T.C. Memo. 1999-112
UNITED STATES TAX COURT
WALTER S. AND SALLY H. NEWBERN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 3792-87, 12619-90. Filed April 2, 1999.
A. Eugene Lewis, for petitioners.
Judith C. Winkler, for respondent.
MEMORANDUM OPINION
COLVIN, Judge: These cases are before the Court on
petitioners’ second motion to set aside stipulations of settled
issues.
Petitioners contend that their counsel at that time
(petitioners' former counsel) signed stipulations of settled
issues in these cases without their authority. The sole issue
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for decision is whether petitioners are bound by those
stipulations of settled issues. We hold that they are.
The parties and petitioners' former counsel submitted
memoranda and affidavits relating to petitioners' motion. We
decide the motion on the basis of those memoranda and affidavits.
Neither petitioners, nor their former counsel, nor respondent
requested a hearing to decide this motion.
Section references are to the Internal Revenue Code of 1986.
Unless otherwise indicated, Rule references are to the Tax Court
Rules of Practice and Procedure. References to Mr. and Mrs.
Newbern are to Walter and Sally Newbern.
Background
1. Settlement of Petitioners' Tax Court Case
Petitioners claimed flow-through deductions based on their
interest in the Vanguard Oil Technology partnership, which were
disallowed by a notice of deficiency dated November 24, 1986.
Petitioners filed a petition on February 13, 1987, in docket No.
3792-87. Petitioners retained Declan J. O'Donnell (O'Donnell) in
June 1987 on the recommendation of the Vanguard Oil Technology
partnership. O'Donnell signed and filed petitioners' petition in
docket No. 12619-90, and he filed an entry of appearance in the
case at docket No. 3792-87 on September 14, 1992. In 1994, he
signed and filed amendments to the petitions in both of these
cases which alleged that Mrs. Newbern was an innocent spouse.
Signature of counsel on a petition is a representation that
counsel is authorized to represent a taxpayer. Rule 33(b).
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Several times in fall 1994, O'Donnell and other lawyers in
O'Donnell's law firm discussed with Mr. Newbern the possibility
of settling petitioners' cases. On January 31, 1995, O'Donnell
and respondent's counsel signed stipulations of settled issues in
these cases which resolved issues concerning Vanguard Oil
Technology's investment in the Elektra Hemisphere tax shelter for
1981 and 1982. O'Donnell promptly notified petitioners in
writing of the settlements. Petitioners knew the terms of the
settlements in February 1995. At a time not specified in the
record after he signed the stipulations of settled issues,
O'Donnell asked petitioners to ratify the stipulations in
writing. They did not do so. Petitioners retained new counsel
for these cases on November 17, 1995. O'Donnell withdrew as
petitioners' counsel on December 10, 1996.
2. Petitioners' Motion To Set Aside the Settlements
Petitioners filed a motion to set aside the stipulations of
settled issues on March 3, 1997, which was more than 2 years
after O'Donnell told petitioners the terms of the settlements.
We denied petitioners' motion because the consistent settlement
procedures of section 6224 apply only to partnership taxable
years beginning after September 3, 1982, and thus do not apply to
Elektra Hemisphere's 1981 and 1982 tax years. Estate of Campion
v. Commissioner, 110 T.C. 165 (1998). We also decided that
respondent had not committed fraud on the Court and that
petitioners were bound by the settlements with respect to the
Elektra Hemisphere partnership issues. We permitted petitioners
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to file a second motion to set aside the stipulations of settled
issues in which they could assert that O'Donnell lacked authority
to settle the partnership issues.
Discussion
1. Position of Petitioners, O'Donnell, and Respondent
Petitioners contend that O'Donnell did not have authority to
sign the stipulations of settled issues and that Mr. Newbern did
not intend to settle these cases on the basis stipulated. Mr.
Newbern asserts that he authorized O'Donnell in November 1994 to
concede petitioners' claim that Mrs. Newbern was an innocent
spouse but not to concede or settle the partnership issues.
O'Donnell had no written authority from petitioners to
settle the cases, but he stated in his affidavit that he
remembers that he felt comfortable signing the stipulations of
settlement based on a telephone conversation he had with
petitioners.
2. Background
Whether an attorney has authority to act on behalf of a
taxpayer is a factual question to be decided according to common
law principles of agency. Dorchester Indus. Inc. v.
Commissioner, 108 T.C. 320, 330-331 (1997); Adams v.
Commissioner, 85 T.C. 359, 369-372 (1985); Kraasch v.
Commissioner, 70 T.C. 623, 627-629 (1978). Generally, a lawyer
may settle a client's claim only if the client expressly
authorizes the lawyer to do so. See Smith v. Washburn & Condon,
297 P. 879, 880 (Ariz. 1931); see also Model Rules of
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Professional Conduct rule 1.2(a). However, prolonged silent
acquiescence by a client with full knowledge of the facts may be
treated as ratification of an unauthorized act or settlement by
his or her lawyer. Thompson v. D.C. Am., Inc., 951 F. Supp. 192,
195-196 (M.D. Ala. 1996) (a settlement agreement negotiated by
the plaintiff's attorney without her authority was treated as
ratified by the plaintiff because she kept settlement proceeds
for more than a year); Yarnall v. Yorkshire Worsted Mills, 87
A.2d 192, 193 (Pa. 1952) (a settlement stipulation executed
without authority by the plaintiff's attorney was treated as
ratified by the plaintiff in part because he waited 20 months to
repudiate the settlement).
Where taxpayers challenge the authority of counsel to act on
their behalf, the burden of proof is on the taxpayers to show
that their counsel lacked authority. Dahl v. Commissioner, T.C.
Memo. 1995-179, affd. per curiam without published opinion 85
F.3d 643 (11th Cir. 1996); Smith v. Commissioner, T.C. Memo.
1990-430.
3. Whether Petitioners Are Bound by the Settlements
Petitioners deny that they authorized O'Donnell to settle.
O'Donnell believed petitioners had authorized him to sign the
stipulations of settled issues. Petitioners have failed to prove
that O'Donnell lacked express authority to settle. However, even
if we did not believe that O'Donnell had express authority to
settle, petitioners impliedly ratified the settlements by failing
to repudiate them for more than 2 years after they knew about
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them. See Mishawaka Properties Co. v. Commissioner, 100 T.C.
353, 366 (1993) (implied ratification); Kraasch v. Commissioner,
supra at 627-628 (taxpayers were bound by a petition filed and
signed in their names; we deemed their conduct after the petition
was filed to be implied ratification since they knew about the
petition and did not disaffirm it); Gaviola v. Commissioner, T.C.
Memo. 1986-349 (Court rejected taxpayer's attempt to withdraw a
stipulation of settlement based on her claim that her attorney
was without authority to represent her because, even if she did
not initially authorize him to represent her, she ratified his
representation during the course of proceedings before the Tax
Court), affd. without published opinion 819 F.2d 1129 (2d Cir.
1987).
For the reasons stated above, we deny petitioners' second
motion to set aside the stipulations of settled issues.
Petitioners are bound by their settlements of the Elektra
Hemisphere partnership issues.
An order will be issued
denying petitioners' second
motion to set aside stipulations
of settled issues.