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A Procedural Goldmine

Posted on Sep. 30, 2022

Every once in a while a case comes along with a host of procedural issues. Of course when the case has been open in the Tax Court for more than a decade, it has better chances for this to happen. In the consolidated cases of Dollarhide Enterprises, Inc. v. Commissioner, Dk. Nos. 23113-12, 23139-12 & 21366-14, Judge Holmes brings us this procedural feast in an order. Here is his description:

But we write at greater length because of the unusual circumstances that have caused the oldest of these cases to enter its second decade of litigation without there ever having been a trial. Along the way, these cases have brought to light potentially important circuit splits on a couple questions of great significance to those who follow tax procedure: (1) under what conditions can parties to a Tax Court proceeding make a binding settlement of the issues in the case without agreeing on the computations needed to enter a final determination and (2) what it means to file a return.

We have written before on the issue of when parties in a Tax Court case have entered into a binding settlement (here – discussing the 9th Circuit decision in Dollarhide, here, here and here) and on the issue of what is a properly filed return – here. Dollarhide provides an opportunity to visit both issues again.

As Judge Holmes explains in the opinion, the first two dockets were scheduled for trial in 2014 – a normal time frame for the first scheduled trial. Due to the filing of the third petition, the cases were continued with required status reports. In 2016 the parties reported that they had reached a settlement.

Their settlement did not take the form of an agreed decision for each of the three cases, but instead a “stipulation of settled issues.” This is an exceptionally common way for parties to wind down litigation in the Court. Because tax returns and notices of deficiency can include so many disputed items, settlements often consist of lists of issues in which the parties make mutual concessions or compromises. A taxpayer’s final bill — the amount he has to write a check for — is usually harder to figure out. The calculation often includes a computation of interest, arithmetic adjustments to other items (e.g. limits on deductibility computed by reference to a percentage of adjusted gross income), and a summing of penalties and additions to tax computed as a percentage of the resulting deficiency, reduced by any allowable credits.

The problem in this case arose because the agreement between the IRS and the Dollarhides had a different meaning for each party. The Court’s description of the agreement states:

the Commissioner and the Dollarhides agreed to accept the “income, deductions, exemptions, and credits” on returns that the Dollarhides submitted in 2011 during the course of their audit for their 2006 and 2007 tax years. The Commission[er] also conceded that Dollarhide Enterprises had no tax deficiency at all.

To the IRS this agreement meant the Dollarhides would receive the credits they reported on their late filed 2006 return as the IRS computed the liability. The IRS, however, did not view this settlement as a concession on the timeliness of the claim for the credits. To the Dollarhides this language meant they would actually receive the refunds their returns generated. While it’s not necessary in a stipulation of settled issues to discuss statute of limitations issues, the failure to do so here created a huge chasm in the understanding of the agreement. Once it became clear to the Dollarhides that the agreement they thought they reached with the IRS did not include the IRS actually paying them a refund, they balked on following through. As is normal anytime there is a stipulation of settled issues and one party tries to back out, the other party usually moves forward to ask the Court to enforce the agreement. The Court notes:

The Commissioner finally moved in December 2017 for entry of decision. This is, again, an extremely common motion in our Court that parties use to set up for decision disputes about the computation of a final deficiency once they’ve agreed on settlement of all the individual issues.

The Court ruled for the IRS on its Rule 162 motion. The Dollarhides were unhappy with this result and said they would never have agreed if they had understood that it meant they did not receive their refunds. Judge Holmes quoted from the Court’s earlier opinion:

In ruling on Rule 162 motions, we look to Federal Rule of Civil Procedure 60. See, e.g., Etter v. Commissioner, 61 TCM 1772, 1773 (1991). FRCP Rule 60(b) is the rule that’s applicable here, and the Dollarhides point us to FRCP 60(b)(3) which requires a showing of “fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party.” The fraud or other misconduct that the Dollarhides argue the Commissioner engaged in is not telling them about the legal requirement that they had only three years from the due date of their 2006 tax return to file a claim for refund of any overpayment.

The Court notes that the Dollarhides could have done the research to figure out that their late filing would result in the loss of the refund based on withholding credits; however, that’s when the second procedural issue in the case enters the scene. Judge Holmes again quoted from the earlier opinion:

The Dollarhides do also complain that the only reason that they didn’t file their 2006 tax return within three years of its due date is that the revenue agent examining that year insisted that they submit it to her.

The plot thickens. Now petitioners have linked their understanding of the settlement to another procedural issue recently exposed in the 9th Circuit’s decision in Seaview Trading discussed here. In Seaview Trading the 9th Circuit held that giving a tax return to an IRS agent who requested the return constituted the filing of the return. The Dollarhides claim they also gave their return for the year at issue to someone at the IRS within three years of the due date of the return. If giving the return to a person at the IRS happened within that time period and if that act constituted the filing of their return, then they had a reason for expecting a refund based on the terms of the stipulation of settled issues.

The Court also pointed out that the 9th Circuit failed to address a number of issues present in the appeal leaving the Tax Court to wonder what the appeals court intended with respect to issues not addressed. With this background of an incomplete stipulation of settled issues, an unclear filing of the return and unanswered questions from the appeal, the Tax Court proceeds to discuss and decide the case.

Partial Stipulation

The Tax Court notes that it has dealt with partial stipulations previously and held that they create a binding agreement.

The first problem that these cases present then is whether our Court can continue to maintain its longstanding custom of enforcing partial settlements, disposing of any remaining disputes about computations with Rule 155 submissions, and then entering final decisions.

Is a stipulation of settled issues in the absence of a stipulation of decision enforceable?

We ourselves have held for many years that it is. Our leading case on the subject is from 1988, Stamm International Corp. v. Commissioner, 90 T.C. 315. In that case, as in the Dollarhides’ cases, the parties settled on an issue-by-issue basis. When they couldn’t agree on the final, bottom-line amount, the Commissioner tried to get out of the settlement on the ground that he thought the bottom-line amount should be much higher and when agreeing to the offer, neither he, nor the IRS’s lawyer had contemplated a Code section that the taxpayer established, would result in a much lower settlement. Stamm Int’l, 90 T.C. at 319.

Judge Holmes points out that Stamm is not the only case where the parties reached a partial settlement that had a different tax result than anticipated yet the Tax Court found the settlement binding. The Fourth Circuit endorsed this practice in Korangyi v. Comm’r, 893 F.2d 69, 72 (4th Cir. 1990).

The first crack in this consensus came only in 2015. In a per curiam opinion from the Seventh Circuit, that court held that it was error for us to grant the Commissioner’s motion for entry of decision when the parties had settled all the individual issues but disagreed about the bottom-line number: “The Stipulation of Settled Issues . . . says nothing about the key issue in the case: the deficiency amounts for the tax years in question. Indeed, the Stipulation of Settled Issues does not even specify a method for determining the deficiency amounts.” Shah v. Comm’r, 790 F.3d 767, 770 (7th Cir. 2015).   

So, now there is a circuit split with the 7th and 9th Circuit declining to uphold stipulations of settled issues that do not lay out the final consequences of the settlement while the Tax Court and the 4th Circuit would enforce settlements on the issues without a discussion of the bottom line impact.

Return Filing

Judge Holmes notes that the issue of return filing was well settled before the recent 9th Circuit decision in Seaview Trading.

A return was “filed” only if it was delivered to the specific individuals identified by the Code or regulations. Allnutt v. Comm’r, 523 F.3d 406, 412-13 (4th Cir. 2008); see e.g. Coffey v. Comm’r, 987 F.3d 808, 812 (8th Cir. 2021) (quoting Comm’r v. Estate of Sanders, 834 F.3d 1269, 1274 (11th Cir. 2016)) (holding that for a return to be filled, it must be delivered to the individual specified in the Code or Regulations); Heard v. Comm’r, 269 F.2d 911, 913 (3d Cir. 1959) (holding that filing only occurs when the paper is received by the proper official). Thus, a taxpayer who sent his return to the wrong IRS service center would not have “filed” his return until it showed up at the right service center. Winnett v. Comm’r, 96 T.C. 802, 808 (1991).

He calls this an area ripe for much additional litigation. He does not mention that the IRS was so unhappy with the decision in Seaview Trading that it has requested en banc review in the 9th Circuit which request is still pending.

Meaning of 9th Circuit Decision

Judge Holmes notes that the 9th Circuit did not address all of the issues in the case. Specifically, it did not mention the 2007 individual case. Because the Tax Court’s decision in that case occurred years ago, Judge Holmes questions whether he can vacate the earlier decision even though both parties urge that result. He decides that

There is no statute, regulation, or useful precedent that either the parties or we can find. It is, however, the general rule that “an inferior court has no power or authority to deviate from the mandate issued by an appellate court.” Briggs v. Pa. R. Co., 334 U.S. 304, 306 (1948). We will therefore assume that we do have the power to vacate a prior decision and enter a new one in accord with the parties’ agreement in this situation. To do so doesn’t deviate from the mandate in these cases. And it will, one hopes, bring these cases to an end. Or at least allow the entry of decisions that neither party will have standing to appeal.

After making this decision he enters a series of orders and a decision. Maybe this is the end of the case or maybe the Dollarhides will continue to provide a basis for those interested in tax procedure to learn.

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