Stipulations in the Tax Court-- When the Saints Go Marching In
In New Orleans Louisiana Saints, Limited Partnership v. Commissioner, T.C. Memo. 1997-246 (6/2/97), the Tax Court reminded us how important stipulations can be. The Tax Court, of course, frequently mouths the slogan that stipulations are the backbone of Tax Court practice, and indeed they are. The Tax Court litigation forum has several features that distinguish it from other tax litigation fora, particularly from the district courts. Stipulations are one of those features. Stipulations are required or encouraged in district courts, depending upon the predilections of the particular judge, but they are deified in the Tax Court. The extensive required stipulations in the Tax Court tend to cut down trial time, force the parties and their counsel to focus on the facts that really are in dispute, and generally, we think, lead to better justice. But, ill-considered stipulations can be the Holy Grail or disastrous, depending upon perspective. That is the lesson of the Saints case. Let's look at it.
The petitioner was the partnership proceeding under the unified partnership litigation rules. The issue was the tax benefits from the acquisition of the New Orleans Saints, an NFL franchise, in 1985 by a partnership ("Saints Partnership"). Given the cost of acquiring a major sports franchise, investors look to squeeze every possible tax benefit out in order to maximize their return on investment (or, if we believe some owners, minimize their losses). (As an aside, in view of the incessant whining from some sports franchise owners as to their astronomical losses, we wonder why the IRS does not attack the tax benefits under the hobby loss theory.) In any event, Section 1060 requires that basis be allocated among the assets acquired. The parties agreed that, although Section 1060 was not applicable for the year involved, its residual methodology would be used in valuing the assets in question. At trial the parties focused on a particular asset -- the Superdome leasehold. The buyer and seller agreed to allocate $16 million to the leasehold. In its tax returns, the partnership amortized the leasehold on that basis. The IRS felt none should be allocated.
Prior to trial, the parties stipulated that, if any portion of the overall purchase price were allocable to the leasehold, the portion so allocable was $16 million. Of course, under the Danielson rule (for more on Danielson, click here), the partnership probably would have been limited to that amount, so the stipulation secured for the partnership the best that it could possibly obtain -- i.e., the stipulation obtained the "best case" for the taxpayer. The question is why the IRS stipulated to the taxpayer's best case, particularly in the valuation field which is particularly susceptible to differing and widely varying opinions some of which undoubtedly could push the value below $16 million.
The answer may be that the IRS determined to force the Court to consider its primary position that nothing should be allocated to the leasehold. Through the stipulation, the IRS forced on the Court an all or nothing position. The IRS perhaps did not want the Court to have the luxury of picking some point in between. (This is somewhat like, but conceptually different that "baseball arbitration," but has the same all or nothing approach.)
So, as posited by the parties through their stipulation, the issue before the Court was whether there was any basis (perhaps even the proverbial scintilla) allocable to the Superdome leasehold and only if it could find no basis could it then hold for the IRS. As stated by the Court: "Accordingly, we must decide whether petitioner is entitled to allocate any portion of the price it paid to acquire the Saints to its Superdome leasehold."
That was an issue the partnership was bound to win because of the stipulation, at least in the view of the Tax Court.
Understanding why requires delving briefly into the facts regarding the Superdome leasehold. The Seller had entered a ten-year lease of the Superdome in 1975, which was set to expire in 1985, unless the Seller renewed the lease pursuant to some options. Immediately prior to 1985, the Seller put the Saints on the market and, in order to induce the highest offer, flirted with New Orleans and other cities for the highest "inducements" to sweeten value of the overall financial package that the Saints could "sell" or, viewed form another angle, that would inure to a buyer so that, in determining how much the buyer would pay, the buyer would add the value of the inducements.
Through political maneuvering in New Orleans, the structure for securing these inducement benefits to this particular Buyer to keep the Saints in New Orleans was obtained by this Buyer entering with the State a lease titled "Fifth Amendment to New Orleans Saints Superdome Stadium Lease" (the Revised Lease). As you must have suspected, the prior lease being amended was with the Seller, not the Buyer, but this new lease was with the Buyer. This inducement was material to the arrangement that then resulted in the sale to the Buyer.
The Court first addressed a threshold conceptual issue -- whether it could be said that any portion of the purchase price paid to the Buyer was attributable to the Revised Lease that the partnership entered directly with the State. In theory at least, the methodology in Section 1060 which the parties stipulated would apply, applies only to assets acquired from the Seller. Of course, the lease was part of the financial package that induced the Buyer to buy and, correspondingly, the expectation of a lease revision containing this genre of inducements was factored into the price for which the Seller was willing to sell. Accordingly, in a financial sense, the price paid by the Buyer to the Seller did include some significant amount attributable to the inducements and, at least in an economic sense, is therefore a cost of the inducements paid by the Buyer to realize the benefit of the inducements. In every realistic and financial sense, the cost paid to achieve those benefits (even if legally acquired from the State) should logically be matched over the period that the benefits accrue. The partnership argued at trial that, even if technically the lease with its inducements were not acquired from the Seller, there was a "mutual conditionality" -- a term perhaps coined for the position -- that permitted it to be treated as sold by the Seller.
The Tax Court rejected that notion, since it could not clear the hurdle that the inducements in the Revised Lease entered directly by the Buyer were simply not the Seller's to sell. Economically and in the real world, of course, this is legal myopia, for in every real sense of the term the Seller was effectively selling those inducements. Nevertheless, all was not lost by virtue of the stipulation noted above.
The partnership's fall back position was that the 1975 lease in existence prior to the Revised Lease had some value, that Buyer did buy from the Seller and pay the Seller for the benefits of that lease, and that the all or nothing stipulation requires that the entire $16 million be allocated to that asset. Of course, the value of the 1975 lease without the considerable new inducements of the Revised Lease was likely only a fraction of the value of the Revised Lease, so that this argument if accepted by the Tax Court coupled with the stipulation would give complete victory to the partnership despite having lost the argument that really entitled it to complete victory.
The Tax Court held for the partnership on this issue and all but stated in bright lights that the IRS had made an stipulation that was not consistent with its resolution of the issues.
Which should teach us that stipulations can be very important things. We should also be reminded that stipulations are two way streets. Taxpayers can also be hung on their improvident stipulations. Which means that stipulations should not be lightly entered. But, with careful development of strategy and an understanding of how the stipulation under consideration relates to the overall strategy, a stipulation can be a powerful tool, as this case amply demonstrates as to the partnership, or a colossal folly, as this case also demonstrates as to the IRS. (We should note that, as suggested above, the stipulation may not be folly because, in litigating cases, such strategic decisions are made in full recognition of the risks; here, as noted above, we speculate that the IRS may have recognized this risk in order to posture this case so that the Tax Court was presented with an all or nothing proposition, in which case it might be willing to go wholly for the IRS if it felt that only a minor portion of the price was allocable to the 1975 lease.)
Posted 6/4/97
IRS LOSES BATTLE FOR BLANKET EXEMPTION OF FSA’S
In Tax Analysts v. IRS, ___ F.3d ___ (D.C. Cir. 7/8/97), unofficially reported at 97 TNT 131-10 (7/9/97), the Court held that there is no blanket exemption from FOIA for Field Service Advice ("FSA"). The Court described FSA’s as follows:
Field Service Advice Memoranda, known by their initials "FSAs," are issued by the Office of Chief Counsel for the IRS. The Office of Chief Counsel employs more than 1600 attorneys and provides legal advice to the IRS, directs litigation in the Tax Court, and provides guidance and support for litigation in other courts. See Internal Revenue Manual 1171 (1993). Although the Chief Counsel is the chief legal officer for the IRS, id., the Office of Chief Counsel is not part of the IRS. The Chief Counsel is an Assistant General Counsel of the Treasury Department, appointed by the President with the advice and consent of the Senate. 31 U.S.C. section 301(f)(2). For most purposes, the Chief Counsel is subject to the supervision of the General Counsel of the Treasury Department, not the Commissioner of Internal Revenue (although during the time period relevant to this case, the Commissioner delegated certain IRS functions, including handling agency appeals, to the Office of Chief Counsel, and the Commissioner retained authority over the Office of Chief Counsel with respect to those functions). Internal Revenue Manual 1112.62 (1990). According to the deposition testimony of senior officials in the Office of Chief Counsel, that office understands itself as independent from the IRS.
Attorneys in the national office of the Office of Chief Counsel prepare FSAs in response to requests from field personnel of either the Office of Chief Counsel or the IRS, such as field attorneys, revenue agents, and appeals officers. Field personnel request an FSA for legal guidance, usually with reference to the situation of a specific taxpayer. Each FSA includes a statement of issues, a conclusions section, a statement of facts, and a legal analysis section. Chief Counsel Directives Manual (35)(19)44 (1992). /1/ The staff preparing an FSA are instructed that the conclusions section should recommend a position on each issue and state "any limitations or conditions to which a conclusion may be subject." Id. The style of the analysis section "should be exploratory and descriptive so that the strengths and weaknesses of a case are presented and developed candidly, directing attention to the authorities against the conclusions arrived at as well as those which support them." Id.
The government agrees that among the primary purposes of FSAs is ensuring that field personnel apply the law correctly and uniformly. The IRS tells us that FSAs are not formally binding on IRS field personnel who request them. It is not clear whether they bind requesters within the Office of Chief Counsel. In any case, the government concedes that FSAs are held in high regard and are generally followed.
The Court squarely rejected the IRS’s claim that all FSA’s were exempt from disclosure. The Court remanded the case to the district court for further consideration of what portions the IRS may properly withhold by redaction under Section 6103 and appropriate privileges (such as deliberative process, attorney-client privilege and work-product privilege).