Drake v. C.I.R.

Decision Date20 December 2007
Docket NumberNo. 06-2507.,06-2507.
Citation511 F.3d 65
PartiesGregory DRAKE, Petitioner, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
CourtU.S. Court of Appeals — First Circuit

Timothy J. Burke with whom Burke & Associates was on brief for petitioner, appellant.

Rachel I. Wollitzer, Tax Division, Department of Justice, with whom Eileen J. O'Connor, Assistant Attorney General, and Kenneth L. Greene, Tax Division, Department of Justice, were on brief for respondent, appellee.

Before BOUDIN, Chief Judge, TORRUELLA, Circuit Judge, and SCHWARZER,* Senior District Judge.

BOUDIN, Chief Judge.

Gregory Drake's decade-long battle with the IRS is recounted in rich detail in the Tax Court's decision. Drake v. Comm'r, 92 T.C.M. (CCH) 37 (2006) ("Drake II"). The present phase began when the IRS Appeals Office on November 10, 2003, upheld an IRS proposed tax levy. On appeal, the Tax Court remanded, finding that Drake's initial hearing was tainted by improper ex parte communications between an IRS insolvency unit advisor and the settlement officer handling Drake's case. Drake v. Comm'r, 125 T.C. 201, 210, 2005 WL 2560781 (2005) ("Drake I").

A second hearing occurred before a new IRS appeals officer on November 4, 2005. At that time Timothy Burke, Drake's counsel, and two IRS agents discussed settlement, and Drake submitted a compromise offer on November 14. Drake then filed a motion for his attorney's fees incurred in relation to the first hearing. In the same month, the IRS imposed a jeopardy levy — which it may do subject to a hearing "within a reasonable period of time after the levy" — on the proceeds of a 1997 bankruptcy sale of Drake's house, comprising around $150,000 held in brokerage accounts in the names of Drake's sons. 26 U.S.C. § 6330(f) (2000).

Throughout December 2005, the parties continued settlement discussions. By letter on December 20, 2005, the IRS made a detailed global settlement offer, seeking to resolve all outstanding issues involving Drake, his wife Barbara, and his two sons; the sons' involvement turned on their control of the sale-of-house proceeds. Drake was given until December 28 to accept the offer, and when he failed to do so, the IRS informed him that the offer was no longer available.

Nevertheless, Burke had a conference call with IRS counsel on January 6, 2006, after which the IRS sent Burke a set of settlement documents with a letter stating:

Pursuant to our conversation of this date, we are enclosing the original and two copies of a Decision document in the above-referenced case. The original and one copy should be signed, dated, and returned to this office for filing with the Tax Court.

The documents were to be signed by Burke and Drake's sons.1 Neither Burke nor Drake's sons signed and returned the settlement documents.

On January 13, 2006, the IRS sent a letter to Burke stating that "[a]s of this date, the terms of the settlement have not been accepted by your client and related parties.... We are hereby withdrawing the proposed January 6, 2006 settlement...." Burke responded, taking the position that the parties had agreed to settle "on the terms reflected in the December 20, 2005 letter.... It is the taxpayers' position that the Service breached the parties agreement on January 13, 2006 by way of its letter of that date."

The IRS also considered Burke's proposal as an offer-in-compromise. Burke's proposal included the same terms as the January 6 settlement offer except that he reserved the right to seek attorney's fees. In a March 13, 2006, notice of determination, the IRS rejected that offer while upholding the jeopardy levy and the IRS's collection action.

Drake challenged the second notice of determination, and on July 24, 2006, the Tax Court issued a new decision which is now before us on appeal. It found no procedural defects in Drake's second collection hearing and no final settlement between the parties barring the IRS from its full assessment; it also ruled that the IRS had not abused its discretion in imposing a jeopardy levy and in rejecting Drake's offer-in-compromise, and that Drake was not entitled to attorney's fees. Drake now appeals.

Our review of the Tax Court's decision is in most respects similar to our review of district court decisions: factual findings for clear error and legal rulings de novo. Interex, Inc. v. Comm'r, 321 F.3d 55, 58 (1st Cir.2003); Kinan v. Cohen, 268 F.3d 27, 32 (1st Cir.2001). As to the IRS's rejection of Drake's offer-in-compromise and its imposition of the jeopardy levy, review turns on whether the IRS abused its discretion. Murphy v. Comm'r, 469 F.3d 27, 32 (1st Cir.2006); Olsen v. United States, 414 F.3d 144, 150 (1st Cir.2005).

Drake's most promising argument is his claim to have reached a binding settlement agreement with the IRS on January 6, 2006. Drake claims that his attorney asked the IRS attorney whether the December 20 offer was still open, the IRS attorney said yes, and Drake's attorney accepted the offer, thereby binding the IRS. Curiously, this specific narrative is contained in Drake's brief but not in Burke's terse affidavit, which merely describes the fact and length of the conversation.2

Without filing any affidavits, the IRS said that the offer was the January 6 letter sent to Burke, and that Burke's failure to return the settlement documents, or otherwise respond to the letter, constituted a failure to accept the offer which was then withdrawn. The Tax Court assumed only that Burke had on January 6 told the IRS counsel that Drake and his wife wanted to go forward with the settlement on the terms earlier proposed and that the IRS then sent on the documents. As neither side seeks an evidentiary hearing, we accept the Tax Court's version of the events.

Was there, then, on this record a binding contract established as of January 6? Under classic contract principles, the parties might have intended that a binding agreement be formed immediately — in which event the IRS would now be bound unless the Drakes' failure promptly to sign the documents forfeited their rights. Or the parties could have intended an agreement only after the terms were reduced to writing and the documents signed — leaving the IRS (or the Drakes) free to back away.3

There are other possibilities as well. The parties might have had different understandings or they may not have thought specifically about what would happen if either side changed its mind before the contract was signed. In all events, where the matter is uncertain and no further evidence is furnished as to what the parties had in mind, courts tend to attribute to the parties whatever common intention seems most consonant with the objective facts, looking to "context, inferred purpose and common sense ... in determining what the parties probably intended or would have been likely to intend if they had focused on the issue." OneBeacon Ins. Co. v. Georgia-Pacific Corp., 474 F.3d 6, 8 (1st Cir.2007); accord Winston v. Mediafare Entm't Corp., 777 F.2d 78, 80 (2d Cir.1985).

The Tax Court's conclusion that there was no binding agreement on January 6 is entitled to deference unless clearly erroneous. See Salem Laundry Co. v. New Eng. Teamsters & Trucking Indus., 829 F.2d 278, 280 (1st Cir.1987). The most telling piece of objective evidence, which supports the Tax Court, lies in status reports filed with the court on January 6. The IRS report said that the parties were still negotiating but "[a]s of this date ... have not resolved the outstanding income tax liabilities ...." Burke's report had a more optimistic tone, but did not claim a definitive agreement.4

Drake now conjectures that the IRS filing was prepared prior to January 6 and not revised to reflect the January 6 conversation between counsel; but the January 6 telephone conference was held at 9:56 a.m. and there is no indication that the IRS filing was made prior to the call. The IRS lawyer, filing a report before the present disagreement arose and characterizing the status of the matter "as of this date," certainly had no reason to mis-describe the state of play.

Drake says that the phrase used in his counsel's status report — that the parties "believe they have achieved a basis for settlement" — means a definitive agreement. But while the phrase can be used in this way, Lewis v. Comm'r, 90 T.C. 1044, 1046, 1988 WL 49320 (1988), it can as a matter of language just as easily mean that the definitive agreement will be the written one. And it is not a phrase used in this case by the IRS's status report.

Further, while a complex deal can be reached in an oral conversation, here the global settlement had terms affecting several different parties, and needed papers to be signed by non-partiesi.e., the Drakes' two sons — and delivered to nonparties, namely Citigroup. It would not be surprising to require the execution and return of the enclosed documents as the final steps needed to complete the contract.

Indeed, the IRS argues that because the global settlement involved members of the Drake family who were not party to the Tax Court proceedings, the agreement actually had to be in writing, see 26 U.S.C. § 7122; 26 C.F.R. § 301.7122-1(d)(1). Whether these provisions apply under these circumstances may be debatable, Haiduk v. Comm'r, 60 T.C.M. (CCH) 864 (1990), but either way it makes some sense to treat the IRS's request for signed documents as a precondition to settlement.

Without explanation, Drake failed to return the documents or otherwise communicate with the IRS for a week before the IRS revoked the offer. And although Burke continued to insist in correspondence that an agreement had been reached, Drake waited until February 22 to inform the Tax Court of the settlement, and another six weeks before filing a motion to compel settlement. While none of these facts is dispositive, they tend to confirm that the Tax Court did not clearly err in finding no contract.

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