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
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")1 a California
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
1
For a partial history of AMCOR and the related litigation,
see Crop Assocs.-1986 v. Comm'r, 80 T.C.M. (CCH) 56, 2000 WL
976792, at *1-7 (T.C. July 17, 2000).
-2-
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
-3-
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
-4-
F.2d 22, 28 (1st Cir. 1991); see also Smart v. Gillette Co. Long-
Term 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,
-5-
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
2
Nault argues that the government has waived the position that
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
-6-
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
particular legal theories advanced by the parties").
-7-
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.3 Here, the greater implies the lesser--
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
3
Albeit in dicta, the Court of Federal Claims has reached a
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).
-8-
"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.4 Nault's contention is based on a
4
Nault cites the Eleventh Circuit's decision in Fickling v.
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
-9-
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.
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.
-10-
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).
-11-
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.5 He directs our
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
5
In addition to noting the limited probative value of Nault's
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.
-12-
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.
-13-