UNITED STATES TAX COURT
Agency decision
Ask Donna
What actually matters in this document.
Text
T.C. Memo. 2005-205
UNITED STATES TAX COURT
JESSE M. AND LURA L. LEWIS,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 15673-87, 18551-88,
29429-88.
Filed August 29, 2005.
R determined deficiencies and additions to tax
against Ps and hundreds of other taxpayers who then
signed “piggyback agreements” with R, agreeing to be
bound by the outcome of selected test cases involving
tax shelter programs promoted by K. Before trial of
the test cases, R’s trial attorney, with his immediate
supervisor, entered into a secret settlement (not
disclosed to R’s management, the attorney for other
test case petitioners, or the Tax Court) with D,
attorney for test case petitioners T, arranging refunds
to the Ts sufficient to pay D’s attorney’s fees as
consideration for the Ts’ staying in the test case
array and T’s testifying at trial. After the Court
upheld R’s determinations and entered decisions in
favor of R in the test cases, R’s management discovered
1
These cases have been consolidated for the sole purpose of
deciding the motions currently before the Court.
- 2 the settlement and disclosed it to the Court. The
Court entered decisions in favor of the Ts in
accordance with the settlement but allowed the adverse
determinations against other test case petitioners to
stand. The other test case petitioners appealed the
Court’s decisions against them.
After R’s management had discovered the settlement
and disclosed it to the Court and while the other test
cases were on appeal, R made a blanket settlement offer
to Ps and other non-test-case petitioners that was less
advantageous to taxpayers than the T settlement. Ps
accepted R’s offer, and Ps’ counsel and R signed
stipulated decisions in accordance with the terms of
the offer, which were entered as decisions by the
Court.
The Court of Appeals ultimately held that the
misconduct of R’s attorneys in arranging and failing to
disclose the settlement with the Ts constituted “fraud
on the court”. It mandated that “terms equivalent to
those provided in the settlement agreement with [the
Ts] and the IRS” be extended to “appellants [test case
petitioners] and all other taxpayers properly before
this Court.” Dixon v. Commissioner, 316 F.3d 1041,
1047 (9th Cir. 2003), revg. and remanding T.C. Memo.
1999-101, supplemented by T.C. Memo. 2000-116. Ps now
seek to have their stipulated decisions vacated so they
can become entitled to the benefit of the T settlement.
Held, because Ps and their counsel had become
aware of the misconduct of R’s attorneys and of the
pending appeals by test case petitioners when they
entered into their stipulated decisions, Ps are not
entitled to have those decisions vacated.
Declan J. O’Donnell and Robert Alan Jones, for petitioners.
Henry E. O’Neill, for respondent.
- 3 MEMORANDUM OPINION
BEGHE, Judge:
This matter is before the Court on
petitioners’ motions for leave to file motions to vacate
stipulated decisions entered more than 12 years ago in the abovenumbered dockets.
The motions for leave, which have been filed,
are accompanied by motions to vacate, which have been lodged.
The issue presented by the lodged motions is whether stipulated
decisions previously entered should be vacated because of fraud
on the Court.
We have followed our practice of examining the
merits of the lodged motions in deciding whether to grant leave
to file them.2
We decide that the motions for leave to file
motions to vacate should be denied.
Background
Petitioners’ motions have been made in the context of the
difficult, protracted, and ongoing litigation commencing with
Dixon v. Commissioner, T.C. Memo. 1999-614 (Dixon II),3 revd. and
remanded sub nom. DuFresne v. Commissioner, 26 F.3d 105 (9th Cir.
1994), on remand Dixon v. Commissioner, T.C. Memo. 1999-101
(Dixon III), supplemented by T.C. Memo. 2000-116 (Dixon IV),
revd. and remanded 316 F.3d 1041, 1047 (9th Cir. 2003) (Dixon V).
For purposes of these motions, we take judicial notice of our
2
See infra note 28.
3
See infra note 10 regarding Dixon I.
- 4 findings in Dixon III and IV, as modified by Dixon V.
Otherwise,
the pertinent facts, as set forth in petitioners’ motions and the
oppositions thereto, and as summarized in this “Background”
section of our opinion, are undisputed.4
Respondent determined deficiencies of $935 in petitioners’
Federal income taxes for their taxable year 1983, $3,523 for
their taxable year 1984, and $2,744 for their taxable year 1986.
For all 3 years, respondent also determined that petitioners were
liable for additions to tax for negligence or intentional
disregard of rules or regulations under section 6653(a)(1) for
1983 and 1984 and under section 6653(a)(1)(A) for 1986, with
increased interest under section 6653(a)(2) for 1983 and 1984 and
4
Motions similar to those under consideration herein have
been filed and lodged by other taxpayers, most of whom were
represented by Messrs. O’Donnell and Jones when they settled
their cases and who continue to be represented by them in
connection with their pending motions. In addition, similar
motions by still other taxpayers, some represented by Messrs.
O’Donnell and Jones and some represented by other attorneys, have
not been filed or lodged by the Court for technical reasons and
have been returned to the taxpayers’ attorneys.
Still other motions have been filed and lodged on behalf of
taxpayers who signed stipulated decisions that were entered
before discovery and revelation of the settlements in the test
cases whose concealment was ultimately held in Dixon V to
constitute fraud on the Court. In two such cases, Kahle v.
Commissioner, docket Nos. 24558-84 and 38976-84, in which the
stipulated decisions were agreed to and entered after publication
of the Court’s opinion in Dixon II and before the discovery and
revelation of the Thompson settlement, respondent has conceded on
the record that the taxpayers are entitled to have their
stipulated decisions vacated so that they can become entitled to
the benefits of the Thompson settlement as mandated by the Court
of Appeals for the Ninth Circuit in Dixon V.
- 5 under section 6653(a)(1)(B) for 1986.5
For 1984, respondent also
determined an addition to tax of $880.75 under section 6661 for
substantial understatement of tax.
Petitioners, originally proceeding pro se, filed a petition
in this Court on June 2, 1987, seeking a redetermination of the
deficiency, additions to tax, and additional interest determined
by respondent for the year 1983.
On July 18, 1988, petitioners
filed a similar petition with respect to their 1984 taxable year,
and on November 14, 1988, they filed their petition with respect
to their 1986 taxable year.
When petitioners filed their
petitions, they resided in Westlake Village, California.
The Kersting Project
The deficiencies, additions to tax, and interest stemmed
from petitioners’ participation in tax shelter programs promoted
by Henry F.K. Kersting (Mr. Kersting).
Respondent issued the
notices of deficiency to petitioners in furtherance of a project,
called the Kersting project, that respondent had established
regarding those programs.
Respondent also sent notices of
deficiency to other taxpayers who had participated in the
Kersting programs.
Ultimately, more than 1,800 cases arising
from disallowance of deductions claimed by participants in the
5
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
- 6 Kersting programs were filed in this Court.
Respondent assigned
the role of Kersting project attorney to Kenneth W. McWade (Mr.
McWade), an attorney in the Internal Revenue Service (IRS)
District Counsel’s office in Honolulu, Hawaii.
The Tax Court cases generated by the Kersting project were
assigned to Judge William A. Goffe (Judge Goffe) for disposition.
Mr. Kersting took an active role in opposing respondent’s
enforcement activities against his tax shelter programs.
In a
letter dated March 1, 1985, Mr. Kersting informed Kersting
program participants that he had retained attorney Brian Seery
(Mr. Seery) to represent them in the Tax Court at no charge.
After Mr. Seery entered his appearance in many of the Kersting
project cases in this Court, he and Mr. McWade discussed
settlement options for the cases, as well as procedures for
trying them.
Respondent’s Pretrial Settlement Offer
During 1982 through 1986, respondent had in effect an
official settlement offer for the Kersting tax shelter programs.
The offer permitted the participants to resolve their cases by
agreeing to pay deficiencies that averaged 7 percent less than
those determined in their deficiency notices.
The 7-percent
reduction of the deficiencies reflected a deduction equal to an
average of the participants’ actual out-of-pocket expenses in
approximately 25 Kersting project cases.
From respondent’s
- 7 perspective, the 7-percent reduction settlement offer was
equivalent to allowing a theft loss deduction in the year of
payment.6
In addition to reducing the deficiencies by 7 percent,
respondent’s offer incorporated other concessions and
adjustments:
(1) To concede the negligence addition to tax and
increased interest imposed on tax-motivated transactions pursuant
to section 6621(c); (2) to concede an annual deduction under
section 162 or 212 for certain “leasing” program participants for
expenses that exceeded the out-of-pocket adjustment; (3) to
concede the deficiency in full to participants in one particular
program who could show that funds paid to their children did not
give rise to constructive receipt of income by the parents; and
(4) to make appropriate adjustments if the participant had
reported a capital gain upon the surrender of stock certificates
to Mr. Kersting.
Respondent’s purpose in offering these
concessions and adjustments was to provide similar treatment for
all Kersting program participants who wished to settle their
cases.
Although District Counsel generally is expected to adhere to
the terms of an official project settlement offer, once a tax
6
Respondent’s position represented an additional concession
insofar as the allowance of a theft loss deduction for payments
induced by misrepresentation is postponed until the year of
discovery of the theft. See sec. 165(e); Bellis v. Commissioner,
61 T.C. 354, 357 (1973), affd. 540 F.2d 448 (9th Cir. 1976).
- 8 shelter project, such as the Kersting project, is assigned to a
particular District Counsel’s office, that office has the
authority to settle any individual case in the project.
District
Counsel has the authority in special circumstances to settle
individual tax shelter project cases on a basis different from
the project settlement offer.
By September 1986, Messrs. McWade and Seery agreed to modify
the 7-percent reduction settlement offer to incorporate a new
feature they called the “burnout” in cases involving more than 1
taxable year.
Under this feature, the interest on a taxpayer’s
total unpaid deficiencies for the first and second years of tax
liability would not begin to accrue until the due date for the
second year.
The burnout thus postponed for a year the accrual
of interest on the first year’s deficiency and reduced the total
interest that accrued on the deficiencies for both years.
This
was accomplished by zeroing out the taxpayer’s agreed deficiency
for the first year and adding it to the agreed deficiency for the
second year.
The record does not disclose whether petitioners were aware
of respondent’s pretrial settlement offer; in any event,
petitioners did not enter into a settlement before trial.
The Test Case Procedure
It would have been a daunting task to try the cases of the
hundreds of similarly situated Kersting program participants who
- 9 did not accept respondent’s pretrial settlement offer.
In June
1986 Messrs. Seery and McWade addressed the problem by deciding
to employ a test case procedure.
Under that procedure, a few
typical cases are selected as test cases, while the petitioners
whose cases are not selected as test cases are encouraged to
execute a piggyback agreement; i.e., a stipulation to be bound by
the outcome of the test cases.
Petitioners and respondent entered into piggyback agreements
providing that petitioners’ cases would be resolved in accordance
with the outcome of the final decisions in the test cases.
The
pertinent dates are as follows:
Taxable
Year
Docket
No.
Dates of Execution
Petitioners Respondent
Date of
Filing
1983
1984
1986
15673-87
18551-88
29249-88
Undated
10/20/88
2/16/89
9/11/87
10/31/88
2/27/89
9/08/87
10/27/88
2/23/89
Petitioners, who were still proceeding pro se, signed their
piggyback agreements.
Mr. McWade signed petitioners’ piggyback
agreements on behalf of respondent.
Pretrial Proceedings in the Test Cases
Among those petitioners whose cases Messrs. Seery and McWade
selected to be test cases were Mr. Seery’s clients Jerry and
Patricia A. Dixon (the Dixons), plus six other couples and an
individual.
The experience of the Dixons typified the experience
of the other test case petitioners.
The Dixons’ deficiencies
were for the taxable years 1977 through 1981 and totaled
- 10 $102,856.
Respondent further determined that the Dixons were
liable for negligence additions for 1977 through 1980 under
section 6653(a) and for 1981 under section 6653(a)(1).
The
deficiencies and negligence additions so determined were
attributable to their participation in Kersting tax shelter
programs.
The test case petitioners also included John R. and Maydee
Thompson (the Thompsons) and Mr. and Mrs. John R. Cravens (the
Cravenses).7
The Thompsons’ deficiencies were for the taxable
years 1979 through 1981 and totaled $79,293.
Respondent further
determined that the Thompsons were liable for additions to tax
for negligence for 1979 and 1981 and for increased interest for
1981 pursuant to section 6621(d),8 as well as a late filing
addition to tax for 1981 under section 6651(a).
The
deficiencies, negligence additions, and increased interest were
attributable to their participation in Kersting tax shelter
programs.
The Thompsons filed a petition in this Court seeking
review of the deficiencies, increased interest, and additions,
with Mr. Seery as their counsel.
7
Mr. Seery particularly wished to include the Cravenses as
test case petitioners because they treated their payments to Mr.
Kersting to participate in the programs as basis reductions that
resulted in their reporting capital gains on terminating their
interests in the programs.
8
Sec. 6621(d) was redesignated sec. 6621(c) by the Tax
Reform Act of 1986 (TRA), Pub. L. 99-514, sec. 1511(c)(1)(A)-(C),
100 Stat. 2744. We will hereinafter refer to the provision as
sec. 6621(c).
- 11 The Thompsons had previously hired another attorney, Samuel
M. Huestis (Mr. Huestis), to prepare an estate plan for them.
In
a letter dated October 28, 1986, Mr. Huestis expressed concern to
Mr. Seery about Mr. Seery’s apparently close association with Mr.
Kersting.
Mr. Heustis said Mr. Seery could be viewed as having a
conflict of interest between Mr. Kersting and the participants in
the Kersting programs, and that any resulting harm to the
Thompsons could result in an action against Mr. Seery for
“professional negligence”.
On October 31, 1986, Mr. Seery filed
a motion to withdraw as counsel for the Thompsons in their
docketed cases, which the Court granted.
In ruling on a subsequent motion, Judge Goffe observed that
Mr. Seery might have a conflict of interest if he represented
both petitioners and Mr. Kersting.
Mr. Seery subsequently filed
motions to withdraw as counsel in the Kersting project cases
(both test cases and nontest cases), citing concerns about a
possible conflict of interest.
The Court granted Mr. Seery’s
motions.9
9
On Nov. 7, 1986, Mr. Seery had filed a motion to change the
place of trial of the test cases from Maui to Honolulu. Mr.
Seery asserted that a trial in Maui would be inconvenient and a
hardship to Mr. Kersting, who lived and operated a business in
Honolulu. On Nov. 14, 1986, the Court denied that motion, noting
that the motion “implies that * * * [Mr. Seery] represents not
only petitioners but also Henry Kersting, the promoter of the tax
shelters which are the subject of this litigation.” The Court
went on to observe that, if Mr. Seery were representing both Mr.
Kersting and petitioners, the dual representation would
constitute a conflict of interest. The Court attached to the
(continued...)
- 12 Additional Attorneys Engaged by Mr. Kersting
Mr. Kersting then engaged attorneys Robert J. Chicoine (Mr.
Chicoine) and Darrell D. Hallett (Mr. Hallett) to represent the
test case petitioners.
Messrs. Chicoine and Hallett agreed to do
so with the understanding they would not represent Mr. Kersting.
Early in January 1987, they entered their appearances for the
Dixons and the other test case petitioners and promptly filed
motions to suppress evidence seized in 1981 from Mr. Kersting’s
office.10
Throughout 1987, Messrs. Chicoine and Hallett also
negotiated with Mr. McWade to settle the test cases.
They
ultimately reached an oral agreement with Mr. McWade for a
settlement in which respondent would concede 20 percent of the
proposed deficiencies; in letters dated February 9, 1988, they
disclosed this proposed settlement to the test case petitioners
and to non-test-case petitioners who had inquired about the
possibility of a more advantageous settlement.
The proposed 20-
percent reduction settlement displeased Mr. Kersting; on February
20, 1988, he wrote to Messrs. Chicoine and Hallett that “I hereby
revoke your appointment as counsel for the test cases”.
In April
1988, Messrs. Chicoine and Hallett informed the test case
9
(...continued)
order copies of several authorities concerning conflicts of
interest, including Adams v. Commissioner, 85 T.C. 359 (1985).
10
In an Opinion dated Feb. 11, 1988, this Court held that it
lacked power to suppress evidence seized from a third party not
before the Court. See Dixon v. Commissioner, 90 T.C. 237 (1988)
(Dixon I).
- 13 petitioners they would withdraw as counsel because of a
disagreement with Mr. Kersting.
Mr. Kersting then engaged
attorney Joe Alfred Izen, Jr. (Mr. Izen), to represent the test
case petitioners at trial.
The Thompsons Hire Mr. DeCastro
The Thompsons and the Cravenses did not engage Messrs.
Chicoine and Hallett.
Instead, Mr. Huestis helped the Thompsons
find attorney Luis C. DeCastro (Mr. DeCastro) as their
replacement for Mr. Seery.
In November 1986, the Thompsons
engaged Mr. DeCastro to represent them before this Court.
The
Cravenses did not hire counsel to represent them in their test
cases.
Thus, most of the test case petitioners, including the
Dixons, continued to be represented by an attorney selected by
Mr. Kersting.
The Thompsons and the Cravenses, however,
continued as test case petitioners who were not represented by
counsel engaged by Mr. Kersting.
The Thompson Settlement
In December 1986, Mr. McWade and his supervisor, District
Counsel William A. Sims (Mr. Sims), entered into contingent
settlement agreements with the Cravenses regarding their test
cases and with Mr. DeCastro regarding the Thompsons’ test cases.
For purposes of the present motions, only the details of the
Thompson settlement are relevant, but we must describe it in some
detail.
By December 1986, Mr. McWade had negotiated a settlement
- 14 with Mr. DeCastro calling for reduction of the Thompsons’ total
deficiencies from the $79,293 originally determined in their
statutory notices to $64,425, a reduction of 18.8 percent.11
The
settlement also eliminated all additions to tax and the increased
interest rate under section 6621(c) for 1981.
The settlement
also incorporated the burnout feature, combining the agreed
deficiencies for the years 1979 and 1980 in the year 1980.
On December 23, 1986, Mr. McWade sent Mr. DeCastro decision
documents incorporating the above-described settlement.
The
transmittal letter stated:
As previously indicated, the Decision documents in
John R. and Maydee Thompson will not be filed with the
Court until the Decision becomes final in the test
cases. In the interim, the Thompsons can make an
advance payment, as discussed at our conference, and
stop the accrual of any additional liability for
interest.
Mr. DeCastro executed the decision documents on behalf of the
Thompsons.
Neither Mr. McWade nor Mr. Sims communicated the
terms or existence of the Thompson settlement to their superiors
in the Office of Chief Counsel.
On December 30, 1986, the Thompsons paid $59,545 as interest
on their then-agreed deficiencies, timed to take advantage of the
full deductibility of that interest for taxable years beginning
11
Respondent later indicated that Mr. McWade’s agreement to
reduce the Thompsons’ deficiencies by 18.8 percent reflected
“increased litigation hazards caused by the Motion to Suppress
Evidence” filed by Messrs. Chicoine and Hallett that was
ultimately denied in Dixon I.
- 15 before January 1, 1987.
See TRA sec. 511(b), 100 Stat. 2246.
The payment was made with two checks, one of which, for $34,000,
was originally dishonored.
check early in 1987.12
The Thompsons replaced the $34,000
On June 15, 1987, pursuant to further
negotiations, the Thompsons paid the total proposed deficiencies
of $63,000, in order to halt further accrual of interest on the
deficiencies.13
By June 1987, their payments to the Internal
Revenue Service with respect to the taxable years 1979 through
1981 totaled $121,770.
Shortly before trial of the test cases in this Court in
January 1989, Messrs. McWade and DeCastro reached an oral
agreement (the new agreement) in the Thompsons’ cases calling for
reduction of the agreed deficiencies for 1979, 1980, and 1981 to
zero, $15,000, and $15,000, respectively.
The purpose of this
reduction was to generate refunds to the Thompsons from the
$121,770 they had previously paid toward satisfaction of the
12
In March 1987, Mr. McWade agreed to reduce the combined
deficiency of the Thompsons for 1979 and 1980 from $34,425 to
$33,000, bringing the reduction in total deficiencies to
approximately 20 percent. The record does not disclose why Mr.
McWade agreed to that reduction, although similar 20-percent
reduction settlements were later offered to the clients of
Messrs. Chicoine and Hallett. Mr. DeCastro communicated this
proposed reduction to his clients, but apparently he did not
execute decision documents confirming the Thompsons’ acceptance
of this lowered amount.
13
The Thompsons paid this amount with a check for $63,000;
respondent credited $775 to their taxable year 1988, a year not
then before the Court. The balance of $62,225 was credited to
their liabilities for their taxable year 1979.
- 16 previously agreed deficiencies and interest.
The refunds,
estimated to exceed $60,000, were to be used to pay Mr.
DeCastro’s fees in connection with the test case trial.
Moreover, if the results of the trial were more favorable to the
Thompsons than the new agreement, they would be entitled to the
results of the trial.
On August 3, 1989, Mr. DeCastro wrote a
letter to Mr. McWade, reducing the new agreement to writing.
Mr.
McWade signed the letter and returned it to Mr. DeCastro.
When Messrs. McWade and DeCastro reached the new agreement,
respondent’s official settlement policy still provided for a 7percent reduction in determined deficiencies, elimination of the
negligence additions, and other minor concessions.
This was
notwithstanding that some petitioners’ attorneys, including Mr.
DeCastro and Messrs. Chicoine and Hallett, had previously
negotiated 20-percent reduction settlements on behalf of some of
their clients.
The new agreement, however, reduced the
Thompsons’ determined deficiencies for the years at issue from
$79,293 to $30,000--a reduction of 62 percent.
The new agreement
was thus a much more substantial deviation from respondent’s
official settlement policy.
Messrs. Sims’s and McWade’s
superiors did not approve the new agreement.
They did not
discover the new agreement until after this Court had tried the
test cases and issued its opinion and initial decisions therein.
- 17 Posttrial Proceedings in the Test Cases
On December 11, 1991, the Court, through Judge Goffe, issued
its opinion in Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon
II), sustaining almost all respondent’s determinations that the
Kersting programs in issue lacked substance for tax purposes.
In February 1992, Mr. Kersting sent a lengthy “Dear Friend”
letter to the participants in his programs.
He advised them:
We came to talk about the escape routes open to
essentially all of us as a result of the adverse
decision in US Tax Court. There is first the road to
San Francisco where we plan to point out to the 9th
Circuit [Court] of Appeals the items of “reversible
error” with which the Judges opinion is laced and the
procedural flaws which had been disregarded by the
Judge even though he was bound by law to take them into
consideration. The appeal is being prepared by Joe
Izen and shall be filed timely in due course.
*
*
*
*
*
*
*
To my total exhilaration there was not a single voice
of disgruntlement or dissent at either the meeting in
Houston or Los Angeles. On the contrary, there was
unanimous support for the appeal at the 9th Circuit
[Court] of Appeals in San Francisco and for continuing
efforts to right the wrong we have been subjected to in
US Tax Court. * * *
Mr. Kersting’s letter also warned the participants in his
programs that “IRS soldiers * * * will begin another harassment
campaign soon in order to break down your willingness to resist.
It would be well within their character.”
Accordingly, he
advised:
In anticipation of this we have formed a defense team
of attorneys who have indicated their willingness to
provide the shield for you if you get singled out for
- 18 direct molestation. I have met with the attorneys
several times over the last 10 days or so and I have
convinced myself of their skills and competency.
Moreover, they seem to have the most important trait in
dealing with the Revenue Service, namely fearlessness.
It is the distinction which makes the difference. The
IRS is to us a formidable and threatening adversary.
We need the presence of someone who can provide the
balancing force and the element of stabilization. I
will include with this letter a copy of the business
card of the attorney I have in mind. * * *
The copy of the business card bore the name “R.A.J. Limited,
Robert Alan Jones, Esq., President”.
Subsequently, Mr. Jones and attorney Declan J. O’Donnell
announced the “Henry Kersting Tax Defense Group”.
A “Defense
Group” brochure, created in May 1992 and stamped “advertising
material”, describes the legal services Messrs. O’Donnell and
Jones would offer to Kersting program participants.
The brochure
includes a description of the qualifications and practice
backgrounds of Messrs. O’Donnell and Jones, along with retainer
agreements and copies of relevant memoranda and correspondence.
One such memorandum, entitled “Status of the Kersting Cases”, was
signed by Mr. O’Donnell and dated May 12, 1992.
It advised that
most of the Kersting program participants had executed piggyback
agreements to be bound by the results in the test cases.
It
stated:
The Dixon case was decided for the Government and
against the six Petitioners. The opinion of Judge
Goffe was filed on December 11, 1991, and the Appeal
deadline date is June 11, 1992. Mr. Joe Izen of
Houston, Texas, represents the lead case Petitioners
and will handle the Appeal. * * *
- 19 The memorandum further advised that Messrs. O’Donnell and
Jones had “a Program to abate I.R.S. activity against its’ [sic]
clients until the dispute is finally resolved by Appeal.
Enclosed herewith is a letter from Mr. Alan Jones to Mr. Kenneth
McWade, IRS District Counsel, which establishes this treaty.”
Another memorandum, dated May 18, 1992, entitled
“Relationship to Henry Kersting”, discussed Messrs. O’Donnell’s
and Jones’s request to assist in preparing the taxpayers’
appellate brief in the appeal of the test cases.
It quoted a
communication from Mr. Kersting to Mr. Izen as follows:
Joe Izen - Joe - You probably know by the messages left
at your office that Alan Jones and Declan O’Donnell
have been trying to reach you for several days. They
need to talk to you for all sorts of reasons as they
are representing now a number of our mutual clients.
Moreover, they have developed certain contributions to
the Appeal to be filed at the Ninth Circuit Court of
Appeals in San Francisco of which you should know as
you are formulating the Briefs. I wish you would take
the time and return their calls. Henry. 05/11/92.
In the meantime, in March 1992, this Court had entered
decisions in the test cases in accordance with its opinion in
favor of respondent.
The test case petitioners (with the
exception of the Thompsons and the Cravenses) appealed the
decisions in their cases to the U.S. Court of Appeals for the
Ninth Circuit.
After entry of the decisions in the test cases, Mr. McWade
attempted to have respondent’s Collection Division assess
deficiencies in the Thompson and Cravens cases in accordance with
- 20 the previously undisclosed settlement agreements rather than in
accordance with the decisions entered by the Court.
Mr. McWade’s
attempts alerted senior officials in the IRS Regional Counsel’s
Office to the new agreement reached by Messrs. Sims, McWade, and
DeCastro before trial.
These senior officials determined that
the new agreement was unauthorized.
At their behest, on June 9,
1992, respondent filed motions for leave to file motions to
vacate the decisions entered in the Thompson and the Cravens
cases and one other test case.14
Respondent requested the Court
to conduct an evidentiary hearing to determine whether the
agreements with the Cravenses and the Thompsons had affected the
trial of the test cases or the ensuing decisions of the Court.
On or about June 11, 1992, the IRS Regional Counsel decided that
Messrs. Sims and McWade should be removed from the Kersting
project cases, and that responsibility for the project should be
reassigned to other District Counsel attorneys.
The Deputy
Regional Counsel reassigned all 15 test case dockets to Thomas A.
Dombrowski (Mr. Dombrowski) and all the nontest cases in the
project to Henry E. O’Neill (Mr. O’Neill).
On June 22, 1992, this Court granted respondent’s motions to
vacate decisions in the Thompson and Cravens cases.
The Court
ordered the parties to file agreed decisions with the Court, or
14
In addition to the cases of the Thompsons and the
Cravenses, respondent also sought to vacate the decision entered
against test case petitioner Ralph J. Rina.
- 21 otherwise move as appropriate.
The Court denied respondent’s
request for an evidentiary hearing.
In a separate order filed
the same date, the Court denied respondent’s motion to vacate the
decision filed in the case of Ralph J. Rina, the test case
petitioner in docket No. 17640-83, stating:
The Court has reviewed the testimony of Cravens, the
testimony of Thompson, the stipulated facts and
stipulated exhibits relating to the Cravenses and the
Thompsons, and the exhibits offered through Thompson as
a witness. The Court finds that these reviewed items
had no material effect on the opinion which the Court
filed on December 11, 1991, as that opinion relates to
petitioner Rina. If the reviewed items were stricken
from the record, the Court would file an opinion in all
material respects like the opinion it filed on December
11, 1991 (with the exception of certain portions
relating specifically and expressly to the Cravenses or
the Thompsons), and the Court’s findings, analyses, and
conclusions relating to petitioner Rina would remain
the same. * * *
Two days after the Court’s order and decision denying the
motion to vacate the decision in Mr. Rina’s case, Messrs.
O’Donnell and Jones wrote Mr. Dombrowski a joint letter, dated
June 24, 1992, concerning further proceedings in the Kersting
project cases.
In that letter, Messrs. O’Donnell and Jones
informed Mr. Dombrowski that they represented “about one-hundred
Petitioners” and that they understood Mr. Dombrowski had replaced
Mr. McWade as respondent’s counsel “because of an ethical concern
regarding the impropriety of two settlement offers * * * secretly
extended to Mr. Cravans [sic] and Mr. Thompson who testified for
the I.R.S. at the Dixon Trial.”
- 22 The letter further reported on the status of the cases as
follows:
The Motions for Leave to File Motions to Vacate
were granted as to cases not on Appeal and a similar
Motion (to remand rather than vacate judgment) is
pending in the Ninth Circuit Court of Appeals as to the
cases on Appeal.
More recently, J. Goeffe [sic] has denied the
Motion to vacate. He has decided that the newly
disclosed “Contingent Settlements” would not change his
ruling in any material way.
On July 6, 1992, Messrs. O’Donnell and Jones entered their
appearances on behalf of petitioners in the present cases.
In a letter dated July 31, 1992, Mr. Kersting updated the
situation for Kersting program participants.
He advised that Mr.
Izen and another attorney, Robert Patrick Sticht (Mr. Sticht),
were “exposing the government’s fraud and perfidy in a secret
deal between Cravens and Thompson on the one hand, and IRS
attorney McWade (and other government officials) on the other
hand.”
Mr. Kersting explained his version of the misconduct of
the Government’s attorneys as follows:
As many of you already know, the growing scandal in the
“piggyback” cases involves a settlement in favor of
Cravens/Thompson in exchange for their damaging
testimony and exhibits that were all put together as
part of a prearranged plan to influence and persuade
Judge Goffe to rule against us. * * *
Also in July 1992, Mr. DeCastro filed a motion for entry of
decision in the Thompson case reflecting the terms of the new
agreement he had reached with Mr. McWade shortly before trial,
- 23 providing for deficiencies of zero, $15,000, and $15,000 for the
taxable years 1979, 1980, and 1981, respectively.
On August 20,
1992, respondent filed objections to Mr. DeCastro’s motion for
entry of decision, together with respondent’s own motions for
entry of decision and an accompanying memorandum.
Respondent’s
motion papers set forth the facts regarding the Thompson
settlement that had been discovered by IRS senior officials.
Respondent informed the Court that, before the test case trial,
Messrs. Sims and McWade had agreed to settle the Thompson cases
by reducing the Thompsons’ deficiencies in amounts sufficient to
compensate them for their projected attorney’s fees.
As
respondent explained to the Court, Messrs. Sims and McWade had
agreed with Mr. DeCastro that:
All settlement refunds in excess of the amounts
provided by the December 1986 agreement would go
ultimately to the benefit of Mr. DeCastro for payment
of his legal fees and costs. Mr. DeCastro would be
paid solely from amounts refunded by the Service to
Thompson. * * * This “New Agreement”, in sum and
substance, if not explicitly, was designed, and
constituted an agreement by Messrs. Sims and McWade to
pay Mr. DeCastro’s legal fees and expenses.
Respondent’s motion papers maintained that the new agreement
pursuant to which respondent would pay Mr. DeCastro’s fees was
unauthorized and had no legal basis.
Respondent conceded,
however, that the original 18.8-percent reduction settlement
between Messrs. McWade and DeCastro on behalf of the Thompsons
was valid and within the scope of District Counsel’s settlement
- 24 authority.
Consequently, respondent asked the Court to apply the
18.8-percent reduction settlement to the Thompsons.15
The result
for the Thompsons would have been deficiencies of zero for
taxable year 1979, $34,425 for 1980, and $30,000 for 1981.16
Respondent’s motion papers compared the amounts of the
Thompsons’ deficiencies originally determined for the 3 years at
issue, totaling $79,293.52, with the unauthorized new agreement
reducing the deficiencies to zero, $15,000, and $15,000, or
total deficiencies of only $30,000, thus generating the refunds
used to pay Mr. DeCastro’s legal fees.
These figures, without
more, indicate that the new agreement represented a 62-percent
15
Respondent’s motion papers explained that the December
1986 agreement between Mr. DeCastro and Messrs. Sims and McWade
to reduce the Thompsons’ deficiencies by 18.8 percent exceeded
the terms of the standard 7-percent reduction settlement offer.
Nevertheless, respondent conceded, “Respondent’s counsel
possessed the authority to make such an offer, and such offer was
accepted by petitioners herein as well as others.” Respondent
also noted an “approximately 20 percent” reduction settlement
offer previously made to other participants. Respondent did not
revive the 20-percent reduction offer after trial. See supra
note 11.
16
As things worked out, the final settlement of the
Cravenses, who were not represented by counsel, was less
favorable to them than respondent’s modified 7-percent reduction
settlement offer. In particular, the Cravenses’ correct tax
liabilities for 1979 and 1980 were $4,508 and $5,893.45,
respectively, for a total of $10,401.45. The Cravenses’
settlement, which was for $9,782.16, represents a reduction of 6
percent of the deficiencies respondent originally determined.
In addition, the Cravenses’ settlement did not include the
burnout feature. On Aug. 25, 1992, this Court entered a decision
for the stipulated total amount of the deficiencies, but the
decision included the stipulation that certain advance payments
made by the Cravenses had not yet been taken into account.
- 25 reduction of the deficiencies originally determined by
respondent.
On August 26, 1992, the Court denied respondent’s motion and
held respondent to the pretrial concessions granted by Messrs.
Sims and McWade in the new agreement as set forth in the August
3, 1989, letter agreement between Messrs. McWade and DeCastro.
The Court granted Mr. DeCastro’s motions for entry of decision in
the Thompson cases as follows:
Year
Deficiency
Additions to Tax
1979
1980
1981
--$15,000
15,000
-------
Respondent did not appeal this Court’s decisions in the
Thompson and the Cravens cases.17
As a result, the Cravenses and
Mr. DeCastro’s clients, the Thompsons, had their cases closed,
while the other test case petitioners, who had appealed the
decisions entered in their cases, added the newly revealed facts
about the misconduct of respondent’s attorneys to the grounds for
their appeals.
On September 14, 1992, Mr. Kersting wrote another “Dear
Friend” letter to the participants in his tax shelter programs,
17
As noted above, this Court had also denied the motion to
vacate with respect to petitioner Ralph J. Rina, and he appealed.
Unlike the Thompsons and the Cravenses, Mr. Rina had no
settlement agreement with Messrs. Sims and McWade. On June 13,
1995, however, Mr. Rina agreed to entry of a stipulated decision
in the amounts originally determined by respondent in his
deficiency notice.
- 26 informing them of developments in the ongoing litigation.
said:
He
“I had reason to believe that the Appeal of Judge Goffe’s
decision at the 9th Circuit [Court] of Appeals in San Francisco
was just around the corner.
as you know.”
It did not come about that quickly,
Mr. Kersting noted the misconduct of Messrs. Sims,
McWade, and DeCastro in entering into and not disclosing the
Thompson settlement and added:
“It threw the appeals schedule
into turmoil and motions had to be filed to ask for an extension
of time for filing the Appeal.”
Mr. Kersting advised:
You had stipulated to go along with the outcome of the
test cases including Thompson and Cravens which
entitles you to ask for the same concessions arranged
by the Revenue Service to Thompson and Cravens. An
arrangement whereby $100,000.00 of taxes allegedly owed
were reduced to a mere $15,000.00.
This “Dear Friend” letter concluded by disclosing that
relations had soured between Mr. Kersting and the “Henry Kersting
Tax Defense Group” of Messrs. O’Donnell and Jones.
Mr. Kersting
explained:
I anticipate that tension will build now between
O’Donnell and our attorneys and me. We are on a
collision course which might lead to litigation. There
will be attempts by either Mr. O’Donnell or Mr. Alan
Jones to alienate you from us. Frequent efforts have
been made already verbally. Remind yourself that you
are lined up at present with a proven legal team of Joe
Izen and Butch Bradt. They have kept the squeezers at
the Revenue Service away from us for many years. They
will continue to protect us and lead us out of the
quagmire eventually. They will do it at a cost much,
much less than projected by Mr. O’Donnell.
- 27 Shortly thereafter, Messrs. Izen and Sticht each filed a
separate motion with the Court to intervene in the Thompson and
Cravens cases.
Mr. Sticht filed his motion in the Thompson cases
on September 29, 1992, and in the Cravens cases on October 2,
1992.
Mr. Izen filed his motions in both cases on October 27,
1992.
Messrs. Sticht and Izen maintained they should be allowed
to intervene in these cases in order to assert that Mr. McWade
had committed fraud on the Court by arranging the Thompson
settlement and failing to inform the Court or the parties.
In a subsequent “Notice to Apprise the Court of Petitionerintervenors” served on November 5, 1992, Mr. Sticht identified
Norman and Irene Cerasoli as petitioner-intervenors.
At that
time, Norman and Irene Cerasoli were being represented by Messrs.
O’Donnell and Jones.18
on November 6, 1992.
The Court denied the motions to intervene
Messrs. Izen and Sticht filed notices of
appeal of the denials of their motions to intervene, again
alleging fraud on the Court.
18
In a colloquy before this Court during a hearing following
the remand by the Court of Appeals for the Ninth Circuit in Dixon
V, Mr. Jones remarked that he had argued the existence of fraud
on the Court earlier in these proceedings. Although he did not
specify the occasion, we note that Mr. Jones represented the
Cerasolis when Mr. Sticht had included their names as petitionerintervenors in November 1992 and made his allegations of fraud on
the Court. On Jan. 12, 1993, Mr. Sticht entered his appearance
in the Cerasoli cases, adding his name to those of Messrs.
O’Donnell and Jones. We also note that Mr. Jones argued fraud on
the Court as a ground for vacating stipulated decisions in
Richards v. Commissioner, T.C. Memo. 1997-149, supplemented by
T.C. Memo. 1997-299, affd. without published opinion 165 F.3d 917
(9th Cir. 1998).
- 28 Respondent’s Posttrial Settlement Offer
Early in January 1993, respondent made mass mailings
extending a “global settlement” proposal to all known Kersting
non-test-case petitioners, including those who had signed
piggyback agreements.
Respondent’s letters to the Kersting
program participants explained that, after the trial of the test
cases:
It subsequently came to our attention that two of
the test case petitioners had entered into settlement
agreements with the Service prior to the trial, and
that these agreements were not disclosed to the Tax
Court or the other test case petitioners. The
settlement agreements provided that these particular
test case petitioners could proceed to trial, but would
receive the benefit of the better of their pretrial
settlement agreement or the results of the trial. The
Tax Court has since been advised of this situation and
has concluded that the outcome of the trial was not
affected by the testimony of these test case
petitioners. This means that the Tax Court opinion, as
it pertains to other Kersting cases, remains unchanged.
However, in light of these recent developments, we have
concluded that in fairness all petitioners be afforded
an opportunity to settle their cases.
In general, the global settlement proposal contained in the
January letters represented a revival of the official settlement
that respondent had offered during 1982 through 1986.
It
permitted petitioners to resolve their cases by agreeing to pay
deficiencies that were 7 percent less than those determined in
their deficiency notices.
Additionally, respondent would impose
no penalties or additions to tax, and petitioners would pay
interest only at the generally applicable (i.e., non-tax-
- 29 motivated) rate under section 6621(a).
The settlement offered by
respondent in January 1993 did not include the burnout feature
canceling the accrual of interest for the first year for which
multiyear deficiencies had been determined.
Respondent’s letters further stated:
“Acceptance of this
settlement offer will preclude any further challenge or appeal
with respect to the Kersting programs or the merits of the Dixon
opinion.”
The letter contained a “Sample Analysis” illustrating
a hypothetical taxpayer who owed $20,000 in Kersting-related
deficiencies for the taxable year 1985.
The analysis indicated
that, if the taxpayer accepted the new 7-percent reduction
settlement offer, he or she would owe a total of $36,388 in tax
and interest.
However, if the taxpayer did not accept the
settlement, the taxpayer would owe $67,901 under the piggyback
arrangement as given effect in accordance with this Court’s 1991
opinion.
Petitioners’ Settlements
Respondent made the initial mass mailing on January 8, 1993,
and sent copies to petitioners in the present cases.
Because
counsel for various petitioners complained they had not received
the settlement proposal letters, respondent remailed them to
those counsel on January 29, 1993.
Respondent sent Mr.
O’Donnell, as first counsel of record for petitioners in the
present cases, copies of identical letters dated January 8 and
- 30 January 29, 1993.
Petitioners were given 60 days within which to
accept or reject the settlement.
In a letter dated March 11,
1993, Mr. O’Donnell informed respondent’s counsel, Mr. O’Neill,
that petitioners herein had decided to accept the settlement
proposal.
Thereafter, respondent forwarded a stipulated decision
document to petitioners’ counsel reflecting a disposition of
these cases on the settlement terms set forth in the mass
mailings.19
On May 17, 1993, Mr. O’Donnell signed the decision
documents in docket Nos. 15673-87 and 18551-88; on May 18, 1993,
Mr. Jones signed the decision document in docket No. 29429-88.
On June 16, 1993, Mr. O’Neill signed petitioners’ decision
documents on behalf of respondent.
The decisions entered in petitioners’ cases reflected a
reduction of the proposed deficiencies by 7 percent to $3,276 for
1984 and $2,552 for 1986; the stipulated deficiency for 1983 was
reduced from $935 to $314, some $556 less than the $870 figure
that would have resulted from a reduction of the original
deficiency by 7 percent.20
The decisions provided there would be
no additions to tax and that no part of the deficiencies
19
Respondent extended the settlement proposal to all known
Kersting non-test-case petitioners in mass mailings in January
1993. Respondent reports that taxpayers accepted the proposal in
approximately 400 cases. Overall, between 1991 and the present,
stipulated decisions were filed in approximately 750 Kersting
project cases.
20
The record does not explain this discrepancy, nor is it
relevant for purposes of the pending motions.
- 31 constituted a substantial underpayment for which additional
interest would be charged pursuant to section 6621(c).
On June
23, 1993, the Court entered the decisions in petitioners’ three
dockets.
On September 22, 1993, the decisions became final under
section 7481.
Petitioners subsequently paid in full the
liabilities assessed in accordance with those decisions.
Initial Appellate Proceedings
In the meantime, the appeals by test case petitioners
represented by Mr. Izen were going forward.
On June 14, 1994,
the Court of Appeals for the Ninth Circuit vacated the decisions
in the remaining test cases on the ground that the misconduct of
Messrs. Sims and McWade required further inquiry.
curiam opinion, it observed:
In a per
“We cannot determine from the
record whether the extent of misconduct rises to the level of a
structural defect voiding the judgment as fundamentally unfair,
or whether, despite the government’s misconduct, the judgment can
be upheld as harmless error.”
DuFresne v. Commissioner, 26 F.3d
105, 107 (9th Cir. 1994) (hereafter DuFresne).
Accordingly, the
Court of Appeals remanded the remaining test cases to this Court
with directions “to conduct an evidentiary hearing to determine
the full extent of the admitted wrong done by the government
trial lawyers.”
Id.
It further directed this Court to “consider
on the merits all motions of intervention filed by parties
affected by this case.”
Id.
- 32 Notwithstanding the later opinion of the Court of Appeals
for the Ninth Circuit in Dixon V,21 vacating the decisions in the
other test cases for “fraud on the court”, the panel that issued
the opinion in DuFresne entered separate orders on the same day
dismissing Messrs. Izen’s and Sticht’s appeals of this Court’s
denials of their motions to intervene in the Thompson and Cravens
cases.
These orders explained:
The Tax Court’s August 25 and 26, 1992 decisions
entering settlement in the Cravens and Thompson cases,
respectively, are final. 26 U.S.C. § 7481(a)(1); Fed.
R. App. P. 13. The Tax Court lacks jurisdiction to
vacate those decisions. Billingsley v. CIR, 868 F.2d
1081, 1084 (9th Cir. 1989). Because there is no case
remaining in which the taxpayers can intervene, this
appeal is moot. [Adair v. Commissioner, 26 F.3d 129
(9th Cir. 1994) (No. 92-70812).]
Evidentiary Hearing After Remand of DuFresne
On September 30, 1992, Judge Goffe, who had presided over
the trial of the test cases, terminated his recall status as a
Senior Judge of this Court and retired from the bench.
The Chief
Judge of this Court reassigned the Kersting project cases to
Judge Renato Beghe.
Thereafter, to give effect to the direction
of the Court of Appeals in DuFresne regarding intervention,22
21
For a description of Dixon v. Commissioner, 316 F.3d 1041
(9th Cir. 2003) (Dixon V), and the events leading up to it, see
infra under heading “The Second Appeal”.
22
In an order dated June 16, 1995, calendaring a preliminary
hearing in the remaining test cases, this Court had caused a copy
of respondent’s motion for an evidentiary hearing pursuant to the
mandate of the Court of Appeals in DuFresne v. Commissioner, 26
(continued...)
- 33 this Court ordered that the cases of 10 non-test-case
petitioners, one docket represented by Mr. Izen, some represented
by Mr. Sticht, and others by Messrs. O’Donnell and Jones, be
consolidated with the remaining test cases for purposes of the
evidentiary hearing mandated by the Court of Appeals in its
DuFresne opinion.23
This Court conducted this evidentiary hearing at special
trial sessions held in Los Angeles May 13 through 30 and June 10
through 26, 1996, and August 18, 1997.
On the basis of the
record developed at the evidentiary hearing, this Court, on March
30, 1999, issued its Supplemental Memorandum Findings of Fact and
Opinion in Dixon III and entered decisions in the test cases.
We
held that the misconduct of the Government attorneys in the trial
of the test cases did not, in the words of DuFresne, constitute a
“structural defect” in the trial, but rather resulted in
“harmless error”.
However, with a view to promoting basic
fairness and justice in the Kersting project cases, and to
discourage future Government misconduct, the Court exercised its
22
(...continued)
F.3d 105 (9th Cir. 1994), to be served on all attorneys who had
entered appearances in the nontest cases.
23
The group of cases that were consolidated for purposes of
the evidentiary hearing initially included the case of William D.
and Karyn S. Booth, docket No. 28950-88, in which Mr. O’Donnell
had entered his appearance. However, at the start of the
evidentiary hearing, the Court granted Mr. O’Donnell’s motion to
sever the Booth case from the cases consolidated for the
evidentiary hearing.
- 34 inherent power and imposed sanctions against respondent.
In
particular, the Court held that Kersting program participants who
had not had decisions entered in their cases, or whose decisions
were not final, were relieved of liability for (1) the interest
component of the addition to tax for negligence under sections
6653(a)(2) and 6653(a)(1)(B), and (2) interest computed at the
increased rate prescribed in section 6621(c).
On June 24, 1999, the Court vacated its decisions in the
test cases to consider the applications of attorneys Izen and
Jones for fees and sanctions against respondent.
After the test
case and non-test-case petitioners who had participated in the
evidentiary hearing, including those represented by Mr. Sticht,
had filed numerous additional papers, the Court, on March 31,
2000, filed a Supplemental Memorandum Opinion as Dixon IV.
The
Court awarded in part the fees sought and denied the motions for
additional sanctions.
On the same date, the Court again entered
decisions in the test cases.
The test case petitioners filed
timely notices of appeal from these decisions, again seeking
review by the U.S. Court of Appeals for the Ninth Circuit.
The Second Appeal
On January 17, 2003, the Court of Appeals issued a second
opinion in the test cases, Dixon v. Commissioner, 316 F.3d 1041
(9th Cir. 2003) (Dixon V), as amended on March 18, 2003, vacating
and remanding this Court’s decisions in the test cases other than
- 35 the Thompson, Cravens, and Rina cases.24
Citing Hazel Atlas Glass
Co. v. Hartford-Empire Co., 322 U.S. 238, 247 (1944), overruled
on other grounds Standard Oil v. United States, 429 U.S. 17, 18
(1976), the Court of Appeals held that “There can be no question
but that the actions of McWade and Sims amounted to a fraud on
both the taxpayers and the Tax Court.”
Id. at 1046.
The Court
of Appeals held that “fraud on the court” occurs regardless of
whether the opposing party is prejudiced.
Id.25
Rather than
ordering a new trial or entering decisions eliminating all tax
liabilities of the taxpayers, the Court of Appeals directed that
“terms equivalent to those provided in the settlement agreement
with Thompson and the IRS” be extended to “appellants and all
other taxpayers properly before this Court.”
Id. at 1047.26
The
Court of Appeals left to the Tax Court’s discretion “the
fashioning of such judgments which, to the extent possible and
practicable, should put these taxpayers in the same position as
24
See supra note 16.
25
In Dixon v. Commissioner, 316 F.3d at 1046 n.9, the Court
of Appeals expressed disagreement with the contrary decision by
the Court of Appeals for the Seventh Circuit in Drobny v.
Commissioner, 113 F.3d 670, 678-679 (7th Cir. 1997), affg. T.C.
Memo. 1995-209. In Drobny, the Court of Appeals for the Seventh
Circuit held that proof of fraud on the court requires a showing
that the alleged misconduct actually affected the outcome of the
case to the taxpayer’s detriment.
26
In setting forth the factual background and procedural
history of the Kersting project, the Court of Appeals noted
without comment that several hundred taxpayers had settled their
cases. Dixon v. Commissioner, 316 F.3d at 1043.
- 36 provided for in the Thompson settlement.”
Id. n.11.
On April
18, 2003, in accordance with its opinion in Dixon V, the Court of
Appeals for the Ninth Circuit issued its mandate reversing and
remanding the Tax Court’s decisions in the test cases.27
On February 20, 2004, petitioners Jesse M. and Lura L. Lewis
filed and lodged the motions before us, seeking to have their
stipulated decisions of 1993 vacated, and to have their cases
reopened to enable them to obtain the benefits of the Thompson
settlement, as mandated by the Court of Appeals, with respect to
“appellants and all other taxpayers properly before this Court”.
They maintain they “were legally bound by the Dixon lead cases by
virtue of a ‘Piggy Back agreement’ that requires consistent
treatment and identifies them as group members”.
They urge that
the Court of Appeals’ holding of fraud on the Court in Dixon V
justifies granting them leave to file their motions to vacate.
On July 9, 2004, respondent filed objections to petitioners’
motion to vacate.
27
Respondent argued that petitioners, by
On July 11, 2000, shortly after the test case petitioners
had filed their notices of appeal, this Court had certified
certain dispositive orders in the nontest cases for interlocutory
appeal, and appeals were taken in these cases. In an order dated
Mar. 14, 2003, another panel of the Court of Appeals for the
Ninth Circuit remanded the cases of various non-test-case
petitioners represented by Messrs. Izen, Sticht, Jones, and
O’Donnell for further proceedings consistent with the opinion in
Dixon V. These nontest cases have been consolidated with the
remaining test cases for the purpose of applying the outstanding
mandates of the Court of Appeals for the Ninth Circuit regarding
the terms, interpretation, and application of the Thompson
settlement.
- 37 agreeing to stipulated decisions when they or their counsel were
aware of the Government’s misconduct, had rescinded their earlier
piggyback agreement.
Respondent urged that because petitioners
made a “fully formed decision to opt out” of the Dixon
litigation, they could not show that their decision to settle was
caused by the previously disclosed fraud on the Court.
This Court directed petitioners to submit replies to
respondent’s objections, and petitioners did so on August 20,
2004.
Therein, petitioners maintain that permitting them to
reopen their cases and participate in the Thompson settlement
would be “the only meaningful part of the sanction” mandated by
the Court of Appeals.
They also asked for a hearing on their
motions in order to highlight alleged intimidation of Kersting
project petitioners by respondent’s agents.
On February 14, 2005, petitioners filed a supplement to
their motions for leave.
In the supplement, Messrs. O’Donnell
and Jones address respondent’s litigating position following the
remand in Dixon V.
They ask that respondent’s litigating
position be characterized as a proposed settlement that includes
both a forgiveness of interest for the 12 years preceding 1992
and a reduction of 62 percent in the deficiencies determined by
respondent.
They then ask the Court to impose this proposed
settlement summarily.
Although we gave respondent leave to reply
- 38 to petitioners’ supplement, respondent, on March 14, 2005, filed
notices that he chose not to do so.
Discussion
The Court of Appeals for the Ninth Circuit has decided that
Messrs. Sims and McWade committed fraud on the Court when they
failed to inform this Court, their superiors, and the other test
case petitioners and their counsel, of their settlement agreement
with Mr. DeCastro on behalf of the Thompsons.
Mr. McWade
compounded that misconduct at the original trial before Judge
Goffe by creating a diversion that prevented Mr. Thompson from
revealing the settlement during his testimony.
The Court of
Appeals held that “the actions of McWade and Sims amounted to a
fraud on both the taxpayers and the Tax Court” that “corrupts the
adversarial nature of the proceeding, the integrity of witnesses,
and the ability of the trial court to judge impartially.”
v. Commissioner, 316 F.3d at 1047.
Dixon
The Court of Appeals has
vacated this Court’s decisions in the cases of the test case
appellants and directed that they “and all other taxpayers
properly before this Court” receive the equivalent of the
Thompson settlement.
In so doing, the Court of Appeals noted
without comment that several hundred taxpayers had settled their
cases.
Id. at 1043.
The opinion of the Court of Appeals constitutes the law of
the case; under the law of the case doctrine, the decision of an
- 39 appellate court on a legal issue must be followed in all
subsequent proceedings in the same case.
United States v. Hughes
Aircraft Co., 243 F.3d 1181, 1186-1187 (9th Cir. 2001); Caldwell
v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d
278, 281 (9th Cir. 1996).
In accordance with the law of the case
doctrine and the mandate of the Court of Appeals, there have been
subsequent proceedings in this Court, including discovery,
multiple sessions of an additional evidentiary hearing, and
briefing by the parties, with the goal of “the fashioning of such
judgments which, to the extent possible and practicable, should
put these taxpayers in the same position as provided for in the
Thompson settlement.”
n.11.
Dixon v. Commissioner, 316 F.3d at 1047
For purposes of the motions now before us, it is obviously
appropriate to assume that any “judgments” we may fashion
pursuant to the Court of Appeals’ mandate will be substantially
more favorable to the affected taxpayers than if they had
accepted and become bound by the 7-percent reduction settlement
offered by respondent in January 1993.
In the present cases, petitioners ask us to vacate their
stipulated decisions so that they can participate in the benefits
to be generated by the subsequent proceedings mandated by the
Court of Appeals in Dixon V.
We shall not grant their request.
- 40 The undisputed facts relevant to petitioners’ motions show they
are not entitled to the benefits of the Thompson settlement.28
Absent certain narrow exceptions, discussed below, a
decision of this Court based upon the parties’ agreement to
settle a case is final.
applicable principle:
The U.S. Supreme Court has stated the
“There must be an end to litigation
someday, and free, calculated, deliberate choices are not to be
relieved from.”
Ackermann v. United States, 340 U.S. 193, 198
(1950) (ruling that strategic decisions not to appeal, made
during the course of litigation, which in retrospect appear to be
disadvantageous, do not provide a basis for posttrial relief).
In these cases, absent stipulation to the contrary, the
venue for an appeal is the U.S. Court of Appeals for the Ninth
Circuit; its holdings culminating in Dixon V constitute
dispositive authority governing the cases of these petitioners.
That court has expounded upon the finality of judgments and
decisions not to appeal in Plotkin v. Pac. Tel. & Tel. Co., 688
F.2d 1291, 1293 (9th Cir. 1982):
28
In deciding whether to grant a motion for leave to file
motion to vacate a final decision, the Court’s usual practice is
to consider the merits of the underlying (lodged) motion to
vacate decision to determine whether the moving party has alleged
sufficient facts to call into question the validity of the
decision. See Brannon’s of Shawnee, Inc. v. Commissioner, 69
T.C. 999, 1002 (1978); see also Toscano v. Commissioner, 52 T.C.
295, 296 (1969), vacated on another issue 441 F.2d 930 (9th Cir.
1971); Campbell v. Commissioner, T.C. Memo. 1988-105.
- 41 Allowing motions to vacate * * * after a
deliberate choice has been made not to appeal, would
allow litigants to circumvent the appeals process and
would undermine greatly the policies supporting
finality of judgments. Litigants unsuccessful at trial
could forego available appeals and, should subsequent
decisions in other cases render their positions viable,
they could move to have adverse judgments vacated. The
uncertainty resulting from such a rule would be
unacceptable.
Although Ackermann and Plotkin involved litigants’ decisions
not to appeal, their holdings also apply to motions to vacate.
The U.S. Court of Appeals for the Fourth Circuit has explained:
We find no meaningful distinction between a motion
asking for relief from a decision not to appeal, as in
Ackermann, and one that asks for relief from a decision
to settle, as in this case. The decision to settle a
case is made in the same manner as any other decision
with respect to the course of litigation, including a
decision not to appeal. A litigant weighs the chance
of success against the probable cost of achieving that
success through further litigation, all based on
whatever limited information is available at the time.
* * * [Schwartz v. United States, 976 F.2d 213, 218-219
(4th Cir. 1992).]
Thus, a party making “a conscious and informed choice of
litigation strategy * * * cannot in hindsight seek extraordinary
relief” from the consequences of that choice.
United States v.
Bank of N.Y., 14 F.3d 756, 759 (2d Cir. 1994).
“To hold
otherwise would undermine the finality of judgments in the
litigation process.”
Id. (citing Ackermann v. United States,
supra, and denying a motion for relief from a consent decree
entered pursuant to a settlement agreement).
- 42 The above authorities compel the conclusion that, in 1993,
when petitioners settled their cases by agreeing to entry of
final decisions of this Court, they abandoned any opportunity to
benefit from the Court of Appeals’ mandates in Dixon V, issued 10
years later.
Petitioners settled knowingly, with the advice of
counsel who were intimately familiar with the events of the
Kersting project litigation.
More to the point, they did so with
the understanding, set forth explicitly in respondent’s January
1993 letter, that accepting the settlement would “preclude any
further challenge or appeal with respect to the Kersting programs
or the merits of the Dixon opinion.”
Under the applicable statutory provisions and rules, the
time has long since expired within which petitioners might have
sought relief from their choice to settle.
Section 7481(a)(1)
provides the general rule that a decision of the Tax Court
becomes final upon expiration of the time to file a notice of
appeal.
Section 7483 provides that a notice of appeal generally
must be filed within 90 days after a decision is entered.
The
90-day appeal period may be extended, however, if the taxpayer
files a timely motion to vacate or revise the decision.
App. P. 13(a).
Fed. R.
Pursuant to Rule 162, a motion to vacate or
revise a decision must be filed within 30 days after the decision
is entered, unless the Court allows otherwise.
A timely motion
to vacate or revise the decision will cause the 90-day period to
- 43 run from the entry of the order disposing of the motion or from
the entry of a new decision, whichever is later.
13(a)(2).
Fed. R. App. P.
Thereafter, as a general rule, the Tax Court lacks
jurisdiction to vacate a decision that has become final.
Billingsley v. Commissioner, 868 F.2d 1081, 1084-1085 (9th Cir.
1989); Abatti v. Commissioner, 859 F.2d 115, 117 (9th Cir. 1988),
affg. 86 T.C. 1319 (1986).
The strictness of the finality rules is intentional.
“The
legislative history shows that Congress was conscious of the need
that ‘finality’ be clearly defined, so that the process of
collection can proceed unimpeded.
Court decisions, supporting
this objective, have been strict in applying the statute.”
Toscano v. Commissioner, 441 F.2d 930, 932 (9th Cir. 1971),
vacating and remanding 52 T.C. 295 (1969).
The statutory
framework finds support in the strong policy of finality in our
decisions.
See Estate of Smith v. Commissioner, 123 T.C. 15, 28
(2004); Cinema ‘84 v. Commissioner, 122 T.C. 264 (2004), affd.
412 F.3d 366 (2d Cir. 2005); Taub v. Commissioner, 64 T.C. 741,
751 (1975), affd. without published opinion 538 F.2d 314 (2d Cir.
1976); see also Calderone v. Commissioner, T.C. Memo. 2005-151.
As the Court of Appeals for the Ninth Circuit explained, in
affirming one of our decisions in Abatti v. Commissioner, supra
at 119:
“Exceptions which would allow final decisions to be
reconsidered must be construed narrowly in order to preserve the
- 44 finality of judgments.”
Accordingly, the authority of the Tax
Court to act on a motion to vacate a decision that has become
final is extremely limited.
Cinema ‘84 v. Commissioner, supra at
270.
We have recently reviewed the limited exceptions to finality
in Estate of Smith v. Commissioner, supra at 27-28.
There, we
observed the general principle that the finality of a decision is
absolute.
See Abatti v. Commissioner, 86 T.C. at 1323.
We
noted, however, that we have jurisdiction to set aside a decision
where there is a fraud on the Court.
See Toscano v.
Commissioner, supra; Kenner v. Commissioner, 387 F.2d 689 (7th
Cir. 1968); Taub v. Commissioner, supra at 751; see also Senate
Realty Corp. v. Commissioner, 511 F.2d 929 (2d Cir. 1975).29
In
Toscano, the Court of Appeals for the Ninth Circuit explained the
exception to finality for fraud on the Court by saying:
“a
decision obtained by fraud on the Tax Court can be set aside by
it at any time because it is not a decision at all--a view
29
In addition to fraud on the court, there are some other
narrow exceptions to finality. Thus, this Court and some Courts
of Appeals have ruled that this Court may vacate a final decision
if that decision is shown to be void, or a legal nullity, for
lack of jurisdiction over either the subject matter or the party.
See Billingsley v. Commissioner, 868 F.2d 1081, 1084-1085 (9th
Cir. 1989); Abeles v. Commissioner, 90 T.C. 103, 105-106 (1988);
Brannon’s of Shawnee, Inc. v. Commissioner, 69 T.C. 999 (1978).
We have also vacated a final decision where a clerical error was
discovered after the decision had become final. Michaels v.
Commissioner, 144 F.3d 495 (7th Cir. 1998), affg. T.C. Memo.
1995-294. There has been no suggestion that any of these other
exceptions to finality applies in the cases at hand.
- 45 strongly supported * * * by the Supreme Court in Hazel-Atlas
Glass Co. v. Hartford Empire Co., 322 U.S. 238”.
Toscano v.
Commissioner, supra at 933 (citing Kenner v. Commissioner,
supra).
Petitioners’ principal claim in these cases is that they
were victimized by the fraud on the Court whose predicate facts
were disclosed before they agreed to settle.
They maintain that
they were legally bound by the outcome of the test cases by
virtue of their piggyback agreements and are therefore entitled
to “consistent treatment”.
That consistent treatment, they
maintain, is the “target or model settlement to be followed,
i.e., the Thompson settlement”.
They conclude that “they should
have leave of this Court to file appropriate papers that would
include them in the remand group of Dixon III” (i.e., Dixon V).
Petitioners’ claim ignores the legal consequences of their
superseding agreements to settle.
The compromise and settlement
of tax cases is governed by general principles of contract law.
See Dorchester Indus., Inc. v. Commissioner, 108 T.C. 320, 330
(1997), affd. without published opinion 208 F.3d 205 (3d Cir.
2000).
A settlement stipulation is a contract.
Each party
agrees to concede some rights that he or she may assert against
his or her adversary as consideration for other rights secured in
the settlement agreement.
171, 177 (1956).
See Saigh v. Commissioner, 26 T.C.
Petitioners’ agreement with respondent acted
- 46 “both as a rescission and a discharge by substitution” of their
earlier piggyback agreements.
13 Corbin on Contracts, sec.
67.8(6), at 68 (Rev. ed. 2003).
At the time of their settlement,
the parties had a genuine dispute, which they resolved under
conventional contract principles:
respondent maintained that
petitioners owed deficiencies totaling $7,202, plus additions and
interest, and petitioners maintained they owed nothing.
When
petitioners settled, respondent’s consideration to petitioners
took the form of respondent’s promises to accept 7 percent less
than the deficiencies originally determined and to forgo the
additions.
Petitioners’ consideration in return was their
promise to pay the reduced deficiencies, plus their agreement,
set forth explicitly in respondent’s offering letter, that the
settlement would “preclude any further challenge or appeal with
respect to the Kersting programs or the merits of the Dixon
opinion”.
The legal effect of their dealings “in substance, was
a mutual surrender, by the parties, of their antithetical
positions, in exchange for a new, formally executed, complete and
binding contract.”
Richards Constr. Co. v. Air Conditioning Co.,
318 F.2d 410, 414 (9th Cir. 1963).
As the Court of Appeals for
the Ninth Circuit added in Richards:
“Generally speaking, a
contract to settle a genuine dispute is binding; the law favors
such contracts; this was such a contract.”
Id.
For the reasons
- 47 stated above, petitioners are not entitled to relief from the
contracts by which they settled their cases.
Petitioners are no more successful with their related
argument that, “Under this sanction [i.e., the Court of Appeals’
mandate that the Thompson settlement be extended to all parties
properly before that court] it would be unfair, inequitable, and
more of a ‘reward’ than a ‘sanction’ to exclude settled
petitioners.”
They urge that they “have paid in substantial
monies and suffered damages to their legal rights equivalent to
those who have withheld monies.
Clearly, the Ninth Circuit would
have decreed exclusion of settled cases in the event it
considered their remedies not cognizable by this Trial Court.”
We disagree.
The Court of Appeals’ direction that the equivalent of the
Thompson settlement be extended to “appellants and all other
taxpayers properly before this Court” by its terms excludes those
who knowingly settled their cases after the predicate facts of
the fraud on the Court were disclosed.
The language of the Court
of Appeals confirms our view that petitioners’ legal predicament
differs fundamentally from the posture of those who did not
settle.
Petitioners’ cases are closed; in contrast, the cases of
those who did not settle are still open.
Under the doctrine of
finality discussed above, we find no significance in the fact
that the Court of Appeals did not specifically exclude already-
- 48 closed cases from its mandate.
To the contrary, we think that if
the Court of Appeals had intended to extend the Thompson
settlement to previously closed cases, it would have explicitly
said so.
Before petitioners settled their cases, their legal
situation was the same as those petitioners who did not settle;
the cases of all such petitioners were open.
That prior
similarity, however, does not entitle petitioners to the rights
preserved by those Kersting project petitioners who did not
settle.
The Court of Appeals for the Ninth Circuit rejected a
similar contention in Abatti v. Commissioner, 859 F.2d at 117,
where it held that some taxpayers in a tax shelter group who had
signed piggyback agreements and failed to appeal adverse
decisions in the test cases were not entitled to the relief
gained by other piggybackers who did appeal the adverse
decisions.
The Court of Appeals observed that there is “‘no
general equitable doctrine which countenances an exception to the
finality of a party’s failure to appeal merely because his rights
are “closely interwoven” with those of another party.’”
Id. at
120 (quoting Federated Dept. Stores v. Moitie, 452 U.S. 394, 400
(1981)).
In addition to arguing that they retain the status of other
non-test-case petitioners who rejected or did not respond to
respondent’s 1993 settlement offer, petitioners argue that the
- 49 circumstances of their agreements to settle justify relief from
the finality of the resulting decisions.
They argue that they
settled on the premise that “no fraud on the Court existed” and
“that the Thompson scenario was harmless”.
These arguments do
not withstand scrutiny.
It is axiomatic that knowledge of the facts precludes a
claim of fraud.
Soliman v. Phillip Morris, Inc., 311 F.3d 966,
975 (9th Cir. 2002); see Melanson v. United Air Lines, Inc., 931
F.2d 558, 563 (9th Cir. 1991) (fraudulent failure to disclose
requires a plaintiff unaware of the concealed fact who would not
have acted had he known of the fact); 37 C.J.S., Fraud, sec. 37
(1997) (“one can secure no redress for a representation which he
knew to be false or for failure to disclose facts which he knew
to exist”).
Petitioners do not deny that, when they agreed to settle
their cases, they had learned of the previously secret deal-namely, that respondent’s attorneys McWade and Sims had
engineered a settlement with a party-witness in the test cases
who thereby became entitled to the better of his settlement or
the resulting decision of the Court.
There is ample evidence in the record that petitioners had
become aware of those facts.
In July 1992, Mr. Kersting informed
the Kersting project participants of the recently disclosed,
previously secret McWade/DeCastro agreement.
Mr. Kersting
- 50 characterized that agreement as “the government’s fraud and
perfidy in a secret deal between Cravens and Thompson on the one
hand and IRS attorney McWade (and other government officials) on
the other hand.”
The misconduct, as Mr. Kersting described it,
“involves a settlement in favor of Cravens/Thompson in exchange
for the damaging testimony and exhibits that were all put
together as part of a prearranged plan.”
In September 1992, Mr.
Kersting advised the Kersting project petitioners who had signed
piggyback agreements that they should demand “the same
concessions arranged by the Revenue Service for Thompson and
Cravens.
An arrangement whereby $100,000.00 of taxes allegedly
owed were reduced to a mere $15,000.00”.
He also informed the
Kersting project participants of the progress of the appeals in
the test cases:
“I had reason to believe that the Appeal of
Judge Goffe’s decision at the 9th Circuit [Court] of Appeals in
San Francisco was just around the corner.
that quickly, as you know.”
It did not come about
Mr. Kersting noted the misconduct of
the Government’s lawyers and added:
“It threw the Appeals
schedule into turmoil and motions had to be filed to ask for an
extension of time for filing the Appeal.”
In addition, all relevant information Messrs. O’Donnell and
Jones had about the litigation of the test cases is attributable
to their clients, petitioners herein.
543 U.S.
,
See Commissioner v. Banks,
, 125 S. Ct. 826, 832 (2005); Veal v. Geraci, 23
- 51 F.3d 722, 725 (2d Cir. 1994) (relationship between attorney and
client attorney represents is one of agent and principal); Morrow
Crane Co. v. Affiliated FM Ins. Co., 885 F.2d 612 (9th Cir. 1989)
(principal is deemed to know what agent knows concerning those
matters in which agent has power to bind principal); 1
Restatement, Lawyers 3d, sec. 28 (1998) (information imparted to
a lawyer during and relating to the representation of a client is
attributed to the client for the purpose of determining the
client’s rights and liabilities in matters in which the lawyer
represents the client).
Attorneys having such information are
duty bound to communicate it to their clients.
See Phillips v.
Woodford, 267 F.3d 966, 984 n.11 (9th Cir. 2001) (attorney must
explain the matter in a manner reasonably necessary to permit the
client to “make informed decisions” regarding the
representation); Model Rules of Profl. Conduct, R. 1.4(a), cmt. 5
(2004) (“For example, when there is time to explain a proposal
made in a negotiation, the lawyer should review all important
provisions with the client before proceeding to an agreement”); 1
Restatement, supra, sec. 20 (a lawyer must keep a client
reasonably informed about the matter and must consult with a
client to a reasonable extent concerning decisions to be made by
the lawyer).
On the documents before us, Messrs. O’Donnell’s and Jones’s
awareness of the Sims/McWade/DeCastro misconduct can be traced to
- 52 June 24, 1992, when, on behalf of “about one-hundred
Petitioners”, Messrs. O’Donnell and Jones wrote to respondent,
noting “an ethical concern regarding the impropriety of two
settlement offers * * * secretly extended to Mr. Cravans [sic]
and Mr. Thompson who testified for the I.R.S. at the Dixon
Trial.”
The letter further advised of a motion to remand
“pending in the Ninth Circuit Court of Appeals as to the cases on
Appeal”.
In August 1992, respondent presented a full report of the
misconduct to this Court as it had been disclosed and developed
at that time.
Although this report was not served upon Messrs.
O’Donnell and Jones directly, it came to the attention of Mr.
Sticht, who joined them in representing the Cerasolis and who was
aware of that report in September 1992.
On September 29, 1992,
Mr. Sticht’s motion of petitioner-intervenors for leave to
intervene stated:
On or about August 20, 1992, the respondent filed
its (a) Notice of Objection To Petitioner’s Motion, (b)
Motion For Entry Of Decision, and (c) Memorandum Of
Points And Authorities * * * . Respondent’s motion
described the circumstances surrounding the previously
disclosed “ostensible contingent settlement” * * * .
In January 1993, respondent sent two separate copies of the
renewed 7-percent reduction settlement offer letter to
petitioners, in care of their attorneys.
In that letter,
respondent informed petitioners that two test case petitioners
had entered into settlement agreements with the Service before
- 53 the trial, and that their agreements had not been disclosed to
the Tax Court or the other test case petitioners.
Respondent
further explained that the settlement agreements with those two
test case petitioners provided that they could proceed to trial
but would receive the benefit of the better of their pretrial
settlement agreement or the results of the trial.
All the foregoing demonstrates that, when petitioners
through their attorneys agreed to settle in March 1993,
petitioners and their attorneys knew of the predicate facts that
later gave rise to the holding of fraud on the Court by the Court
of Appeals for the Ninth Circuit.
This knowledge of petitioners
and their attorneys precludes a claim of fraud that would vitiate
the settlement stipulation from which petitioners, through those
same attorneys, now ask to be relieved.
In view of the overwhelming evidence of actual knowledge, we
are puzzled by petitioners’ assertion that, at the time they
settled, they thought no fraud on the Court existed.
Perhaps
their claimed unawareness means that they, or their attorneys,
were unaware of the legal consequences of fraud on the Court.
would not be persuaded by an assertion to that effect.
We
Rule
60(b) of the Federal Rules of Civil Procedure explicitly
discusses “An action * * * to set aside a judgment for fraud upon
the court.”
Moreover, Messrs. Izen and Sticht, counsel for other
Kersting petitioners, explicitly alleged “fraud on the court” in
- 54 motions to intervene filed in September and October 1992, several
months before petitioners’ counsel executed their settlement
documents, including a case in which Mr. Sticht and Mr. Jones
were co-counsel.
In view of this history, any assertion that,
when petitioners agreed to settle their cases, they thought “that
no fraud on the Court existed” is unpersuasive.
When petitioners
settled, they and their attorneys clearly had received enough
information about the misconduct of the Government’s attorneys to
make an informed decision.
Petitioners have listed other circumstances surrounding
their decision to settle, but none of these circumstances was the
result of fraud on the Court or any other exceptional situation
that would permit relief from their settlement.
Thus,
petitioners argue that when they settled, they thought the
Thompson settlement was harmless.
This appears to be an argument
that when they settled, petitioners assumed or believed, despite
the recently revealed misconduct of the Government’s attorneys,
that this Court’s rulings of harmless error in favor of
respondent would be upheld on appeal.
That assumption or belief
turned out to be erroneous; in Dixon V, the Court of Appeals for
the Ninth Circuit reversed this Court’s rulings of harmless error
on the ground that “fraud on the court” occurs regardless of
whether the opposing party is prejudiced.
316 F.3d at 1046.
Dixon v. Commissioner,
In any event, petitioners’ mistaken assumption
- 55 or belief about the harmlessness of the Thompson settlement does
not provide a basis for vacating their stipulated decisions.
When parties make a deliberate, strategic choice to settle, they
cannot be relieved of that choice merely because their assessment
of the consequences turns out to be incorrect.
United States v.
Bank of N.Y., 14 F.3d at 759.
Petitioners also argue they settled because they feared
worse results if they did not settle.
Any worries they may have
had about subsequent results, however, do not provide a basis for
vacating the decisions in their cases.
Concern about the outcome
of litigation is not an extraordinary circumstance; it is a
factor affecting one’s evaluation of any settlement.
The fact
that the ultimate outcome would have been more favorable to
petitioners than what they settled for is no reason to relieve
them of their settlement agreement.
See id.
Petitioners also contend no settlement other than the
renewed 7-percent reduction settlement offer was available.
That
situation, however, was not created by any fraud of respondent;
to the contrary, as far as the record shows, that contention is
correct.
Respondent’s offer, made a few months after discovery
of Messrs. McWade’s and Sims’s misconduct, was the only one on
the table when petitioners accepted it in March 1993.
That fact,
however, does not entitle them to relief from their agreement to
accept respondent’s offer.
As explained above, when petitioners,
- 56 with the advice of counsel, decided to settle their cases, they
knowingly assumed the risk that the ultimate outcome of the
nonsettling test cases on appeal would be more favorable than the
current settlement offer they were about to accept.
Petitioners have cited seven Courts of Appeals opinions as
“Precedent for the remedy of vacating a prior decision on the
grounds cited.”
All those cases note that fraud on the court may
form a basis for vacating decisions of the Tax Court, or of a
U.S. District Court.
The proposition is unassailable.
None of
the cited cases, however, supports the proposition that a party
to a case who knows, or has reason to know, of circumstances in
the case that may be deemed to give rise to fraud on the court,
and who nevertheless agrees to a stipulated decision in that
case, may later obtain relief from that decision on the ground of
fraud.
These authorities do not help petitioners.30
Petitioners, after respondent’s objection to their motions
for leave and motions to vacate, filed a reply to that objection.
In their reply, petitioners ask for a hearing on their motions,
noting that, in a pleading filed in 1992, respondent had conceded
that, in a hearing on the misconduct of the Government’s
30
Of the seven cases cited, only one supports a sanction of
any sort, on the basis of fraud. See Aoude v. Mobile Oil Corp.,
892 F.2d 1115 (1st Cir. 1989) (case dismissed in view of
plaintiff’s use of fraudulent documents and testimony). This
suggests that the relief petitioners seek is even more
extraordinary than they would be willing to acknowledge.
- 57 attorneys, the Court may determine facts based upon “expected
contradictory testimony.”
Respondent’s concession of the need
for a hearing, however, occurred before the evidentiary hearings
in 1996 and 1997 on remand from DuFresne.
Those hearings
required more than 5 weeks of trial and produced hundreds of
exhibits and thousands of pages of testimony regarding the
misconduct of the Government’s attorneys.
The Court agrees with
respondent that no further testimony is needed to enable the
Court to decide petitioners’ motions for leave.
Petitioners also ask for a hearing so that they might
expose:
“the scheme whereby CID alleged agents would call on
investors to frighten them about a possible indictment against
them, personally.
Then a project attorney from Hawaii would call
to offer not only the 7% settlement, but, also, certain freedom
from the CID.”
proceeding.
This bare assertion is irrelevant to the present
The relief that petitioners seek in this case was
mandated by the Court of Appeals as a result of Messrs. Sims’s
and McWade’s failure to disclose the Thompson settlement, not as
a result of alleged objectionable telephone calls by agents of
the Internal Revenue Service.
See Harbold v. Commissioner, 51
F.3d 618 (6th Cir. 1995).
Finally, petitioners’ supplement to their motion for leave
fails to supply any reason to grant the relief petitioners seek.
In the supplement, Messrs. O’Donnell and Jones address
- 58 respondent’s litigating position in response to the mandate of
the Court of Appeals in Dixon V--in general, that the mandate
requires a 20-percent reduction in deficiencies plus payment of
actual attorney’s fees--as a settlement offer.
They then
elaborate on the terms of that putative offer to their benefit,
by assuming it contains both a forgiveness of interest for the 12
years preceding 1992 and a reduction of proposed deficiencies by
62 percent.
They conclude by asking the Court to impose this
settlement upon respondent.
As we decided in an order in these
cases dated February 24, 2005, we decline to be put into the
anomalous position of compelling a settlement, especially when
the “settlement” as set forth by Messrs. O’Donnell and Jones
might most generously be construed to be no more than a
counteroffer to a position articulated by respondent.
Following the remand in Dixon V, the remaining test case
petitioners and a representative group of non-test-case
petitioners who did not accept respondent’s January 1993
settlement offer (including non-test-case petitioners represented
by Messrs. O’Donnell and Jones) have made prodigious efforts to
discover and introduce evidence that the Thompson settlement was
actually more generous to the Thompsons than is apparent from its
formal terms.
Whether those efforts have been successful is
irrelevant to our disposition of the pending motions for leave.
The Thompson settlement as it had become known in 1993 has been
- 59 held by the Court of Appeals for the Ninth Circuit to constitute
fraud on the Court and, hence, to justify entitlement by the
litigants remaining before the Court to the benefits of the
Thompson settlement as we finally determine and apply them.
Here
petitioners, although aware of the predicate facts, deliberately
gave up any right to participate in the benefits of that
settlement.
Because of their decision to settle, petitioners’
legal situation decisively differs from that of the other
Kersting project petitioners who rejected or failed to respond to
respondent’s posttrial settlement offer.
By settling as they
did, petitioners reduced their proposed deficiencies, eliminated
all additions, stopped the further accrual of interest against
them by paying the reduced deficiencies, and put an end to their
participation in litigation that, to date, has lasted more than
12 years beyond the date they chose to settle.
When they did so,
they also assumed the risk that, as a result of the appeals
pending when they chose to settle, other Kersting project
petitioners might become entitled to a more favorable outcome.
We conclude that petitioners’ stipulated decisions are
final, inasmuch as petitioners agreed to those decisions with the
advice of experienced counsel.
At the time of the settlements,
their counsel, who signed the decision documents, were aware of
the misconduct that ultimately led the Court of Appeals to decide
that such misconduct constituted fraud on the court.
Their
- 60 counsel were also aware that test case petitioners represented by
Mr. Izen had appealed the Tax Court’s decisions, which had
sustained respondent’s determinations despite the revelation of
the misconduct of Messrs. Sims and Mcwade.
The finality of the
stipulated decisions in petitioners’ cases precludes them from
participating in the relief mandated by the Court of Appeals in
Dixon V to other Kersting project petitioners who did not accept
respondent’s January 1993 settlement offer.
In view of the foregoing,
Orders will be issued denying
petitioners’ motions for leave to
file motions to vacate decisions,
as supplemented.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.