Hartman v. Commissioner of Internal Revenue, T.C. Memo. 2008-124 (U.S.T.C. 5/1/2008)
| Decision Date | 01 May 2008 |
| Docket Number | No. 18551-88.,No. 16761-87.,No. 15673-87.,No. 48690-86.,No. 1371-85.,No. 29429-88.,No. 4116-87.,1371-85.,48690-86.,4116-87.,15673-87.,16761-87.,18551-88.,29429-88. |
| Parties | LARRY L. HARTMAN, ET AL.,<SMALL><SUP>1</SUP></SMALL> Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent<SMALL><SUP>*</SUP></SMALL> |
| Court | U.S. Tax Court |
In Dixon V, the Court of Appeals for the Ninth Circuit held that the misconduct of M (R's trial attorney) and S (M's supervising attorney) in arranging secret settlements with test case petitioners the Ts and the Cs was a fraud on the Tax Court. The Court of Appeals observed that the fraud not only violated the rights of the other test case petitioners and petitioners in more than 1,300 cases bound by the outcome of the test cases but also defiled the sanctity of the Court and the confidence of all future litigants. The Court of Appeals ordered the Tax Court to sanction R by entering judgments in favor of the remaining test case petitioners and other petitioners in the Kersting tax shelter group before the Court of Appeals, on terms equivalent to those provided in the Ts' secret settlement agreement. The Court of Appeals left the fashioning of such judgments to the discretion of the Tax Court.
Shortly before the trial of the test cases that resulted in the Tax Court's opinion in Dixon II, P1 settled his cases on terms more favorable to him than R's project settlement offer but less favorable to him than the Ts' settlement, and stipulated decisions were entered in P1's cases.
After the trial, Dixon II opinion, and entry of decisions in the test cases, R's management discovered the misconduct of M and S when M attempted to have R assess deficiencies in the Ts' and the Cs' cases in accordance with the secret settlements rather than with the Court's decisions in those cases. In motions to vacate the decisions entered in the cases of the Ts, the Cs, and a third test case petitioner, R disclosed to the Court the misconduct of M and S. R concedes that stipulated decisions in Kersting project nontest cases entered after the Court filed its Dixon II opinion and before R disclosed the misconduct of M and S to the Court should be vacated.
While the remaining test cases were on appeal, R reinstated R's Kersting project settlement offer by means of an offer letter that contained material omissions. The offer letter stated: P2s (proceeding pro sese at the time) and
P3s (represented by counsel) accepted R's offer, and stipulated decisions were entered in their cases. Other Kersting project petitioners accepted the reinstated project settlement offer; as a result, stipulated decisions were entered in more than 400 cases.
The stipulated decisions entered in Ps' cases were not appealable and became final many years ago. Ps now seek to have their decisions vacated so that the sanctions mandated by the Court of Appeals in Dixon V can be imposed on R in their cases. Ps argue that, because they were bound by the decisions in the test cases, the fraud committed by M and S in the test cases necessarily adversely affected their cases. They ask this Court to impose on R the same sanctions mandated by the Court of Appeals in Dixon V for the fraud on the Court of M and S in the test cases which, they assert, is imputed to their cases.
In Lewis v. Commissioner, T.C. Memo. 2005-205, we denied the motions of P3s for leave to file motions to vacate their stipulated decisions on the grounds they and their counsel had become aware of the misconduct of R's attorneys and of the pending appeals by test case petitioners when they agreed to the decisions. P3s filed a motion for reconsideration asking us to reconsider our Lewis opinion on the ground that their settlement agreements did not encompass or foreclose imposing sanctions on R for the fraud M and S committed on the Court. We granted the motion for reconsideration, granted the motions for leave filed by P1, P2s, and P3s, and consolidated the three sets of cases for purposes of this opinion. Upon reconsideration, we hold that the law of the case set forth in Dixon V requires that Ps' motions to vacate stipulated decisions be granted and that all Kersting project petitioners whose cases were bound by the test
cases and who suffered entry of stipulated decisions are entitled to the benefit of the T settlement.
1. Held: The fraud on the Court committed by R's attorneys in the test case proceedings constituted fraud on the Court in every case bound by the outcome of the test cases and harmed the integrity of the judicial process, not only as the test case procedure was employed in the Kersting project cases, but also as it might be employed in the future.
2. Held, further, imposing the sanctions against R in every case that was part of the Kersting tax shelter project is the appropriate sanction for the fraud committed in the test case proceedings because it serves to remedy the harm done to the judicial process, restore public confidence in the test case procedure, and rectify the violation of the rights of every petitioner bound by the outcome of the test cases.
3. Held, further, once R discovered the misconduct of R's attorneys, R had an obligation to fully disclose the misconduct, not only to the Court and the test case petitioners, but also to all petitioners who had been bound by the outcome of the Kersting project test cases.
4. Held, further, R's posttrial settlement offer did not adequately disclose R's attorneys' misconduct to the offerees and did not remedy or purge the fraud from the Kersting project cases.
5. Held, further, P2s' and P3s' requests that sanctions be imposed on R for the fraud committed on the Court are not a "challenge or appeal with respect to the Kersting programs or the merits of the Dixon opinion" encompassed by R's posttrial settlement offer, but rather encompass another issue in their cases that is to "be resolved separately" under the specific terms of that offer.
6. Held, further, the posttrial and other settlements and stipulated decisions entered in the cases at hand and in other Kersting project cases do not divest the Tax Court of its inherent power to impose sanctions against R for the fraud committed on the Court in those cases. See, e.g., Bader v. Itel Corp. (In re Itel Secs. Litig.), 791 F.2d 672 (9th Cir.
1986) (party cannot avoid sanctions for committing fraud on the court by settlement or withdrawing from the case).
7. Held, further, the Tax Court has inherent power to impose sanctions against R for the fraud committed on the Court in every case that was part of the Kersting tax shelter project and may impose such sanctions either by vacating the decision in each such case and entering a new decision or by separate order imposing an equivalent monetary sanction. In the cases at hand, we are vacating the decisions.
8. Held, further, once the new decisions in these cases become final, the Court will issue an implementation order to allow R reasonable time to notify all remaining Kersting project petitioners against whom stipulated decisions were entered and to adjust their accounts administratively in accordance with the terms of the Ts' settlement. The Court will not accept for filing motions for leave to file motions to vacate the decisions in the cases of other such Kersting project petitioners unless R fails to adjust their accounts administratively within 9 months after the date of entry of the implementation order.
Robert Alan Jones and Declan J. O'Donnell, for petitioner Larry L. Hartman in docket Nos. 1371-85, 4116-87, and 16761-87 and for petitioners Jesse M. and Lura L. Lewis in docket Nos. 15673-87, 18551-88, and 29429-88.
Matthew K. Chung, for petitioners Wilbert L. F. and Valarie W. Liu in docket No. 48690-86.
Henry E. O'Neill, for respondent.
These consolidated cases are before the Court on petitioners' motions under Rule 1622 to vacate stipulated decisions entered many years ago. Petitioners' cases are broadly representative of hundreds of cases in which stipulated decisions were entered and of dozens of such cases in which motions for leave to file motions to vacate stipulated decisions have been filed.
Petitioners' motions arise from the misconduct of respondent's attorneys in implementing the Court's test case procedure used by the Court in the Kersting tax shelter project to try and decide Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon II), vacated 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 (9th Cir. 2003) (Dixon V), culminating with our disposition of the second remand in Dixon v. Commissioner, T.C. Memo. 2006-90 (Dixon VI), supplemented by T.C. Memo. 2006-190 (Dixon VIII).3 We
have entered decisions in the 27 docketed cases that participated in the second remand; 13 of those cases are on appeal to the Court of Appeals for the Ninth Circuit,4 where, we assume, they will be considered by the panel that decided Dixon V.5
In Dixon V, the Court of Appeals held that the misconduct of respondent's...
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