Lewis v. Commissioner
| Decision Date | 29 August 2005 |
| Docket Number | Docket No. 29429-88.,Docket No. 15673-87.,Docket No. 18551-88. |
| Citation | 90 T.C.M. 176 |
| Parties | Jesse M. and Lura L. Lewis, v. Commissioner. |
| Court | U.S. Tax Court |
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.
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 [94-1 USTC ¶ 50,286], 26 F.3d 105 (9th Cir. 1994), on remand Dixon v. Commissioner [Dec. 53,314(M)] T.C. Memo. 1999-101 (Dixon III), supplemented by [Dec. 53,832(M)] T.C. Memo. 2000-116 (Dixon IV), revd. and remanded [2003-1 USTC ¶ 50,194], 316 F.3d 1041, 1047 (9th Cir. 2003) (Dixon V). For purposes of these motions, we take judicial notice of our 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 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 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 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.
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 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 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.
It would have been a daunting task to try the cases of the hundreds of similarly situated Kersting program participants who 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 Docket Dates of Execution Date of
Year No. Petitioners Respondent Filing
1983 15673-87 Undated 9/08/87 9/11/87
1984 18551-88 10/20/88 10/27/88 10/31/88
1986 29249-88 2/16/89 2/23/89 2/27/89
Petitioners, who were still proceeding pro se, signed their piggyback agreements. Mr. McWade signed petitioners' piggyback agreements on behalf of respondent.
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 $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...
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