Dixon v. Commissioner

• Decision Date: 02 May 2006
• Docket Number: Dkt. No. 10588-83.,Dkt. No. 17642-83.,Dkt. No. 17646-83.,Dkt. No. 9382-83.
• Citation: 91 T.C.M. 1086
• Parties: Jerry and Patricia A. Dixon, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

91 T.C.M. 1086

T.C. Memo. 2006-90

Jerry and Patricia A. Dixon, et al.¹ v. Commissioner.

Dkt. No. 9382-83.

Dkt. No. 10588-83.

Dkt. No. 17642-83.

Dkt. No. 17646-83.

United States Tax Court.

May 2, 2006.

Henry G. Binder and John A. Irvine, for petitioners in docket Nos. 9382-83, 15907-84, and 30979-85.

Joe Alfred Izen, Jr., for petitioners in docket Nos. 17642-83, 4201-84, 38965-84, 40159-84, 22783-85, 30010-85, 35608-86, 479-89, and 8070-90.

Robert Alan Jones, for petitioners in docket Nos. 17646-83, 10931-84, 38757-84, 19464-92, 621-94, and 9532-94.

Declan J. O'Donnell, for petitioners in docket Nos. 10588-83, 27053-83, 28723-84, and 13477-87.

Mickael Louis Minns and Enid M. Williams, for petitioners in docket No. 29643-86.

Robert Patrick Sticht and Boris Orlov, for petitioners in docket No. 7205-94.

Robert Patrick Sticht, for petitioners in docket Nos. 20119-84, 17992-95, and 17993-95.

Henry E. O'Neill and Peter R. Hochman, for respondent.

CONTENTS

                FINDINGS OF FACT
                I.      The Kersting Tax Shelters
                        A.    Background
                        B.    Respondent's Kersting Project
                              1.    In General
                              2.    Bauspar
                        C.    Respondent's Project Settlement Offer
                II.     The Thompsons' Participation in the Kersting Tax Shelters
                        A.    The Thompsons' Tax Returns
                              1.    Prepetition Years-1977 and 1978
                              2.    Years Before the Court
                                    1979
                                    1980
                                    1981
                              3.    Years Following Those Before the Court
                                    1982
                                    1983
                                    1984
                                    1985
                        B.    Examination of the Thompsons' 1978-1981 Returns
                III.    The Test Case Litigation and the Thompson Settlements
                        A.    Selection of the Test Cases
                        B.    Deterioration of the Thompson-Kersting Relationship
                        C.    The Thompsons Engage DeCastro, Who Settles Their Cases
                        D.    IRS Activity Regarding the Thompsons' 1983-85 Returns
                        E.    The Reporting and Resolution of the Thompsons' Deficiency Interest Payments for 1986 and 1987
                        F.    The Thompson Settlement Revised as Trial Approaches
                        G.    Trial and Entry of Decisions
                        H.    Discovery and Disclosure of the Thompson Settlements
                        I.    Implementation and Effects of the Final Thompson Settlement
                        J.    Respondent's Disciplinary Action Against Sims and McWade
                IV.     Ninth Circuit Remand and Subsequent Proceedings
                        A.    Ninth Circuit Orders in the DuFresne Case
                        B.    Evidentiary Hearing and Opinions After the Remand in DuFresne
                        C.    The Ninth Circuit's Opinion and Mandates in These Cases
                        D.    Proceedings Following Remand
                        E.    Further Disciplinary Proceedings
                OPINION
                Preliminary Comments
                I.      Procedural Issues Following Remand
                        A.    Procedural Posture
                        B.    Law of the Case
                        C.    Parties Before the Court
                        D.    Burden of Proof
                II.     Defining and Applying the Thompson Settlement
                

                        A.    Overview
                        B.    Areas of Agreement
                        C.    Starting Point: The Thompsons' Settlement of Proposed Deficiencies for 1979-1981
                              1.    Respondent's Position
                              2.    Petitioners' Position
                              3.    Analysis
                        D.    Other Benefits Relating to the Thompsons' 1981 Tax Year
                              1.    Elimination of the Thompsons' Late Filing (Non-Kersting) Addition for 1981
                              2.    Respondent's Failure To Address the Bauspar Issue in the Thompsons' Statutory Notice for 1981
                        E.    Benefits to the Thompsons Relating to Years Other Than 1979-1981
                              1.    In General
                              2.    The Thompsons' Escape From Kersting Liability with Respect to 1982
                              3.    The Thompsons' 1983 Kersting Deficiency and the Disappearing Statutory Notice
                              4.    The Thompsons' 1983-85 Bauspar Deductions
                              5.    The Thompsons' Deduction of Prepaid Interest on Their 1986 and 1987 Returns
                                    1986
                                    1987
                              6.    The Thompsons' Attorney's Fee Deduction for 1993
                              7.    The Thompsons' Failure To Report Tax Benefit Income for 1993
                              8.    Payment of Witness Fees to Mr. Thompson
                              9.    Release of Lien on the Thompsons' Property and Other Intangible Benefits
                        F.    The Percentage Reduction Summarized
                        G.    Additional Relief
                              1.    Elimination of Non-Kersting Additions
                              2.    Allowance of Bauspar Deductions
                              3.    Elimination of Non-Kersting Deficiencies
                              4.    Attorney's Fees
                III.    Interest on Deficiencies and Overpayments
                

MEMORANDUM FINDINGS OF FACT AND OPINION²

BEGHE, Judge.

With this opinion, the Court hopes to provide a template for resolution of the more than 1,300³ remaining cases of petitioner participants in the second generation⁴ of tax shelter programs (the Kersting project) promoted by Henry F.K. Kersting (Kersting).⁵ During the trial on the merits of the test cases used to try to resolve the vast majority of the pending cases in the Kersting project,⁶ respondent's trial counsel Kenneth W. McWade (McWade) (with the knowledge and connivance of his supervisor, Honolulu District Counsel William A. Sims (Sims)), entered into secret settlements with Luis DeCastro (DeCastro), counsel for test case petitioners John R. and Maydee Thompson (the Thompsons). The financial terms of the final settlement were much more advantageous to the Thompsons than the settlements generally made available to other petitioner participants in the Kersting project.⁷ The final settlement with the Thompsons was intended to provide refunds of tax and interest paid by the Thompsons under a prior settlement, plus interest thereon, that were to be used—and the bulk of the refunds was used—to pay DeCastro's fees for providing the appearance of his independent representation of the Thompsons at the trial of the test cases. After this Court upheld respondent's determinations and entered decisions in favor of respondent in all the test cases, see Dixon v. Commissioner [Dec. 47,801(M)], T.C. Memo. 1991-614 (Dixon II), respondent's senior management discovered the settlements, moved this Court to vacate the decisions (including the decisions in the Thompsons' cases) that had not already been appealed to the Court of Appeals for the Ninth Circuit, and requested an evidentiary hearing. After vacating the decisions, the Court denied the motion for evidentiary hearing, entered decisions for the Thompsons in accordance with their final settlement, and reentered or allowed to stand its decisions in the other test cases. The Court thereafter denied motions by test case and nontest case petitioners to intervene in the Thompsons' cases shortly before the new decisions in those cases became final. In DuFresne v. Commissioner [94-1 USTC ¶ 50,286], 26 F.3d 105 (9th Cir. 1994) (hereafter DuFresne), the Court of Appeals for the Ninth Circuit vacated the decisions against the other test case petitioners on the ground that the misconduct of Sims and McWade required further inquiry. The Court of Appeals directed this Court to hold an evidentiary hearing to determine: "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." Id. at 108.

This Court conducted the evidentiary hearing directed by the Court of Appeals and held that the misconduct of the Government attorneys did not create a structural defect but rather resulted in harmless error. See Dixon v. Commissioner [Dec. 53,314(M)], T.C. Memo. 1999-101 (Dixon III). We imposed sanctions against respondent in the form of relief from the accrual of interest on additions to tax for negligence as well as relief from additional interest under section 6621(d)/(c) (hereafter, section 6621(c)).⁸

The other test case petitioners again appealed. The Court of Appeals for the Ninth Circuit reversed and remanded our decisions in those test cases in Dixon v. Commissioner [2003-1 USTC ¶ 50,194], 316 F.3d 1041 (9th Cir. 2003), as amended on March 18, 2003 (Dixon V). The Court of Appeals held that the misconduct of respondent's counsel constituted a fraud on the court and directed this Court to enter decisions "in favor of Appellants and all other taxpayers properly before this Court on terms equivalent to those provided in the settlement agreement with Thompson and the IRS." Id. at 1047. In this opinion, we determine the terms of the Thompson settlement and their application to the Kersting project participants before the Court.

FINDINGS OF FACT

The parties have filed a stipulation of facts for evidentiary hearing on September 20, 2004; a first supplemental stipulation of facts for evidentiary hearing on September 20, 2004; a second supplemental stipulation of facts for evidentiary hearing on November 22, 2004; a third supplemental stipulation of facts for evidentiary hearing on March 29, 2005; a fourth supplemental stipulation of facts, filed on June 17, 2005, and a stipulation of settled issues, filed on June 22, 2005. The facts stipulated therein are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. The parties have further stipulated that, for purposes of the present opinion, the Court may incorporate its findings of fact as stated in earlier proceedings unless such facts are inconsistent with the opinion of the Court of Appeals in Dixon V or are inconsistent with facts stipulated or proven in proceedings held after the issuance of Dixon V.

I. The Kersting Tax Shelters

A. Background

All the cases before the Court concern proposed deficiencies, additions to tax, and interest that related to petitioners' participation in tax shelter programs promoted by Kersting. All the...