T.C. Memo. 2003-41
UNITED STATES TAX COURT
ESTATE OF LUCILLE ABBOTT SEXTON, DECEASED, ANN SEXTON
PETERSON, EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 19418-98, 3076-99. Filed February 24, 2003.
Robert Patrick Sticht, for petitioner.
Elaine T. Fuller, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: These consolidated cases1 were closed by the
Court based on stipulated decisions executed by the parties on
January 23, 2001. On April 23, 2001, the estate’s motions to
vacate decisions were filed, alleging a conflict of interest on
1
Both cases involve the same estate, one concerning estate
tax and the other gift tax.
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the part of the attorney who represented the estate and executed
the decisions as the estate’s legal representative. In
particular, the estate, which is represented by new counsel,
contends that its former counsel had a conflict of interest
because he was employed by respondent concerning a different case
at the same time he was representing the estate and executed the
agreed decision documents. Respondent contends that the
circumstances we consider do not warrant the vacating of the
decisions.
FINDINGS OF FACT2
Lucille Abbott Sexton (decedent) died on June 21, 1994. A
Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return, was timely filed. The estate did not report any
taxable gifts or any debt owed to decedent by decedent’s daughter
(Ann Peterson), son-in-law (Bruce Peterson), or their partnership
(Peterson Properties). Further, it was contended by the estate
that decedent had a 20-percent interest in the partnership and
that she owed the partnership $200,000, as evidenced by an
unsecured note. The $200,000 note was claimed as a debt of
decedent on the estate tax return.
During February 1996, respondent notified the estate that it
was to be examined and the estate retained, as its
2
The parties’ stipulation of facts is incorporated by this
reference.
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representative, the accountant who prepared its estate tax
return. On September 16, 1996, respondent sent the estate’s
accountant a discussion draft of a proposed Form 1273, Report of
Estate Tax Examination Changes, reflecting a $472,143 increase in
estate tax.
The estate hired Attorney Dennis G. Harkavy to represent it
and to address the discussion draft received from respondent.
Mr. Harkavy’s engagement to represent the estate was reduced to
writing in the form of a letter dated October 25, 1996.
Respondent issued a 30-day letter on October 1, 1997, proposing
to increase the estate tax from the $68,894 reported to $415,868.
On October 9, 1997, respondent received Mr. Harkavy’s letter
seeking to protest the findings of the 30-day letter and
requesting a conference with Appeals. A decision was made by
Appeals not to extend a conference to the estate, and the matter
was referred for issuance of a notice of deficiency. Notices of
deficiency were issued to the estate for estate tax and gift tax.
The estate tax deficiency was based upon the determination
that transfers totaling $930,350 from decedent to her daughter
(Mrs. Peterson), son-in-law (Mr. Peterson), and Peterson
Properties (partnership) were taxable gifts. Respondent also
disallowed a $200,000 claimed reduction from the gross estate for
the $200,000 unsecured note to the partnership. Harkavy executed
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petitions and caused them to be filed with this Court on behalf
of the estate.
Mrs. Peterson had informed Mr. Harkavy that the $200,000
unsecured note payable to the partnership and reported in the
estate tax return represented the decedent’s obligation to make a
capital contribution to acquire a 20-percent interest in the
partnership. Although Mr. Harkavy did not believe that the
$200,000 deduction would be sustained, he advanced that item on
the estate’s behalf with respondent. In response to respondent’s
counsel during settlement discussions, Mr. Harkavy conceded the
$200,000 disallowance of the unsecured note and the resulting
adjustment.
The gift tax deficiencies were based on respondent’s
determinations that checks in the amounts of $120,000 for 1994,
$281,100 for 1993, $303,400 for 1992, and $225,850 for 1991 were
all taxable gifts made to the partnership. The estate petitioned
this Court with respect to the estate and gift tax notices of
deficiency, and both cases were answered by respondent and placed
in issue.
The estate did not express or argue the position that the
$930,350 in checks given by decedent to the partnership during
the last 3 years of her life, were contributions to capital.3
3
If the estate’s motion is granted, the estate intends to
argue that the $930,350 was a contribution to the partnership’s
capital.
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The Appeals officer proposed a settlement in which the gross
estate would be reduced by 25 percent ($232,587) of the $930,350
adjustment. After the Appeals office closed the estate’s cases
as being “unagreed”, respondent’s counsel, Jack Klinghoffer, and
Mr. Harkavy conferred regarding the cases. Mr. Klinghoffer,
during December 1999, sent tax computations which reflected the
settlement offer made by the Appeals officer, with an additional
$16,000 allowance for administrative expenses. Mr. Harkavy
conveyed the offer to the Petersons and during January 2000, Mr.
Harkavy wrote to Mr. Klinghoffer and rejected the December offer
to settle.
Thereafter, the estate began preparation for trial and
during a July 2000 meeting with Mrs. Peterson, Mr. Harkavy
informed her that he was “doing some work with the IRS”. Mr.
Harkavy did not disclose the specifics of his work with the
Internal Revenue Service (IRS). Mrs. Peterson, based on the
above explanation, did not understand that Mr. Harkavy was
employed by respondent as a consultant or expert witness in
another case. If Mrs. Peterson had known that Mr. Harkavy was
employed by respondent at the same time that he was representing
the estate, she would have terminated his representation of the
estate.
These consolidated cases were scheduled for the October 16,
2000, Los Angeles trial session. After the Court received the
parties’ trial memoranda, a conference call was initiated with
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the parties’ attorneys. During the conference call, the trial
Judge expressed a generally unfavorable view of the estate’s
position in these cases. After the call, Mr. Harkavy contacted
Mrs. Peterson concerning the conference call and explained that
the Judge had a negative view of the estate’s position. Mr.
Harkavy recommended to Mrs. Peterson that they should attempt to
reinstate the December 1999 settlement offer. Mrs. Peterson
agreed to that course of action based on her belief that “the
Judge had already made up his mind”.4
Mr. Harkavy contacted Mr. Klinghoffer and inquired whether
settlement was still possible. Mrs. Peterson was contacted by
Mr. Harkavy at approximately noon on October 3, 2000, and was
advised that negotiations were ongoing and that a final decision
would have to be made by 5:00 p.m. that same day. Prior to that
time, Mrs. Peterson had learned that the estate’s accountant was
being called as a favorable witness for respondent. Mrs.
Peterson contacted her accountant on October 3, 2000, to garner
his support for the estate’s position, but he refused.
Ultimately, on October 3, 2000, Mrs. Peterson called Mr.
Harkavy’s office and agreed to the settlement, which ended up
being the same as the offer made by Appeals during December 1999.
The terms of the settlement agreement were embodied in a
Stipulation of Agreed Issues and signed by Mr. Harkavy on October
4
The pretrial Judge is a different Judge from the one who
is considering the estate’s motions.
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5, 2000, and, ultimately, reflected in agreed or stipulated
decision documents signed by the parties’ attorneys and filed
with the Court on January 23, 2001.
Mr. Harkavy was employed by respondent on September 29,
1998, to help determine the rights of a partnership in connection
with agreements executed with the Community Redevelopment
Agency’s construction of a 73-story office building in downtown
Los Angeles. Lorene Sams is a contracting officer employed by
respondent, in part, to facilitate the contracting for and
procurement of expert witnesses. Ms. Sams was requested by her
manager in the Appeals Office to hire an expert in a case
commonly known as the “McGuire Partners” case. Ms. Sams prepared
a statement of work and contacted the Los Angeles County Bar
Association referral service to obtain a list of attorneys with
expertise in the legal question in the McGuire Partners case.
She received a list of 6 to 10 attorneys from the bar
association, which included Mr. Harkavy’s name. The request for
bids issued by respondent included the following statement of
work:
1. The Contractor shall travel to the Taxpayer
Representative’s office in Los Angeles, CA. While
there, the Contractor shall peruse documents relating
to the series of transactions described and shall
determine which documents the Contractor requires to
review. The Contractor shall notify the IRS, in
writing, outlining the specific documents which the
Contractor’s [sic] requires copies of. The IRS will
request copies of these documents and provide copies to
the Contractor within 5 weeks after date of notification.
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2. The Contractor shall review all documents relating
to the series of transactions described above to
determine:
(1) exactly what rights were purchased;
(2) whether these rights remain even after the
life of the building has expired; and
(3) the useful life of these rights
3. The Contractor shall convey the results of its
review, research and analysis in a written narrative
appraisal report, with adequate supporting
documentation to enable the reader to follow the
thought process throughout the entire report, and
arrive at the logical conclusion.
OPTIONAL LINE ITEM:
4. At the option of the Government, the Contractor may
be required to provide up to (8) hours of consultation
time and travel to the Los Angeles area to attend a
closing conference with IRS personnel and taxpayer
representatives to discuss the findings. At this
conference, the Contractor shall interface with
taxpayer experts in discussing this issue.
5. At the option of the Government, the Contractor may
be contacted to provide any appropriate pre-trial
preparation and trial testimony in U.S. Tax Court.
Mr. Harkavy made a Contract Proposal with respect to the
request for bids, which added the following services to those set
forth in the request for bids:
4. Research underlying Code Sections, Regulations and
Court Cases. Research should initially concentrate on
the threshold questions of whether air rights, FARs,
and TDRs are solely allocable to land, and therefore
not depreciable, or alternatively, an allocation should
be made between land and improvements. If an
allocation is required, the criteria for this
allocation must be established.
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In selecting Mr. Harkavy, Ms. Sams considered cost,
experience in the specialty, and potential to serve as an expert
witness. Ms. Sams did not perform a conflicts analysis to
determine if a potential for conflict of interest existed. She
was unaware that Mr. Harkavy had a power of attorney on file with
respect to his representation of the Sexton estate. Under the
contract, Mr. Harkavy’s charge was to determine the rights of a
partnership in connection with certain agreements. He was not
hired by respondent to represent respondent’s interests as
counsel in the McGuire Partners case. Mr. Harkavy’s involvement
in the McGuire Partners case was concurrent with his
representation of the Sexton estate in these consolidated cases.
Mr. Harkavy did mention to respondent’s Appeals officer in these
consolidated cases that he had been hired as an expert witness by
respondent in an income tax case.
In connection with his consulting position on the McGuire
Partners matter, Mr. Harkavy consulted and corresponded with the
Appeals officer assigned to that matter. He also had
communications with the Chief of Appeals and a disclosure officer
in respondent’s office. Mr. Harkavy entered into a nondisclosure
agreement with respect to the taxpayer information he was exposed
to regarding the McGuire Partners case.
While Mr. Harkavy was representing the estate, respondent’s
attorney, Mr. Klinghoffer, became aware of Mr. Harkavy’s
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consulting position with respondent and that Mr. Harkavy had
prepared an expert witness report for Appeals. An attorney in
Mr. Klinghoffer’s office, who was handling the McGuire Partners
case, asked Mr. Klinghoffer about Mr. Harkavy. Mr. Klinghoffer
explained that Mr. Harkavy was “doing a very good job for his
client.” After becoming aware that Mr. Harkavy had been hired as
an expert witness for respondent, Mr. Klinghoffer inquired of Mr.
Harkavy whether he had informed the estate of his employment.
Mr. Harkavy told Mr. Klinghoffer that he had informed the client.
Respondent’s attorney on the McGuire Partners case decided not to
use Mr. Harkavy as an expert witness, and a different attorney
was hired as an expert. Respondent’s attorney’s reason for not
using Mr. Harkavy had nothing to do with the fact that Mr.
Harkavy represented the estate or with whether he may have had a
conflict of interest.
Mr. Harkavy did not believe that he had a conflict of
interest in representing the estate at the same time he performed
consulting work with respondent. He completed the first part of
his consulting contract on or before February 1999, and his
active consulting work ended approximately July 1999, almost 6
months before the December 1999 settlement was rejected and more
than a year before Mr. Harkavy executed the stipulation decision
in this case. Mr. Harkavy submitted his final invoice to
respondent for the consulting on August 16, 1999. Mr. Harkavy’s
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fees under his consulting contract totaled $18,250--$2,000 of
which was for his attendance at the optional closing conference
between respondent’s personnel and the taxpayer’s representative
in the McGuire Partners case. Mr. Harkavy was not requested to
testify as an expert witness in connection with his opinion on
the McGuire Partners case.
OPINION
In this case, the estate sought leave to move to vacate
decisions entered by the Court based on an agreement of the
parties. In that regard, the estate’s motions were filed after
the 30-day period permitted for moving to vacate a decision
without leave of the Court under Rule 162.5 The Court permitted
the estate’s motions to vacate to be filed on the 90th day from
the entry of decision. Accordingly, regardless of whether the
parties stipulated the decisions or whether the agreed decision
had been approved and entered by the Court, it had not become
final within the meaning of section 7481.
The estate contends that the decisions are flawed and should
be vacated because the estate’s representative had a conflict of
interest and because the estate, if permitted to litigate, would
be successful in substantially reducing the estate tax deficiency
5
Unless specified otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code in effect for the
period under consideration.
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to which it had agreed. Respondent contends that the parties
entered into a valid agreement and the circumstances of this case
do not warrant the setting aside of that agreement.
The estate was represented by an attorney, who was serving
as a consultant for respondent on another case. The estate
contends that Mr. Harkavy was representing the IRS at the same
time he was representing the estate. We have found that the two
cases were unrelated and that Mr. Harkavy did not “represent”
respondent in the unrelated case. In particular, Mr. Harkavy
provided an opinion as to the rights of a partnership under
agreements executed with the Community Redevelopment Agency
regarding the construction of a 73-story office building.
The estate contends that Mr. Harkavy’s relationship with
respondent was in violation of model rule 1.7 of the Model Rules
of Professional Conduct (ABA 2003). Model rule 1.7(a) generally
provides that “a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest.” In
particular, the estate relies on subpart (1) of model rule
1.7(a), which provides that a conflict exists if “the
representation of one client will be directly adverse to another
client”. Under that provision, a conflict occurs only where the
representation of clients is directly adverse.
While Mr. Harkavy had an attorney/client relationship with
the executor and estate, he did not have an attorney/client
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relationship with respondent. The American Bar Association
Standing Committee on Ethics and Professional Responsibility, in
Formal Opinion 97-407, at 1101:134 (1997), provided the following
guidance:
A lawyer who is employed to testify about requirements
of law or standards of legal practice, for example,
acts like any non-lawyer expert witness. The
testifying expert provides evidence that lies within
his special knowledge by reason of training and
experience and has a duty to provide the court, on
behalf of the other law firm and its client, truthful
and accurate information. To be sure, the testifying
expert may review selected discovery materials, suggest
factual support for his expected testimony and exchange
with the law firm legal authority applicable to his
testimony. The testifying expert also may help the law
firm to define potential areas for further inquiry, and
he is expected to present his testimony in the most
favorable way to support the law firm’s side of the
case. He nevertheless is presented as objective and
must provide opinions adverse to the party for whom he
expects to testify if frankness so dictates.
This formal opinion makes a distinction between an attorney’s
representation or advocacy of a client’s interests and an
attorney’s role as a consultant or expert witness.
The estate has argued that doing legal research and
providing legal opinions is the type of work that attorneys
usually perform for clients. The distinction made by respondent,
however, is that Mr. Harkavy did not represent the interests of
the IRS. Under that interpretation, Mr. Harkavy’s contractual
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relationship with the IRS would not rise to the level of an
attorney/client relationship and model rule 1.7(a)(1) might not
apply.6
The estate also argued that model rule 1.7(a)(2) applied.
That rule provides that a conflict of interest exists if
there is a significant risk that the representation of
one or more clients will be materially limited by the
lawyer’s responsibilities to another client, a former
client or a third person or by a personal interest of
the lawyer.
This rule is, in some respects, more inclusive than model rule
1.7(a)(1).7 However, we need not and do not decide whether Mr.
Harkavy committed a violation of paragraph (a)(1) or (a)(2) in
model rule 1.7. Even assuming arguendo that a conflict of
interest did arise under these rules, we must consider the
effect, if any, it had on Mr. Harkavy’s representation of the
estate.
6
Mrs. Peterson testified that, as executor of the estate,
if she had become aware that Mr. Harkavy had been working for
respondent at the same time he was representing the estate, she
would have terminated the relationship. While we appreciate Mrs.
Peterson’s sentiment, by itself, it is not a reason for vacating
an agreed decision.
7
With respect to its conflict argument, the estate also
argued that Mr. Harkavy should have made full disclosure of his
relationship with respondent and obtained the estate’s consent to
same as required in model rule 1.7(b). In that regard, Mr.
Harkavy testified that he had informed Mrs. Peterson of his
involvement with the Internal Revenue Service (IRS). There is
disagreement about whether Mrs. Peterson understood that Mr.
Harkavy was employed by the IRS.
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In that regard, the estate relied on Wilson v. Commissioner,
500 F.2d 645 (2d Cir. 1974), where the Court of Appeals for the
Second Circuit reversed and remanded this Court’s denial of a
motion to vacate. The Court of Appeals found that the taxpayer
in that case was not properly represented and held there was a
direct adverse relationship between the taxpayer and her attorney
resulting in a conflict of interest. Id. at 648. Accordingly,
for Wilson v. Commissioner, supra to apply we would have to find
that there was a conflict and that the estate was not properly
represented. Even if it were shown that Mr. Harkavy had a
conflict of interest, that showing, by itself, would not require
the vacating or disregarding of the agreed decision document.
The Supreme Court in United States v. Armour & Co., 402 U.S.
673, 681-682 (1971) made the following observation concerning
consent decrees:
Consent decrees are entered into by parties to a
case after careful negotiation has produced agreement
on their precise terms. The parties waive their right
to litigate the issues involved in the case and thus
save themselves the time, expense, and inevitable risk
of litigation. Naturally, the agreement reached
normally embodies a compromise; in exchange for the
saving of cost and elimination of risk, the parties
each give up something they might have won had they
proceeded with the litigation. Thus the decree itself
cannot be said to have a purpose; rather the parties
have purposes, generally opposed to each other, and the
resultant decree embodies as much of those opposing
purposes as the respective parties have the bargaining
power and skill to achieve. For these reasons, the
scope of a consent decree must be discerned within its
four corners, and not by reference to what might
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satisfy the purposes of one of the parties to it. * *
* [Fn. ref. omitted.]
Moreover, “a compromise is a contract and thus is a proper
subject of judicial interpretation as to its meaning, in the
light of the language used and the circumstances surrounding its
execution.” Robbins Tire & Rubber Co. v. Commissioner, 52 T.C.
420, 435-436 (1969) (and cases cited therein).
The estate argues that if permitted to proceed to trial it
could show that the $929,350 in payments (25 percent of which was
conceded by respondent in the settlement) were really “disguised
capital contributions to the partnership” and not subject to the
estate or gift tax. The estate further alleges that if Mr.
Harkavy was an “independent counsel” he would have advised the
estate of several legal positions that might have resulted in the
estate’s complete success on the $929,350 issue.
At the time the executor agreed to the settlement with
respondent, she was confronted with the following factors: (1)
Her attorney (Mr. Harkavy) advised that the trial Judge had
expressed a negative view of the estate’s position; (2) the
estate’s accountant was being called as a favorable witness for
respondent; (3) Mrs. Peterson contacted her own accountant but he
would not provide support for the estate’s position; and (4) Mr.
Harkavy’s doubts about the estate’s position and chances of
success.
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After the settlement, the estate, under the guidance of a
new attorney, wishes to advance a theory that the $929,350 was a
nontaxable capital contribution--a theory that was not advanced,
prior to the settlement, on the estate tax return, by the
estate’s accountant or by the estate’s attorney. The estate, on
brief, has also provided several legal theories that it believes
show it would be successful if the agreed decision were vacated
and it were allowed to proceed to trial.
In terms of a judgment entered by consent of the parties,
“the parties are held to their agreement without regard to
whether the judgment is correct on the merits.” Stamm Intl.
Corp. v. Commissioner, 90 T.C. 315, 322 (and cases cited
therein). We note that in Stamm this Court enforced a settlement
of the issues in which the amount of tax had not yet been
calculated or reduced to a decision document. In that case, the
Government sought to be relieved from the settlement agreement
because of its unilateral error about the amount of tax resulting
from the settlement agreement. In holding that the Government
would not be relieved from its agreement, we explained that the
standards for vacating a settlement agreement are “akin to those
involved in vacating a judgment entered by consent.” Id. at 322;
see also Quinones v. Commissioner, T.C. Memo. 1988-269. (The
Government was not relieved from its stipulated
decision even though it was believed by the Government that it
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had charged the wrong person with certain illegal income.)
Accordingly, the merits of the estate’s position (whether or
not it was advanced prior to the settlement) are not a
dispositive consideration in attempting to decide whether we
should grant the estate’s motions to vacate the decisions that
have been entered in accord with the parties’ agreement.
Generally, this Court has not set aside a decision entered
by the parties’ consent “Absent a showing of lack of formal
consent, fraud, mistake, or some similar ground”. Dorchester
Indus. Inc. v. Commissioner, 108 T.C. 320, 335 (1977).
Assuming arguendo that there was a conflict of interest
connected with Mr. Harkavy’s representation of the estate, in
order to vacate the parties’ agreed decisions we would also have
to find that the estate was not properly represented. We have
carefully considered the testimony of Mr. Harkavy, Mr.
Klinghoffer, Mrs. Peterson, and the other individuals involved,
and there is no credible evidence that Mr. Harkavy failed to
properly represent the estate. In addition, there is no evidence
that Mr. Harkavy’s employment by IRS was related to or had any
effect upon his representation of the estate or that it deterred
him from making any of the arguments that the estate wishes to
raise for the first time now. This case is distinguishable from
Wilson v. Commissioner, supra, where the Court of Appeals for the
Second Circuit found it probable that independent counsel would
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have done something differently. Accordingly, there is no
compelling reason to vacate the agreed decisions that have
already been accepted and entered by this Court.
To reflect the foregoing,
An order will be issued
denying the estate’s motions
to vacate.