Several years ago, a settlement reached by the Villanova clinic with an Appeals Officer was set aside when the AO’s manager would not accept the settlement recommendation. Every settlement with an AO or a Chief Counsel docket attorney must receive approval from their manager. Usually, the AO or the Chief Counsel attorney makes explicit statements about the limitations of their authority. However, when time permits, these individuals also usually discuss a proposed settlement with their manager so that the formal submission of the settlement does not result in a surprise to the taxpayer and the employee.
Following the unpleasant surprise created by the rejection of a settlement that resulted from months of discussion with the AO, the clinic researched when a settlement could bind the government. The research did not lead us to the conclusion that we could bind the government in this instance, despite the fact that the AO had led us on for some time. I wrote a three part blog post series, linked here, here, and here, about our case and an article on the binding nature of settlements in general. Les wrote a subsequent post involving a different case that also raised the binding nature of a settlement.
The recent 9th Circuit decision in Dollarhide v. Commissioner, 18-71722 (9th Cir. 2021) raises this issue in the context of a stipulation of settled issues. It is a case worth noting.
read more...In the Tax Court it regularly occurs that the parties reach a settlement at the last minute. Certainly the Tax Court is not unique in having parties reach a last minute settlement. What does create more tension in Tax Court settlements is the circuit riding nature of the court. It only comes to one of the 74 cities in which it sits every few months or every six months or once a year. Continuing a case to allow the parties to wrap up a settlement could throw the case back on the general docket. It could also allow the unscrupulous petitioner or representative to appear to settle only to back out when the court leaves town, not to return for quite some time.
To prevent parties from backing out and to cause them to show that they really did have a settlement, the court regularly requests parties to last minute settlements to file with the court a stipulation of settled issues. Aside from the fact that the Tax Court travels, settlements can take some time because the issues need to be turned into tax computations. By filing with the court a stipulation of settled issues, the parties essentially leave open the possibility of a Rule 155 argument on the consequence of the computation of the issues but otherwise commit themselves to a settlement. The trial judge on the calendar typically retains jurisdiction over the case. In the routine case in which a stipulation of settled issues is filed, the computation occurs within a relatively short time and a decision document is submitted to the court shortly thereafter. Judges typically give about 30 days from the time of filing the stipulation of settled issues for this to occur, though continuances sometimes occur when something causes a delay.
The Dollarhides entered into a stipulation of settled issues in their Tax Court case. After doing so, they declined to sign a decision document. This sounds similar to what happened in the Dorchester Industries case, the seminal Tax Court case regarding the binding nature of certain agreements. When the Dollarhides declined to sign the decision document, the IRS moved to enforce the settlement agreement and the Tax Court agreed with the IRS.
The Dollarhides appealed the enforcement and the 9th Circuit reviewed the decision for abuse of discretion. The 9th Circuit found:
The Stipulation of Settled Issues, on which the Tax Court’s order granting the IRS’s motion for entry of decision is premised, says nothing about the key issue in this case: whether the Dollarhides were barred by the statute of limitations set out in 26 U.S.C. § 6511(b)(2) from receiving a refund for tax year 2006. The Dollarhides contested application of the statute of limitations bar in the Tax Court and continue to do so on appeal.
The Commissioner now concedes that there was no conclusive settlement agreement between the parties with respect to whether the Dollarhides were due a refund for tax year 2006. Because there was no settlement agreement between the parties with respect to this disputed issue, it was an abuse of discretion for the Tax Court to grant the Commissioner’s motion and enter a judgment enforcing the parties’ purported settlement of this issue. See Bail Bonds, 820 F.2d at 1547. We thus vacate and remand on this ground and do not reach the Dollarhides’ remaining arguments on appeal.
This is a somewhat shocking result that both the IRS and the Tax Court would miss the fact that a major piece of the settlement of the case was missing. Since the IRS conceded that this piece was missing, we do not get an opinion from the 9th Circuit that parses the language of the settlement.
While it’s possible to give the Tax Court a stipulation of settled issues that does not settle all of the issues in a case, when the parties do that they usually make it clear that the stipulation is in partial settlement of the case and does not resolve all issues. I would have expected the parties to do that here and cannot say why the stipulation would have left the IRS and the Court with the impression that everything was settled.
Certainly, one lesson here is to make clear in submitting the stipulation of settled issues what issues, if any, are reserved by the parties. Here, the Dollarhides avoid having the settlement foreclose them from making the refund argument but on appeal they faced the daunting task of overcoming an abuse of discretion standard. Another lesson is that the possibility exists to challenge a decision based on a stipulation of settled issues. In most cases taxpayers will lose, but the Dollarhide case shows that success is possible.
The Tax Court case was filed in 2012. The stipulation of settled issues was filed in May 2016, when the case was set for trial in San Diego. The decision was entered in March 2018. In it, Judge Holmes explained:
“Neither party objects to the computation of the Dollarhides’ tax liability in this case — which is for the Dollarhides’ 2006 tax year — and the IRS concedes the penalties. But the Dollarhides want credit for payments — payments so much larger than their liability that they should get a big refund. But there’s a problem: The payments were mostly in the form of withholding from the Dollarhides’ pay back in 2006, plus a substantial amount of excess Social Security tax. The Internal Revenue Code says that money that is withheld from taxpayers’ pay and excess Social Security tax does count toward their income-tax debt, and is treated as being paid all at once on the due date of the return, see I.R.C. § 6513(b). This means that the Dollarhides are treated as having paid more than $47,000 in April 2007, when they should have filed their return. But the Dollarhides didn’t file their 2006 return until February 3, 2011, and it was only on that return that they reported the big withholding and excess Social Security credits.
“In tax law, filing a return that shows credits that are larger than the tax owed means the return is also a claim for a refund of that excess amount. The problem here is that the Dollarhides were claiming a refund more than three years after the Code says they are treated as having been paid. (February 3, 2011 is almost four years after April 2007.) Section 6511(b)(2) of the Code says that they have only three years to claim this refund. They don’t have to pay the actual tax they owe twice, but this Court cannot legally require the IRS to refund the excess amount that they paid because of this three-year time limit.”
Apparently the taxpayers wanted the refund applied to taxes owed for other years, including 2007 in a related case.
What happens when a stipulated settlement does not address an issue, but there is then a judicial determination of it? Why could the 9th Circuit ignore Judge Holmes’ opinion? Are the taxpayers allowed to claim, “We wouldn’t have agreed to that other stuff if you had told us you weren’t agreeing to this”?