UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Plaintiff

CIVIL ACTION NO. C-04-479-

RICHARD M. NAULT

UNITED STATES OF AMERICA

Defendant.

PLAINTIFF' S MEMORANDUM OF LAW IN SUPPORT OF HIS

REPLY TO UNITED STATES' OPPOSITION TO PLAINTIFF'

MOTION FOR SUMMARY JUDGMENT

NOW COMES Plaintiff, Richard M. Nault, by and through his attorneys, Sheehan

Phinney, Bass + Green, P. , and submits this Memorandum of Law in Support of His Reply to

United States' Opposition to Plaintiff s Motion for Summary Judgment.

Introduction

Plaintiff and Defendant still essentially agree on the relevant facts and law of this case.

Plaintiff invested in various Partnerships engaging in farming operations. Affidavit 

M. Nault (hereinafter "Nault Aff."

), 

Exhibit A ~l. l The Internal IRS"

investigated the Partnerships and assessed deficiencies. Id. ~2. The Tax Court entered decisions

according to a settlement submitted by the parties (though the legal effect of those decisions is

disputed). See Tax Court Decisions Exhibit B. Finally, Defendant agrees that if the loss is

deductible, it is an ordinary loss. See Defendant's Memorandum of Law In Support of the

United States' Motion for Summary Judgment (hereinafter " Defendant's Motion ) at 5.

1 All references to Exhibits A-F are to exhibits attached to Plaintiff's Motion for Summary Judgment. Exhibit 

attached to Plaintiff's Objection to Defendant's Motion for Summary Judgment.

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 1 of 9
II. The Holdin2 Of The Tax Court Is A Matter Of Le2al 

Court To Decide.

Defendant suggests that Plaintiff has admitted, in his pleadings or his interrogatory

responses, that the Tax Court "found" that the Partnerships lacked economic substance. Such a

legal opinion is not an issue of fact that can be admitted by a party. See New Amsterdam

Casualty Co. v. Waller 323 F.2d 20 24-5 (4th Cir. 1963). Neither Plaintiffs nor Defendant's

characterization of the Tax Court decisions bind the parties, rather the effect of the Tax Court

decisions is a matter of legal interpretation for the Court. Id. The Court has the decisions before

it and can make its own analysis of the holding of the cases. As such, Plaintiffs initial

characterization of the Tax Court decisions is irrelevant.

III. The Terms Of The Settlement Are Unambi2uouS. And The Court Should

Disre2ard Defendant's Post Hoc Attemot To Introduce Its Subiective State

Mind.

The parties settled the dispute over the Partnership items and the Tax Court entered

decisions accordingly. See Tax Court Decisions and Motion for Entry of Decisions Pursuant to

Rule 248(b), Exhibits Band G. Now, Defendant offers the affidavit of Margaret Hebert, an

attorney for the IRS, purportedly to explain the IRS' subjective reasons for agreeing to the terms

of the settlements, implying that the IRS' reasons for entering the settlements are relevant in

interpreting the settlements and the Tax Court decisions. The Defendant's unexpressed

subjective intent in agreeing to the terms of the settlements is irrelevant and inadmissible in

interpreting the Tax Court decisions. Cf. Marketing and Management Information, Inc. v.

United States. 62 Fed. Cl. 126, 133 (2004) ("In any event, even if it was the subjective intent of

the government that the absence of such a clause would insulate it from liability in the event of a

breach, it was not the intent of the plaintiff, and we must interpret the contract without regard to

the subjective unexpressed intent of one of the parties. ) (quoatation omitted); Royer Foundation

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 2 of 9
& Machine Co. v. New Hampshire Grey Iron, Inc. 118 N.H. 649, 651 (1978) ("The evidence

sought to be introduced by (Plaintiff) does not show a meaning of the writing, but an intent

wholly unexpressed in the writing. ); 11 , WILLISTON ON CONTRACTS 9 30:6

at 80-83 (4th ed. 1999) ("When a contract is unambiguous, the court must. .. give effect to the

contract as written, the duty of the court being to declare the meaning of what is written in the

instrument, now what was intended to be written. ) (emphasis added).

A party objecting to summary judgment must submit an affidavit that provides " such

facts as would be admissible in evidence. " FED. R. CIV. PRO. s affidavit is

inadmissible extrinsic evidence and the Court should disregard her explanation of the IRS'

unexpressed reasons for agreeing to the terms of the settlement. The terms 

described in attachment C as part of Exhibit G unambiguously express the terms of the

settlement. Those unambiguous terms, now integrated into the Tax Court decisions, are all that

matter in interpreting the settlement terms and the Tax Court decisions. As such, Plaintiff has

failed to offer admissible facts to defeat summary judgment on this basis.

IV. Even If The Court Does Not Entirely Disre2ard Ms. Hebert' s Affidavit. Her

Assertion That The Settlement Is The "Economic Eauivalent" Of Treatin2

The Partnerships As Shams Is Plainly Unsupported and Incorrect.

Defendant suggests that the structure of the settlement, allowing the Partners many

deductions, recognizing the Partners' future ordinary income (on which the Partners had , of

course, already paid tax), and allowing the Partners to claim investment tax credits, was merely

an administrative convenience that reached the same economic result as if the Partnerships had

been entirely disregarded. Ms. Hebert provides no shred of information or analysis to 

such a claim. Moreover, such a proposition is absurd on its face.

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 3 of 9
The settlement disallowed a fixed percentage of the Partnerships' deductions taken in the

first year and purportedly included an adjustment for the Partnerships' later income. The

settlements left unchallenged the Partnerships' investment tax credits. These adjustments

however, were all made at the Partnership level and therefore applied globally to all Partners

failing to take into account any individual aspects of a Partner s returns, such as:

the Partner s tax bracket for each year;

whether the Partner was subject to the Alternative Minimum Tax; and

whether the Partner had other gains or losses that were offset by later income or

deductions.

Importantly, the settlement also failed to take into account various offsetting interest provisions

that would have been applicable depending on a Partner s individual returns. This was

particularly damaging to the Partners because the IRS imposed a punitive interest rate and the

settlement, which was delayed by actions of the IRS for over a decade, imposed the adjustment

only in the first year of the Partnerships.

Although it would be very difficult now to precisely recreate how the result would have

been different if Plaintiff had been allowed to adjust all his affected returns (as would have

happened if the IRS proved at trial that the Partnerships generally lacked economic substance), it

is plainly clear from consideration of these issues that the global, one-size-fits-all settlement

could not possibly reach the economic equivalent at the Partner level of disregarding the

Partnerships. 2

The Terms Of The Settlement Do Not Preclude Plaintiff From Takin2 An

Ordinary Loss For The Loss Of His Partnership Interests.

2 At no time during the settlement negotiations or these proceedings has the IRS or the Department of Justice ever

provided Plaintiff of the calculation of the IRS-imposed adjustment. Even Ms. Hebert's inadmissible affidavit fails

to demonstrate any such calculation. To the extent that the Court considers Ms. Hebert's affidavit claiming the

settlement reached the economic equivalent of entirely disregarding the Partnerships, the Defendant should be

required to prove such equivalence.

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 4 of 9
The Defendant admits that a Partnership that lacks economic substance should be entirely

disregarded. Defendant admits that its interpretation of the settlement is inconsistent with its

position that the Tax Court " found" that the Partnerships lacked economic substance. See United

States' Opposition to Plaintiff s Motion for Summary Judgment (hereinafter " Defendant's

Opposition ), at 5. The s and cross all the t's. Id.

6. The Defendant admits , in

fact, pure shams. See id. at 7. But, it did not do something else, and it is bound by the expressed

terms of the settlement that actually recognized the legitimate existence of the Partnerships?

The terms of the parties' 2001 settlement are unambiguous and comprehensive. For

example, one provision of the agreement specifically precludes the Partners from filing

adjustments to returns relating to the income that the IRS recognized in the settlement. 

the Defendant's position , it is noteworthy that the parties included no such similar prohibition on

Partners taking ordinary losses on the loss of their Partnership interests. In fact, such a loss was

clearly envisioned by the parties both because it is not prohibited by the settlement terms and

because the IRS acknowledged that the Partners would have a taxable disposition on a sale or

exchange of their interests. See Exhibits D and E. Defendant does not even attempt to explain

away why the IRS told the Partners that a sale or exchange of their Partnership interests would

create capital gains or losses. See Exhibits D and E. Such an instruction from the IRS is clearly

inconsistent with its current position. In all likelihood, this is because all involved recognized

that the actual treatment of the Partnerships in the settlement required the inclusion of ordinary

3 The Defendant notes that Plaintiff is not asserting or trying to actually prove the Partnerships in fact had economic

substance. See Defendant's Opposition, at 4 n. 3. That is true. This dispute does not turn on 

Partnerships actually had economic substance, and the parties are not asking the Court to make that inquiry. Rather

the question is whether the IRS can actually treat the Partnerships as having economic substance, and tax the

Partners accordingly, and later turn around and deny the Partners' losses on their investments. Such inconsistent

treatment is the basis for Plaintiff's complaint.

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 5 of 9
income (on which the Partners had already paid taxes), included tax credits, and included some

deductions - all recognizing the legitimate existence of the Partnerships. At no point in the

actual terms of the settlement does it say that the Partnerships lacked economic substance. See

Attachment C to Exhibit G. Those words only appear 

Pursuant to Rule 248(b), see Exhibit G and subsequently the Tax Court decisions see Exhibit B.

It is clear that disregarding the basis generated by the Plaintiff s legitimate investments as the

Defendant now attempts to do was simply not part of the settlement. 

adjustments required by the settlements and paid his taxes. 

applying the tax laws, which provide him an ordinary loss because he did not sell or exchange

his interests, as initially envisioned by the IRS.

VI. Plaintiff Was Correct In Filin2 Amended Returns Seekin2 

Entire Adiustment.

Defendant complains that Plaintiff did not provide evidence of his basis before the

adjustment calculated by the IRS and that Plaintiff must have assumed his basis was zero before

the adjustment. In its protest, Defendant overlooks the fact that Plaintiff was amending his prior

returns. The Partnerships terminated in 1995, 1998, and 2000. The settlement did not occur until

2001. Thus, Plaintiff had already filed all of his tax returns for the years in which the

Partnerships ended. Those returns already reflect a complete reconciliation 

the Partnerships, including all investments, deductions, income, and credits. The proper method

of amending such a return is to file an amended return covering only the changes.

F or example, if Plaintiff purchased IBM stock in 1980 with a basis of $1000 and sold it in

1982 for $2000 he would report and pay taxes on $1000 of gain in 1982. 

adjusted his 1980 basis in the stock to $1500, Plaintiff would file an amended 1982 return to give

effect to the $500 change in basis. , Plaintiff is not claiming that his bases were zero

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 6 of 9
before the adjustments, he is amending his returns based on the adjustments required by the

settlement. He had already reconciled his bases in the terminated 

filed tax returns. The subsequent year return for each Partnership,

mandated a reconciling adjustment in Plaintiff s Partnership bases in the year of disposition.

Thus, Plaintiff was correct in his refund claims because the change caused by the IRS adjustment

to Partnership income must flow through the taxpayer s basis in accordance with Section 705 of

the Internal Revenue Code.

VII. PlaintifPs Partnership Interests 

Plaintiff s bases in the Partnerships arose from his initial investment adjusted by losses

and income generated by the Partnerships, which the IRS required Plaintiff to recognize. 4 These

interests became worthless, as clearly identified when the Partnerships filed their final tax returns

and Plaintiff received nothing. Plaintiff did not receive any income, nor was he relieved of any

liabilities. See Plaintiffs Final Year Kl Forms, attached hereto as Exhibit H; Partnership 1065

Forms, attached hereto as Exhibit I. 

interests in three of the Partnerships, Agri-Cal Venture Associates, Agri- Venture and U.S.

Farm Partners 86, because any income, including forgiveness of indebtedness income, would

have appeared on his Kl. 85 and

Coachella Fruit Growers. These Forms 

relief from liability. , nor was forgiven

any liabilities for any of the Partnerships. The termination of the Partnerships is clearly an

4 It is important to note that the Partnerships made a significant amount of money, on which the Partners paid taxes

after the early loss years. This income is evident in the fact that after the deductions disallowed by the IRS

Plaintiff's bases were larger than his initial investments. The only way this increase could happen (absent further

investment by Plaintiff) is if the net adjustment to Plaintiff's returns reflected more recognized income than

disallowed deductions. 5 Neither Plaintiff, his accountants, the Partnerships ' accountants , nor Defendant has a copy of Plaintiff's final KI

for Coachella-85 or the Coachella-85' s 1065 return. 

and will supplement his pleading as soon as it is received.

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 7 of 9
identifiable event on which such a determination of worthlessness can be made. See Echols v.

Commissioner, 950 F.2d 209 213 (5th Cir. 1991). Plaintiffs interests 

subjectively worthless to him at that time. See Exhibit A ~5.

VIII. Conclusion

The IRS claimed the Partnerships lacked economic substance. However, it settled on a

different basis expressed clearly in the terms of the settlement, which never denied the legitimate

existence of the Partnerships. The Defendant suggests that it merely took a shortcut that should

now be given the same effect as if it had done things properly. In order to do so, the Defendant

asks this Court to: (a) rewrite a decision of the Tax Court; (b) reinterpret the unambiguous terms

of the parties' settlement; and (c) make new law to punish the Plaintiff by denying him a

deduction for the loss of his investments. Despite having actually treated the Partnerships as if

they had substance in the settlement, and requiring Plaintiff to pay taxes on that treatment

Defendant asks this Court to disregard Plaintiff s interests. 

the reality of the parties' settlement and allow Plaintiff a deduction for the loss of his

investments.

Respectfully submitted

RICHARD M. NAULT

By His Attorneys

SHEEHAN PHINNEY BASS & GREEN,

PROFESSIONAL ASSOCIATION

Dated: January 20, 2006 By: Isl Robert R. Lucie

Robert R. Lucic (No. 9062)

Peter T. Beach (No. 7861)

Michael G. Valentine (No. 16506)

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 8 of 9
1000 Elm Street, P. O. Box 3701

Manchester, NH 03105-3701

(603) 627-8188

rlucic~sheehan. com

pbeach~sheehan. com

mvalentine~sheehan. com

CERTIFICA TION

I hereby certify that a copy of the foregoing Memorandum was served on the following

persons on this date and in the manner specified herein:

Via ECF:

Stephen 1. Turanchik

Trial Attorney, Tax Division

U. S. Department of Justice

O. Box 55

Ben Franklin Station

Washington, D.C. 20044

stephen.j. 

Via First Class Mail:

Thomas R. Colantuono

United States Attorney

55 Pleasant Street

Concord, NH 

Isl Robert R. Lucie

Robert R. Lucic

Case 1:04-cv-00479-PB Document 18-2 Filed 01/20/2006 Page 9 of 9