Drake v. Commissioner

United States Court of Appeals
For the First Circuit

No. 06-2507

GREGORY DRAKE,

Petitioner, Appellant,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent, Appellee.

ON APPEAL FROM A DECISION OF THE UNITED STATES TAX COURT

Before

Boudin, Chief Judge,

Torruella, Circuit Judge,

and Schwarzer,* Senior District Judge.

Timothy J. Burke with whom Burke & Associates was on brief for
petitioner, appellant.
Rachel I. Wollitzer, Tax Division, Department of Justice, with
whom Eileen J. O'Connor, Assistant Attorney General, and Kenneth L.
Greene, Tax Division, Department of Justice, were on brief for
respondent, appellee.

December 20, 2007

*
Of the Northern District of California, sitting by
designation.
 BOUDIN, Chief Judge. Gregory Drake's decade-long battle

with the IRS is recounted in rich detail in the Tax Court's

decision. Drake v. Comm'r, 92 T.C.M. (CCH) 37 (2006) ("Drake II").

The present phase began when the IRS Appeals Office on November 10,

2003, upheld an IRS proposed tax levy. On appeal, the Tax Court

remanded, finding that Drake's initial hearing was tainted by

improper ex parte communications between an IRS insolvency unit

advisor and the settlement officer handling Drake's case. Drake v.

Comm'r, 125 T.C. 201, 210 (2005) ("Drake I").

A second hearing occurred before a new IRS appeals

officer on November 4, 2005. At that time Timothy Burke, Drake's

counsel, and two IRS agents discussed settlement, and Drake

submitted a compromise offer on November 14. Drake then filed a

motion for his attorney's fees incurred in relation to the first

hearing. In the same month, the IRS imposed a jeopardy levy--which

it may do subject to a hearing "within a reasonable period of time

after the levy"--on the proceeds of a 1997 bankruptcy sale of

Drake's house, comprising around $150,000 held in brokerage

accounts in the names of Drake's sons. 26 U.S.C. § 6330(f) (2000).

Throughout December 2005, the parties continued

settlement discussions. By letter on December 20, 2005, the IRS

made a detailed global settlement offer, seeking to resolve all

outstanding issues involving Drake, his wife Barbara, and his two

sons; the sons' involvement turned on their control of the sale-of-

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house proceeds. Drake was given until December 28 to accept the

offer, and when he failed to do so, the IRS informed him that the

offer was no longer available.

Nevertheless, Burke had a conference call with IRS

counsel on January 6, 2006, after which the IRS sent Burke a set of

settlement documents with a letter stating:

Pursuant to our conversation of this date, we
are enclosing the original and two copies of a
Decision document in the above-referenced
case. The original and one copy should be
signed, dated, and returned to this office for
filing with the Tax Court.

The documents were to be signed by Burke and Drake's sons.1

Neither Burke nor Drake's sons signed and returned the settlement

documents.

On January 13, 2006, the IRS sent a letter to Burke

stating that "[a]s of this date, the terms of the settlement have

not been accepted by your client and related parties. . . . We are

hereby withdrawing the proposed January 6, 2006 settlement . . . ."

Burke responded, taking the position that the parties had agreed to

settle "on the terms reflected in the December 20, 2005 letter. .

. . It is the taxpayers' position that the Service breached the

1
The documents were waivers on behalf of Drake's sons, to be
executed by Burke; memoranda from Drake's sons to Citigroup
instructing Citigroup to transfer the assets in their brokerage
accounts to the IRS; and a stipulation to be filed with the Tax
Court indicating that the dispute would be resolved according to
the terms of the IRS's December 20 letter.

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parties agreement on January 13, 2006 by way of its letter of that

date."

The IRS also considered Burke's proposal as an offer-in-

compromise. Burke's proposal included the same terms as the

January 6 settlement offer except that he reserved the right to

seek attorney's fees. In a March 13, 2006, notice of

determination, the IRS rejected that offer while upholding the

jeopardy levy and the IRS's collection action.

Drake challenged the second notice of determination, and

on July 24, 2006, the Tax Court issued a new decision which is now

before us on appeal. It found no procedural defects in Drake's

second collection hearing and no final settlement between the

parties barring the IRS from its full assessment; it also ruled

that the IRS had not abused its discretion in imposing a jeopardy

levy and in rejecting Drake's offer-in-compromise, and that Drake

was not entitled to attorney's fees. Drake now appeals.

Our review of the Tax Court's decision is in most

respects similar to our review of district court decisions: factual

findings for clear error and legal rulings de novo. Interex, Inc.

v. Comm'r, 321 F.3d 55, 58 (1st Cir. 2003); Kinan v. Cohen, 268

F.3d 27, 32 (1st Cir. 2001). As to the IRS's rejection of Drake's

offer-in-compromise and its imposition of the jeopardy levy, review

turns on whether the IRS abused its discretion. Murphy v. Comm'r,

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469 F.3d 27, 32 (1st Cir. 2006); Olsen v. United States, 414 F.3d

144, 150 (1st Cir. 2005).

Drake's most promising argument is his claim to have

reached a binding settlement agreement with the IRS on January 6,

2006. Drake claims that his attorney asked the IRS attorney

whether the December 20 offer was still open, the IRS attorney said

yes, and Drake's attorney accepted the offer, thereby binding the

IRS. Curiously, this specific narrative is contained in Drake's

brief but not in Burke's terse affidavit, which merely describes

the fact and length of the conversation.2

Without filing any affidavits, the IRS said that the

offer was the January 6 letter sent to Burke, and that Burke's

failure to return the settlement documents, or otherwise respond to

the letter, constituted a failure to accept the offer which was

then withdrawn. The Tax Court assumed only that Burke had on

January 6 told the IRS counsel that Drake and his wife wanted to go

forward with the settlement on the terms earlier proposed and that

the IRS then sent on the documents. As neither side seeks an

2
The narrative was not even contained in Drake's motion to
compel settlement before the Tax Court. In that motion--to which
no affidavit was attached--Drake claimed only that during the
January 6 conference call Burke told the IRS that its settlement
offer "had been accepted" by the Drakes. The Tax Court
understandably concluded that Burke's purported acceptance of the
settlement offer was ineffective, as the earlier offer had lapsed.
Drake put forth the more detailed narrative only later in his
motion to vacate the Tax Court's decision, claiming that the IRS
renewed its settlement offer during the January 6 phone call, and
Burke accepted that offer.

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evidentiary hearing, we accept the Tax Court's version of the

events.

Was there, then, on this record a binding contract

established as of January 6? Under classic contract principles,

the parties might have intended that a binding agreement be formed

immediately--in which event the IRS would now be bound unless the

Drakes' failure promptly to sign the documents forfeited their

rights. Or the parties could have intended an agreement only after

the terms were reduced to writing and the documents signed--

leaving the IRS (or the Drakes) free to back away.3

There are other possibilities as well. The parties might

have had different understandings or they may not have thought

specifically about what would happen if either side changed its

mind before the contract was signed. In all events, where the

matter is uncertain and no further evidence is furnished as to what

the parties had in mind, courts tend to attribute to the parties

whatever common intention seems most consonant with the objective

facts, looking to "context, inferred purpose and common sense . .

3
See 1 Richard A. Lord, Williston on Contracts § 4:11 (4th ed.
2007) ("[I]t is possible and frequently occurs that the parties
will contemplate reducing their agreement to writing before it will
be considered complete, in which case there is no contract until
the writing is executed."); Restatement (Second) of Contracts § 27
& cmt. b (1981); see also Ciaramella v. Reader's Digest Ass'n, 131
F.3d 320, 322 (2d Cir. 1997) ("[P]arties are free to bind
themselves orally . . . . However, if the parties intend not to be
bound until the agreement is set forth in writing and signed, they
will not be bound until then.").

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. in determining what the parties probably intended or would have

been likely to intend if they had focused on the issue." OneBeacon

Ins. Co. v. Georgia-Pacific Corp., 474 F.3d 6, 8 (1st Cir. 2007);

accord Winston v. Mediafare Entm't Corp., 777 F.2d 78, 80 (2d Cir.

1985).

The Tax Court's conclusion that there was no binding

agreement on January 6 is entitled to deference unless clearly

erroneous. See Salem Laundry Co. v. New Eng. Teamsters & Trucking

Indus., 829 F.2d 278, 280 (1st Cir. 1987). The most telling piece

of objective evidence, which supports the Tax Court, lies in status

reports filed with the court on January 6. The IRS report said

that the parties were still negotiating but "[a]s of this date. .

. have not resolved the outstanding income tax liabilities . . . ."

Burke's report had a more optimistic tone, but did not claim a

definitive agreement.4

Drake now conjectures that the IRS filing was prepared

prior to January 6 and not revised to reflect the January 6

conversation between counsel; but the January 6 telephone

conference was held at 9:56 a.m. and there is no indication that

the IRS filing was made prior the call. The IRS lawyer, filing a

4
Drake's January 6 status report states that "counsel have
undertaken extensive negotiations to resolve the subject matter and
believe that they have achieved a basis for settlement"; that "a
revised Offer in Compromise is . . . to be forwarded for a
determination of processability"; and that "[i]t is expected that
this matter will be resolved within thirty days."

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report before the present disagreement arose and characterizing the

status of the matter "as of this date," certainly had no reason to

mis-describe the state of play.

Drake says that the phrase used in his counsel's status

report--that the parties "believe they have achieved a basis for

settlement"--means a definitive agreement. But while the phrase

can be used in this way, Lewis v. Comm'r, 90 T.C. 1044, 1046

(1988), it can as a matter of language just as easily mean that the

definitive agreement will be the written one. And it is not a

phrase used in this case by the IRS's status report.

Further, while a complex deal can be reached in an oral

conversation, here the global settlement had terms affecting

several different parties, and needed papers to be signed by non-

parties--i.e., the Drakes' two sons--and delivered to non-parties,

namely Citigroup. It would not be surprising to require the

execution and return of the enclosed documents as the final steps

needed to complete the contract.

Indeed, the IRS argues that because the global settlement

involved members of the Drake family who were not party to the Tax

Court proceedings, the agreement actually had to be in writing, see

26 U.S.C. § 7122; 26 C.F.R. § 301.7122-1(d)(1). Whether these

provisions apply under these circumstances may be debatable, Haiduk

v. Comm'r, 60 T.C.M. (CCH) 864 (1990), but either way it makes some

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sense to treat the IRS's request for signed documents as a

precondition to settlement.

Without explanation, Drake failed to return the documents

or otherwise communicate with the IRS for a week before the IRS

revoked the offer. And although Burke continued to insist in

correspondence that an agreement had been reached, Drake waited

until February 22 to inform the Tax Court of the settlement, and

another six weeks before filing a motion to compel settlement.

While none of these facts is dispositive, they tend to confirm that

the Tax Court did not clearly err in finding no contract.

This brings us to Drake's quite separate argument resting

on additional facts. Section 7122 allows the IRS to "compromise

any civil case arising under the internal revenue laws," and

accompanying regulations provide guidance regarding the grounds for

compromise and the procedures for submission and consideration of

offers. 26 U.S.C. § 7122; 26 C.F.R. § 301.7122-1. Drake asserts

that the IRS abused its discretion in refusing to accept an amended

offer-in-compromise reflecting the terms of the December 20

proposal.

Drake initially submitted an offer-in-compromise on

November 14, 2005, proposing to return $75,000--half of the money

in the brokerage accounts. However, Drake failed to submit certain

financial documents that the IRS had requested in the November 4,

2005, hearing, and the IRS postponed any processing of the offer-

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in-compromise. Drake did not thereafter submit the requested

financial information.

After the abortive settlement efforts ended with the

withdrawal of the IRS's January 6 proposal, the IRS informed Drake

by letter on January 19, 2006, that his offer-in-compromise would

be submitted for processing. Thereafter on January 28, 2006, Drake

sent a letter to the IRS amending his offer to reflect the terms of

the December 20, 2005, IRS proposal, modified to reflect Drake's

reservation of the right to seek attorney's fees. On March 13,

2006, the IRS issued a new notice of determination which inter alia

rejected Drake's offer-in-compromise.

In its March 13, 2006, letter, the IRS cited again the

failure to provide the requested financial information. Drake says

that the intervening settlement negotiations obviated that earlier

request and that the IRS in a letter on January 19 stated that it

would notify Drake if any further financial information was

required. The former argument is weak; the latter more helpful to

Drake.

But even if there were some uncertainty as to whether the

IRS still wanted the financial information, it was certainly

resolved by the March 13 letter. There is no indication that Drake

sought to supply it and asked the IRS to revisit the matter based

on Drake's asserted misunderstanding that the information was still

required. This is a sufficient basis to uphold the rejection of

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his offer. Nor would it be easy, in any event, to compel the IRS

to accept an offer it deemed inadequate.

Drake also challenges the IRS's November 22, 2005,

jeopardy levy, imposed upon the proceeds of a 1997 bankruptcy sale

which were given by Drake to his sons and thereafter held in

brokerage accounts in the sons' names. The IRS may impose a pre-

hearing levy where collection of the tax is jeopardized by a

taxpayer's removing an asset from the United States, concealing it,

dissipating it, or transferring it to other persons. 26 U.S.C. §

6330(f); 26 C.F.R. §§ 1.6851-1(a)(ii); 301.6861-1(a).

Drake argues that there was no attempt to conceal or

dissipate the assets; but the transfer is itself sufficient, given

Drake's conduct. On January 24, 2002, he responded "no" to the

question whether he had transferred assets out of his name for less

than actual value. In his initial collection due process hearing,

Drake failed to provide information requested by the IRS Appeals

Officer relating to the whereabouts of the 1997 bankruptcy sale

proceeds.

It was not until early 2005, during testimony in Barbara

Drake's bankruptcy proceedings, that Drake disclosed the

whereabouts of the 1997 bankruptcy sale proceeds, and the IRS

learned that the $150,000 was being held in the sons' names. The

IRS was entitled to find in November 2005 that there was a risk

that Drake was attempting to conceal or dissipate assets by

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transferring them to his sons and by failing on numerous occasions

to disclose that transfer to the IRS. The IRS did not abuse its

discretion in reaching this conclusion.

Drake next argues, in rather cursory fashion, that his

second hearing before the IRS, held after the Tax Court remand, was

tainted by "unlawful activities." To the extent that Drake

contends that the second hearing "of its own accord, has raised

substantial issues," that argument is waived as Drake failed to

specify what "issues" were raised by the second hearing. See Mass.

Sch. of Law at Andover, Inc. v. Am. Bar Ass'n, 142 F.3d 26, 43 (1st

Cir. 1998).

Alternatively, if Drake is arguing that the improper ex

parte communications that infected the first hearing also rendered

the second hearing invalid, his contention is easily rejected. On

remand from the Tax Court, Drake received a new hearing before a

new appeals officer who had received no improper communications.

Nothing suggests that the error that infected the first hearing was

not fully cured by the second hearing.

Finally, Drake requests attorney's fees incurred as a

result of the first failed IRS hearing. In tax-related

administrative or court proceedings "the prevailing party may be

awarded a judgment or a settlement for . . . reasonable litigation

costs," which includes reasonable attorney's fees. 26 U.S.C. §

7430(a)(2), (c)(1)(B)(iii). Section 7430 defines a prevailing

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party as one who has "substantially prevailed with respect to the

amount in controversy, or has substantially prevailed with respect

to the most significant issue or set of issues presented." Id. §

7430(c)(4)(A)(i)(I), (II); 26 C.F.R. § 301.7430-5(a)(2).

The question is whether Drake can be characterized as a

"prevailing party"--despite his defeat in Drake II--because he

secured a remand from the Tax Court in Drake I and then lost in the

remanded proceeding. Although this court has not previously

addressed this issue, the circuits that have all agree that a

prevailing party must prevail in the final outcome of the case.5

Drake ultimately lost on all of his claims and is not entitled to

attorney's fees.

Affirmed.

5
Wilkerson v. United States, 67 F.3d 112, 120 (5th Cir. 1995);
Cassuto v. Comm'r, 936 F.2d 736, 741 (2d Cir. 1991); see also
Swietlowich v. Bucks County, 620 F.2d 33, 34 (3d Cir. 1980)
(similar outcome in civil rights case).

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