When Does a Settlement Become Binding on a Party in the Tax Court (Part 3)

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In prior two posts, the focus was on process and on settlements that were determined to bind the parties.  There are a number of decisions in which the court has decided not to bind the parties and I will end this three-part post with a discussion of those cases.  In general, the earlier the settlement is broken off, the less likely it will bind the parties.  Where all of the discussions about settlement take place outside the presence of the courtroom and the Court is not inconvenienced by the breaking of the settlement, the Court is unlikely to find it a binding agreement.

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Cases Where Court Declines to Enforce the Settlement

Estate of Halder v. Commissioner – Petitioner sought to hold an agreement binding regarding the value of the estate’s interest in a partnership on the date of death.  The Appeals Officer spoke with a representative of the estate and stated that he had calculated a value of $1.2 million.  The Appeals Officer offered to fax the basis for the calculation and did so.  The fax mistakenly left off the final page of six which caused the impression that the Appeals Officer determined that the value was $1M and not $1.2M.  Petitioner’s representatives noticed the discrepancy but did not bring it to the AO’s attention.  The representatives then faxed an agreement to the $1M settlement proposal.  The parties never executed any agreement nor did they report to the Court a basis had been reached.  Petitioner then filed a motion to enforce the settlement based on the lower amount.

The court noted that settlement agreements could be reached through correspondence in the absence of a formal agreement citing Manko v. Commissioner.  “A prerequisite to the formation of an agreement is an objective manifestation of mutual assent to its essential terms” i.e., a meeting of the minds.  The court stated that if it enforced a settlement on these facts, it would “allow the estate to take an unfair advantage of a simple, honest error that was immediately corrected.” Citing to Adams, the court quoted “The party seeking modification, however, must show that the failure to allow the modification might prejudice him… Discretion should be exercised to allow modification where no substantial injury will be occasioned to the opposing party; refusal to allow modification might result in injustice to the moving party and the inconvenience to the Court is slight.”

The court pointed out that in eve-of-trial settings, the rules were much more stringent.  Eve-of-trial cases, such as Dorchester and Stamm, also involved the filing of stipulation of settled issues.  Allowing the enforcement of the terms of the mistaken fax would provide an inappropriate advantage to the estate and an injustice would occur.  The Court summed up its view by stating that:

We find those cases [Dorchester and Stamm] distinguishable from the instant case because: (1) The parties did not reach a meeting of minds, execute any settlement agreement, notify the Court that a settlement had been reached, or file a stipulation of settled issues with the Court; (2) the Court did not cancel or delay the trial date because of any settlement between the parties (i.e., the Court granted a continuance in this case because the estate’s expert was ill); and (3) Mr. Lindenbaum contacted Mr. Sherland with regard to the error the next day.

 

In a footnote, the Court added, “Even if we held there was a meeting of minds, we would deny the estate’s motion because the ‘settlement’ was never signed or approved by, or even submitted to, any Service official authorized to approve it.” The Manko case gives hope to petitioners seeking to hold the Service to a settlement not communicated to the Court through the formality of a pre-trial settlement; however, any tentative agreement must have the approval of the appropriate level of authority or it will fail as a basis for binding the Service to the settlement.

David v. Commissioner – The Appeals Officer sent to the taxpayer’s representative an audit statement and a Form 870-AD together with a transmittal letter that stated the taxpayers would be notified “when the proposed settlement is approved.”  The Appeals Officer did not receive back an executed Form 870-AD and later informed the representative that the settlement was no longer available.   The taxpayer sought to enforce the settlement in Tax Court.  The Court found there was no binding settlement because there was no indication that the appropriate person at the Service had approved the settlement and, in fact, the letter to the taxpayer indicated that the approval had not yet occurred.

The opinion offers nothing of great interest except the attempts by the taxpayer’s representative to turn the offer of settlement into a binding settlement on the basis of the delegation orders in the face of clear language in the transmittal letter that the Appeals Officer still needed authorization on his end. 

Mathia v. Commissioner – The parties in this collection due process case submitted the case fully stipulated under Rule 122.  Although the issue of when a settlement occurred arose in the context of a collection due process case challenging the timeliness of respondent’s assessment, the real issue focused on the TEFRA partnership proceeding that gave rise to the assessment.  Applying the same general rules of contract that control in other circumstances, the Tax Court determined that no binding settlement existed in the TEFRA case at the early date sought by petitioner, and held that the statute of limitations on assessment remained open at the time the Service assessed the liability at issue in the collection due process case.

“A settlement agreement can be reached through offer and acceptance made by letter, or even in the absence of a writing…. Settlement of an issue before the Court does not require the execution of a closing agreement under section 7121, or any other particular method or form….Settlement agreements are effective and binding once there has been an offer and an acceptance, filing the agreement with the Court as a stipulation is not required for the agreement to be effective and binding.”  This description certainly fits the circumstances of the settlement my clinic thought it had with the appeals officer.  There was an offer and acceptance of the offer and even the preparation of computations before the appeals officer suddenly, at a much later point, brought up for the first time the failure of the manager to assent to the agreement.

The court in Mathia carefully examined the correspondence between the partnership and the Service attorney to determine if it had a binding settlement.  It found that the correspondence confirms

that Greenwich and respondent reached an agreement in 1991 to enter into a settlement of the partnership-level proceeding, we remain unconvinced that the agreement was sufficiently fleshed out in 1991 to constitute a binding settlement agreement at that time.  The agreement in principle that was reached in 1991 set forth the parameters of a settlement, but the correspondence described above reflects that negotiations continued between respondent and the attorney representing the Swanton TEFRA partnerships to at least September 3, 1993.  Moreover, the correspondence indicates that the execution of a decision document resolving the partnership litigation depended upon the fulfillment of certain conditions such as the TMP’s ability to represent that all partners consented to the settlement.  Implementing and finalizing the proposed settlement required the collection and analysis of detailed information, the preparation of calculations and agreements, and in some cases, the execution of closing agreement by individual partners.

The court further found that even if it determined that the parties had entered into a binding settlement agreement, it would not qualify as an agreement between a partner and the Service within the meaning of IRC 6231(b)(1)(C).  This section requires an agreement between the Service and a partner not the Service and the partnership.  The case then goes into an analysis of the partnership provisions not relevant to the overall analysis of when an agreement becomes binding because the analysis here is peculiar to the partnership provisions.

Estate of Hunt v. United States, 103 Fed.Appx. 475 (4th Cir.2004)(unpublished opinion)(no free copy of the opinion located) – The taxpayer and the Service entered into a settlement which the parties knew would generate a refund through the operation of the carryback of a loss.  In the settlement discussions, both parties anticipated that the taxpayer would receive interest on the refund payment.  When the Service paid the refund, it paid no interest because the refund occurred within 45 days of the request.  The taxpayer brought suit in federal district court seeking interest arguing the Service was equitably estopped from arguing he should not receive interest and the district court agreed.  The Fourth Circuit reversed finding that employees of the Service could not create a right to interest through their misunderstanding of the application of the refund provisions that was not granted by the statute.  The case shows another limitation on settlement with the government.  Parties cannot rely on every statement that the Service employee makes and use that statement as a basis for relief not otherwise available.

Lessons on Settlement Agreements and Their Binding Effect

If you tell the Tax Court orally or in writing that a basis for settlement exists, you should expect the settlement to bind the parties in the absence of a mutual mistake or fraud.  The difficulty will compound if the Court cancels a scheduled trial time because of representation of settlement; however, do not expect to get out of a settlement reported to the Court just because the reporting of the settlement does not cause postponement of a trial.  You cannot use as an excuse for undoing a settlement that the computations did not turn out the way you expected.  Do the math before telling the Court you have a settlement unless you do not care what the math will bring.

You cannot expect the Court to bind the Service in the same way it might bind the petitioner.  If you expect to bind the Service, you must show that the properly authorized person gave assent to the settlement, see Burton v. Commissioner.  You cannot trick a party into settlement by seeking to use a mistake as the basis for binding a party.  If you know the other side has made a mistake in something you receive, better to clear the air before you try to argue for a binding settlement than to look slick in trying to enforce an agreement you know did not exist in the mind of the other party.  The Court will also not enforce provisions not contained in a settlement document contrary to the statute.

If the Service employee does not affirmatively state to you that a proposed settlement has the approval of the appropriate manager, assume that it does not.  Ask whether such authority exists before taking an offer to your client and suggesting to your client that the Service has agreed to a particular settlement.  The Court precedent suggests little reluctance in enforcing terms recited to the Court and very little appetite for enforcing settlements not yet brought to the Court.  If you want to bind the Service, get it in writing signed by the authorized official or get a statement made by a Chief Counsel attorney to the Court.  Anything else will create problems in trying to enforce it.  A twenty year old letter from practitioners to the Commissioner can still provide some useful basis for thought on this issue.

 

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