, its

conclusions are reviewed under a clear error standard. Id.

DISCUSSION

In this appeal, we are faced with one question: Whether the

settlement agreement reached by the parties was legally binding at

its signing by the taxpayers or at the IRS's signing.

At the outset, we note the parties agree that a settlement was

entered into and that the IRS had one year from the date it entered

into the settlement agreement to assess any tax or penalties

resulting from the settlement agreement. The parties disagree,

however, as to when the limitations period under 26 U.S.C. §

6229(f) began to run. The taxpayers contend that when they signed

and returned the Form 870-L(AD), the parties then had a legally

enforceable agreement. The IRS, on the other hand, contends that

it was not until its authorized representative signed the Form 870-

L(AD) did the parties have a legally enforceable agreement thus

triggering the one-year statute of limitations. We must therefore

resolve the issue of when did the statute of limitations begin to

run.

We have previously held that general contract law principles

govern tax settlement cases. Treaty Pines Investments Partnership

v. Commissioner of IR, 967 F.2d 206, 211 (5th Cir.1992). Moreover,

in the context of settlement agreements utilizing the Form 870-

L(AD), we have considered the very same argument now asserted by
 

1Cited at 58 F.3d 637 (5th Cir.1995). 

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Taxpayers. In Brookstone Corp. v. United States, 58 F.3d 637 (5th

Cir.1995) (per curiam) (unpublished),1 we affirmed the district

court's determination that a settlement reached between the

taxpayer and the IRS was not accepted upon the taxpayer signing the

Form 870-L(AD), but only when it was signed by the IRS. The Form

870-L(AD) was accompanied by a transmittal letter that contained

language which, if read in isolation, might be interpreted to mean

it was an offer subject to acceptance by taxpayers signing it.

However, we distinctly held that the operative document was the

Form 870-L(AD), which was unequivocal and stated that the

settlement agreement would not take effect until signed by the IRS.

Thus, we rejected taxpayer's argument and affirmed the district

court. Brookstone, slip op. at 2.

The facts of Brookstone are similar to the facts of the

instant case and thus we follow its reasoning. We are not

persuaded by the taxpayers' argument that the use of the words

"offer" and "accept" in the Balboni letter constituted language of

an offer for the taxpayers to accept. If we narrowly interpret the

Balboni letter as controlling then we lose sight of Form 870-

L(AD)'s relevance as the operative document. Balboni's letter was

written as a point of clarification of the Palka letter and to

reaffirm the requirements enumerated in Form 870-L(AD), but at no

time was this letter to supersede the Form 870-L(AD). Nonetheless,

when the documents are read together, it is quite apparent that

Form 870-L(AD) is an invitation to offer which requires acceptance
 

2Neither Treaty Pines nor Haiduk were addressing the existence

of a formal settlement document, such as the one [870-L(AD) ]

present here. 

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by the Commissioner prior to the settlement taking effect. See

Gillilan v. Commissioner, 66 T.C.M. (CCH) 398, 1993 WL 311552

(1993) (Stating that taxpayers signing of Form 870-L(AD) was an

offer to settle certain partnership items that could not constitute

an agreement until accepted by the IRS).

Taxpayers argue that binding settlement agreements have been

found to consist of exchanges of letters, such as what is present

in the instant case. See Treaty Pines, supra; Haiduk v.

Commissioner, 60 T.C.M. (CCH) 864, 1990 WL 136717 (1990).

Taxpayers' argument, however, cannot overcome the presence of the

Form 870-L(AD) and its unambiguous language.2 Although taxpayers

make an attempt to argue that the Form 870-L(AD) is ambiguous, the

plain language of the form refutes this argument. Part I of the

form (addressing partnership items) notes that "the undersigned

[taxpayer] offers to enter into a settlement agreement" with

respect to partnership items shown on an attached schedule.

Further down on the form it states that "this offer is subject to

acceptance for the Commissioner of the Internal Revenue Service....

Unless and until it is accepted, it will have no force or affect."

As Brookstone concluded, this language is unambiguous and therefore

it is controlling. As such, the settlement agreement was entered

into as a matter of law on December 6, 1991, when the IRS accepted

the offer by signing the Form 870-L(AD). Thus, the IRS's

assessments executed on December 3 and 4, 1992 were not
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time-barred.

CONCLUSION

Having found that the IRS made a timely assessment of the tax

penalties at issue because it was made within one year after the

IRS and the taxpayers entered into a settlement, we AFFIRM.