United States Court of Appeals

For the First Circuit

No. 07-1455

RICHARD M. NAULT,

Plaintiff, Appellant,

v.

UNITED STATES, 

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Paul J. Barbadoro, U.S. District Judge]

Before

 Torruella and Lynch, Circuit Judges,

and Stahl, Senior Circuit Judge.

Robert R. Lucic with whom Peter T. Beach, Courtney H.G. Herz,

and Sheehan Phinney Bass & Green, P.A., were on brief for

appellant.

Deborah K. Snyder with whom Richard T. Morrison, Acting

Assistant Attorney General, Gilbert S. Rothenberg, Acting Deputy

Assistant Attorney General, and Kenneth L. Greene were on brief for

appellee.

February 15, 2008
For a partial history of AMCOR and the related litigation, 1

see Crop Assocs.-1986 v. Comm'r, 80 T.C.M. (CCH) 56, 2000 WL

976792, at *1-7 (T.C. July 17, 2000).

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STAHL, Senior Circuit Judge. Plaintiff-appellant Richard

M. Nault appeals the district court's decision denying his motion

for summary judgment and granting summary judgment in favor of the

United States. Nault argues that the district court erred in its

interpretation of several agreed judgments entered by the Tax Court

("the Tax Court decisions"), embodying the terms of a settlement

between the Internal Revenue Service ("IRS") and Frederick H.

Behrens, as Tax Matters Partner ("TMP"), regarding the proper tax

treatment of several agriculture-related limited partnerships

organized by American Agri-Corp., Inc. ("AMCOR") a California 1

corporation (collectively the "AMCOR Partnerships" or

"Partnerships"). For the reasons discussed below, we affirm.

I.

Nault allegedly invested approximately $1,230,000.00 in

five AMCOR Partnerships between 1984 and 1986. In 1987, the IRS

began scrutinizing the AMCOR Partnerships' tax returns and issued

Final Partnership Administrative Adjustment Notices disallowing

certain deductions on the basis that the Partnerships' activities

constituted a series of sham transactions lacking economic

substance. After years of litigation, the IRS and the TMP reached

a settlement in which 72% of the Partnerships' deductions were

disallowed, the government agreed not to disallow investment tax
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credits claimed by the partners, and the partners agreed not to

file amended returns modifying any reported income from the

Partnerships on which the partners had paid income taxes. Upon

motion of the IRS, the Tax Court entered decisions with respect to

each Partnership reflecting the terms of the settlement agreement.

Based upon the Tax Court decisions, the IRS issued

adjustments to Nault's 1984, 1985, and 1986 income tax returns, and

Nault paid the additional taxes resulting from the adjustments.

Each of the Partnerships terminated during the lengthy Tax Court

litigation, leaving Nault without any remaining basis in his

partnership interests. In September 2002, Nault filed amended

income tax returns for 1995, 1996, 1998, 1999, 2000, and 2001,

asserting that his basis in the Partnerships should be "restored"

to a level inversely proportionate to the Tax Court decisions'

disallowance of 72% of the Partnerships' loss deductions. Nault

claimed that he was entitled to an ordinary loss deduction for the

taxable basis that was "restored" to his then-worthless partnership

interests.

On December 18, 2002, the IRS denied Nault's request for

a refund. Nault filed a complaint in federal district court on

December 17, 2004, seeking to recover his purported overpayment of

income tax pursuant to 26 U.S.C. § 7422 and 28 U.S.C. § 1346(a)(1).

On February 9, 2007, the district court ruled on the parties' cross

motions for summary judgment, granting summary judgment in favor of
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the government and denying summary judgment to Nault. See Nault v.

United States, Civil No. 04-cv-479, 2007 WL 465310 (D.N.H. Feb. 9,

2007). This appeal ensued.

II.

We review de novo a district court's grant of summary

judgment based on contract interpretation. See John Hancock Life

Ins. Co. v. Abbott Labs., 478 F.3d 1, 7 (1st Cir. 2006). Summary

judgment is appropriate where the evidence shows that "there is no

genuine issue as to any material fact and that the moving party is

entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c).

The parties agree that tax deductions are not permitted

for transactions that lack economic substance and that the inquiry

at hand--whether the Partnerships or transactions relevant to this

appeal lacked economic substance--is confined to interpretation of

the Tax Court decisions implementing the settlement between the IRS

and the TMP. Thus, a detailed recitation of the substantive law

underlying the parties' dispute is unnecessary. See United States

v. ITT Cont'l Baking Co., 420 U.S. 223, 233, 236-37 (1975)

(explaining that settlements incorporated into judicial decisions

are self-contained within their four corners and, consequently, are

detached from the substantive law giving rise to the litigation).

In construing a settlement subsequently adopted by a

court, we apply the same basic rules that govern the interpretation

of ordinary contracts. See id. at 235-37; Rodi v. Ventetuolo, 941
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F.2d 22, 28 (1st Cir. 1991); see also Smart v. Gillette Co. LongTerm Disability Plan, 70 F.3d 173, 178 (1st Cir. 1995) (explaining

that federal common law requires us to be "guided by common-sense

canons of contract interpretation" (citation omitted)).

Interpretation of the terms of an unambiguous contract is a matter

of law, subject to judicial resolution. See id. Quite simply,

"[a]n unambiguous contract must be enforced according to its

terms . . . ." Senior v. NSTAR Elec. & Gas Corp., 449 F.3d 206,

219 (1st Cir. 2006). Moreover, terms within a contract are

accorded their "plain, ordinary, and natural meaning."

Filiatrault v. Comverse Tech., Inc., 275 F.3d 131, 135 (1st Cir.

2001).

A contract is ambiguous where the disputed terms are

facially inconsistent or reasonably susceptible to multiple,

plausible interpretations. See Smart, 70 F.3d at 178. If a

contract is ambiguous, we will consider extrinsic evidence to give

effect to the parties' intent in forming the contract. Id. "The

question of whether a contract is ambiguous is generally a question

of law for the judge . . . ." Senior, 449 F.3d at 219.

Nault contends that the Tax Court decisions should not be

interpreted to mean that the Partnerships or the underlying

transactions lacked economic substance. In support, he asserts

that the disputed language of the Tax Court decisions is ambiguous,

that principles of construction favor his suggested interpretation,
Nault argues that the government has waived the position that 2

the underlying transactions lacked economic substance, in favor of

the position that the Partnerships themselves lacked economic

substance. This contention is irrelevant. The district court

unequivocally held that "the disallowed deductions were

attributable to transactions that lacked economic substance."

Nault, 2007 WL 465310, at *5 (emphasis added). We are not limited

in our review by the fact that the district court rendered its

decision on grounds that the government may or may not have urged

below. Nault's position, if accepted, would confine the lower

court to choosing between the rationales submitted by the parties.

This is not the law. See Kamen v. Kemper Fin. Servs., Inc., 500

U.S. 90, 99 (1991) (holding that a "court is not limited to the

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and that extrinsic evidence conclusively establishes that the

parties intended to effectuate his interpretation. These arguments

are not well-founded.

First, the plain language of the Tax Court decisions

unambiguously favors the government's interpretation. Section II

of each Tax Court decision states:

That the foregoing adjustments to

partnership income and expense are

attributable to transactions which lacked

economic substance, as described in former

I.R.C. § 6621(c)(3)(A)(v), so as to result in

a substantial distortion of income and

expense, as described in I.R.C. § 6621(c)

(3)(A)(iv), when computed under the

partnership's cash receipts and disbursements

method of accounting; and

That liabilities [in varying amounts]

lack economic substance.

The district court held that this language unmistakably signaled

that the adjustments of the loss deductions were made because the

underlying transactions lacked economic substance, thus preventing

Nault from now claiming tax deductions.2
particular legal theories advanced by the parties").

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To escape this seemingly inexorable conclusion, Nault

asserts that the presence of the phrase "so as to result in a

substantial distortion of income and expenses" generates ambiguity.

He argues that this phrase indicates that the underlying

transactions may not have entirely lacked in economic substance,

but merely distorted the Partnerships' balance sheet. To buttress

this conclusion, he points out that the very next sentence simply

declares that "liabilities" in varying amounts lacked economic

substance without any such qualifying language. Thus, Nault

argues, the district court violated the time-honored maxim that

variances in language should not be treated as superfluous.

Nault is mistaken. The reference to former 26 U.S.C.

§ 6621(c)(v) (1988), which helps to define "tax motivated

transactions," confirms that the transactions were "sham[s] or

fraudulent transaction[s]," and therefore lacked economic

substance. See, e.g., Durrett v. Comm'r, 71 F.3d 515, 517 (5th

Cir. 1996). The phrase "so as to result in a substantial

distortion of income and expense" simply tracks the language of the

former 26 U.S.C. § 6621(c)(3)(iv) (1988), which likewise helps to

define "tax motivated transactions." Thus, each phrase

independently establishes that the adjustments were attributable to

the Partnerships' tax-motivated activities. Admittedly, Nault is

correct that transactions that lack economic substance are treated
Albeit in dicta, the Court of Federal Claims has reached a 3

similar conclusion about these decisions. See Keener v. United

States, 76 Fed. Cl. 455, 457 & n.2 (Fed. Cl. 2007) (stating that

the Tax Court found "the various partnership transactions to be

sham transactions"); see also Howell v. Comm'r, 94 T.C.M. (CCH)

104, 2007 WL 2126593, at *1 (T.C. July 25, 2007) (stating that the

IRS and TMP "stipulated that the partnerships entered into

transactions that lacked economic substance and created substantial

distortions of partnership income") (emphasis added).

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differently from those that merely result in a substantial

distortion of income. Compare Dewees v. Comm'r, 870 F.2d 21, 30-31

(1st Cir. 1989) (refusing to permit deductions for sham

transactions), with Mantell v. Comm'r, 66 T.C.M. (CCH) 697, 1993 WL

347409, at *10 (T.C. Sept. 13, 1993) (approving adjustments based

on accounting methods that created a substantial distortion of

income).

Nevertheless, the plain language of the Tax Court

decisions still firmly establishes that the underlying transactions

lacked economic substance. Here, the greater implies the lesser-- 3

because the underlying transactions lacked economic substance, they

necessarily resulted in a substantial distortion of income. Thus,

the government's interpretation--that "[t]he decisions . . . state

that the transactions resulted in a substantial distortion of

income and expense because they lacked economic substance"--is by

far the most natural reading of the disputed language. At the very

least, it is logically consistent; Nault's proposed construction

eviscerates the entire sentence. Under Nault's interpretation, the

"substantial distortion" language must be read to modify the
Nault cites the Eleventh Circuit's decision in Fickling v. 4

United States, 507 F.3d 1302 (11th Cir. 2007), as authority for

this proposition. Nault, however, ignores a crucial factual

distinction between the two cases. There is no indication that the

disputed settlement discussed in Fickling contained any language

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"lacked economic substance" language. We decline the invitation to

mangle the English language by adopting an approach that defies

basic rules of syntax and diction; the Tax Court clearly stated

that the lack of economic substance "result[ed] in" the distortion

of income, not the other way around.

Nault seeks additional support from the fact that the

distortion language was not used in the next paragraph, which

concerned the Partnerships' liabilities. The most obvious

explanation for why this language was not used in reference to the

Partnerships' liabilities is simply that the first paragraph

referred to the underlying transactions themselves, while the

second paragraph referred to the liabilities claimed by the

Partnerships. Naturally, the erroneous liabilities themselves did

not "result in a substantial distortion of income or expense."

They simply lacked economic substance. Moreover, we will not

declare perfectly clear language ambiguous merely because the Tax

Court did not reiterate it verbatim in the very next sentence in

dealing with a related, but not identical, matter.

Next, Nault argues that because the settlement "did not

treat the Partnerships as lacking economic substance," the Tax

Court decisions are ambiguous. Nault's contention is based on a 4
labeling the transaction in question as lacking economic substance.

Indeed, the Eleventh Circuit characterized the settlement in

question as "noncommittal" concerning whether the underlying

transaction was a sham. Id. at 1305.

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fundamentally erroneous conception of the Tax Court decisions,

which approved a settlement. See Miller Tabak Hirsch & Co. v.

Comm'r, 101 F.3d 7, 10 (2d Cir. 1996) (explaining that in a

judicially-approved settlement parties are "free to settle the case

in any manner not violative of law or public policy, regardless of

what the result might have been had the parties gone to trial").

Parties to a settlement, almost by definition, eschew the

possibility of obtaining some portion of what they would like in

exchange for certain terms with which they can live. See Rodi, 941

F.2d at 27 (stating that a settlement "'normally embodies a

compromise,' within the limits of which the litigants . . . must be

prepared to live" (quoting United States v. Armour & Co., 402 U.S.

673, 681 (1971))). The fact that the IRS chose to settle rather

than risk the hazards of litigation is no more a concession that

the transactions at hand possessed economic substance than a

defendant's decision to settle a dubious lawsuit for pennies on the

dollar is a concession that the suit had merit. Indeed, there is

little doubt that parties occasionally settle claims simply to

avoid the hassle, uncertainty, and expense of litigation even where

a favorable outcome seems all but certain.
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Here, it was perfectly permissible for the IRS to insist

upon language that declared the transactions to lack economic

substance--perhaps anticipating claims plaintiffs such as Nault

might make--while simultaneously making certain concessions to the

taxpayers. It was incumbent upon the TMP to dispute any language

that he did not wish included in the Tax Court decisions. See

Rodi, 941 F.2d at 27 (admonishing that litigants must abide by

terms of a settlement even where they prove more onerous than

originally anticipated). In the end, therefore, Nault remains

confined to the language agreed to in the settlement. See In re

New Seabury Co. Ltd. P'ship, 450 F.3d 24, 31, 39 (1st Cir. 2006)

(rejecting the district court's "functional analysis" of the

parties' stipulation in favor of the bankruptcy court's analysis of

its plain language).

Finally, Nault argues that, even if the plain language of

the Tax Court decisions is unambiguous, the district court

nevertheless erred by failing to consider extrinsic evidence.

First, it is elementary that we do not ordinarily examine extrinsic

evidence to alter or clarify the terms of an otherwise unambiguous

contract. See Smart, 70 F.3d at 179. Nevertheless, "in the

exceptional case, a latent ambiguity in seemingly clear contract

language may require us to consider extrinsic evidence to determine

the actual object of the parties' agreement." Coffin v. Bowater

Inc., 501 F.3d 80, 97 (1st Cir. 2007). 
In addition to noting the limited probative value of Nault's 5

extrinsic evidence, we observe that the government likewise adduced

extrinsic evidence--an affidavit from Margaret K. Hebert, an IRS

attorney responsible for the AMCOR litigation--to buttress its own

position. We need not discuss this evidence further, however,

because it is unnecessary to our conclusion.

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This is not such a case. Nault's proposed interpretation

of the Tax Court decisions is not merely strained, but flatly

contradictory to the plain meaning of its terms. In essence, he

"argue[s] that the [disputed] language does not mean what it says."

Id. at 98. If the language of the Tax Court decisions does not

comport with what the parties intended, then the TMP should have

insisted upon different language. 

Finally, we note that Nault dramatically overstates the

persuasive force of the extrinsic evidence that he has proffered.

It is by no means so conclusive as he suggests. He directs our 5

attention to a written summary regarding the settlement, prepared

by the IRS, stating, inter alia, that each partner "may have a

capital gain or loss upon his termination from the partnership"

(emphasis added). This summary, however, was nonbinding, the

specific section in question was designated as informational, the

clause was permissive, and the provision referred only to the

partner's capital contribution. Nault also points to a letter he

received from the IRS indicating that the Service had made "[a]

determination . . . that allow[ed] for capital treatment of these

losses." This statement is certainly peculiar--and inconsistent
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with the IRS's current position. This letter, however, cannot

serve as a definitive guide for our interpretation of Tax Court

decisions executed more than a year previously. Additionally, the

court notes that the same letter notified Nault of the IRS's

rejection of his claims for a deduction for an ordinary loss

related to his "restored" basis in the Partnerships.

In summary, Nault's arguments obfuscate what is, in

reality, a very simple case. The plain language of the Tax Court

decisions indicates that the disallowed loss deductions were based

on transactions that lacked economic substance. We have no

jurisdiction to determine whether the relevant transactions

actually did have economic substance--the sole matter within our

purview is determining what the Tax Court meant by its decisions.

The Tax Court's determination, that the transactions lacked

economic substance, is unambiguous.

III.

The judgment of the district court is affirmed.