T.C. Memo. 2005-76
UNITED STATES TAX COURT
JOHANN KEIL AND CATHERINE KEIL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15206-02. Filed April 7, 2005.
In the summer of 2000, Ps, H and W, retained an
attorney, M, to represent them as to their 1993 and
1994 income taxes. W was M’s contact person for Ps,
and W specifically told M at the time of his retention
that he could not accept any settlement that affected
Ps without her consideration and approval of it. On
Dec. 9, 2003, M settled approximately 45 out of 50
issues in the case; M did not first seek or receive the
approval of either P. One day later, M signed and
caused to be filed with the Court a stipulation of
settled issues (first stipulation of settled issues)
that described the terms of this settlement. Neither P
was aware that M had settled these issues nor that he
had filed the first stipulation of settled issues, and
neither P authorized either of these acts. On or
before Dec. 14, 2003, M settled the remaining five
issues, without seeking or receiving the approval of
either P. After the latest settlement, M contacted W
to obtain her acceptance of both settlements without
telling her that he had already accepted them on behalf
- 2 -
of Ps. W declined to accept the settlements. On
Dec. 15, 2003, M called H to attempt to persuade H to
accept the settlements on behalf of Ps, without telling
H that M had already accepted both settlements on
behalf of Ps. H declined to accept the settlements.
Afterwards, through Dec. 17, 2003, M spoke separately
to W and H on a number of occasions in an attempt to
persuade either of them to accept the settlements.
Neither P ever did so. On Jan. 14, 2004, unbeknownst
to Ps, M caused to be filed with the Court a settlement
stipulation that showed Ps’ 1993 and 1994 Federal
income tax liability, as computed on the basis of the
settlements. On Jan. 27, 2004, the Court entered a
stipulated decision that reflected the amounts shown in
the settlement stipulation. In February 2004, Ps moved
the Court to vacate the stipulated decision and to set
aside the related stipulations of settlement. Ps
asserted in their motion that M was unauthorized to
agree to the settlements on their behalf.
Held: The Court shall grant Ps’ motion in that we
find that M was not authorized by Ps to agree to either
settlement on their behalf.
Michael D. Stewart, Ronald A. Feuerstein, Candace M. Van den
Bosch, and Gary H. Kuwada, for petitioners.1
Elliot H. Kajan, for third party in interest Dwight M.
Montgomery.
Karen Nicholson Sommers, for respondent.
1
Dwight M. Montgomery petitioned the Court on behalf of
petitioners and continued to represent them until he withdrew on
Apr. 9, 2004. Ronald A. Feuerstein entered the case on Feb. 25,
2004. Candace M. Van den Bosch and Michael D. Stewart entered
the case on Apr. 28, 2004. A. Lavar Taylor and Robert S.
Horowitz entered the case on June 9, 2004, and withdrew on
July 15, 2004. Gary H. Kuwada entered the case on June 22, 2004.
- 3 -
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioners petitioned the Court to
redetermine deficiencies of $862,621 and $1,528,818 in their
Federal income taxes for 1993 and 1994, respectively, and related
additions thereto totaling $389,285 and $688,169, respectively.
On December 10, 2003, the parties filed with the Court a
stipulation of settled issues (first stipulation of settled
issues) that stated the terms of a settlement (first settlement)
of approximately 45 out of 50 issues in the case. Six days
later, respondent lodged with the Court a second stipulation of
settled issues (second stipulation of settled issues) that
repeated the substance of the first stipulation of settled issues
and stated the terms of a settlement (second settlement) of the
five issues which were not previously settled. On January 14,
2004, the parties filed with the Court a settlement stipulation
that showed petitioners’ income tax liability (inclusive of any
addition thereto) for 1993 and 1994, as computed on the basis of
the first settlement and the second settlement (collectively,
settlements). On January 27, 2004, the Court entered a
stipulated decision that reflected the amounts shown in the
settlement stipulation.
On February 27, 2004, petitioners moved the Court to vacate
the stipulated decision and to set aside the related stipulations
of settlement. Petitioners asserted in their motion that their
- 4 -
former counsel, Dwight M. Montgomery (Montgomery), was
unauthorized to agree to the settlements on their behalf.2
Following an evidentiary hearing on petitioners’ motion, we
decide whether to vacate the stipulated decision and to set aside
the related stipulations of settlement. We hold that we shall.
FINDINGS OF FACT
Some facts were stipulated. We incorporate herein by this
reference the parties’ stipulation of facts and the exhibits
submitted therewith. We find the stipulated facts accordingly.
Petitioners attached certain documents to their opening brief as
an appendix. These documents and the statements therein are not
evidence. We give these documents and statements no
consideration except to the extent that they are duplicative of a
document or statement otherwise in evidence. See Rule 143(b);3
see also Harris v. Commissioner, T.C. Memo. 1998-332 (documents
attached to a brief are not evidence).
Petitioners, husband and wife, resided in San Juan
Capistrano, California, when their petition was filed. During
1993 and 1994, they worked in a business that provided physical,
occupational, and speech therapy services to nursing homes.
2
Although this motion was filed as a motion to vacate the
decision, we understand and treat it as a request by petitioners
to vacate the stipulations of settlement as well.
3
Unless otherwise indicated, section references are to the
Internal Revenue Code applicable to the relevant years. Rule
references are to the Tax Court Rules of Practice and Procedure.
- 5 -
Petitioners’ S corporation, Continuum Health, Inc. (Continuum),
exercised daily management functions and operated the business.
Petitioners’ wholly owned C corporation, Continue Care
Corporation (CCC), processed the business’s payroll. Petitioner
Catherine Keil (Ms. Keil), a licensed physical therapist, handled
the business’s daily operation and finances. Ms. Keil also dealt
with the business’s accountants and lawyers. Petitioner Johann
Keil (Mr. Keil) handled the business’s development and public
relations. Mr. Keil had no involvement in the business’s daily
operation.
In or around 1999, respondent audited petitioners’ personal
1993 and 1994 Federal income tax returns and the related returns
of Continuum and CCC. Through a referral, Ms. Keil met
Montgomery in the summer of 2000, and petitioners and CCC
retained him to handle the audits. Ms. Keil was Montgomery’s
contact person for petitioners as to this representation, and she
informed him at the time of his retention that he could not
accept any settlement as to the case without her consideration
and approval of it. Until December 15, 2004, Montgomery dealt
exclusively with Ms. Keil as to the subject matter of the audits.
His only interaction with Mr. Keil before December 15, 2004, was
that they spoke with each other on several occasions in October
2004 about an unrelated matter concerning a nonprofit foundation.
- 6 -
Montgomery instructed Ms. Keil to forward to him any
tax-related document that she received as to the subject years,
and he told her that he would take care of those documents. On
November 21, 2000, respondent mailed to Ms. Keil a notice of
deficiency determining a $518,939 deficiency in CCC’s 1994
Federal income tax and related additions thereto totaling
$233,522.55. She forwarded that notice to Montgomery, and he
petitioned the Court with respect to it. On July 13, 2001, the
Court dismissed CCC’s case as untimely filed. Montgomery never
told Ms. Keil that CCC’s case was dismissed. Approximately 6
weeks before that dismissal, Montgomery had noted that the
Court’s dismissal of CCC’s case as untimely filed would cost CCC
approximately $1.2 million to litigate its case in a U.S.
District Court.
On June 25, 2002, respondent issued to petitioners the
notice of deficiency as to their 1993 and 1994 Federal income
taxes. As to those respective years, the notice determined
income tax deficiencies of $862,621 and $1,528,818, section
6651(a)(1) additions to tax of $216,761 and $382,405, and section
6662(a) accuracy-related penalties of $172,524 and $305,764. On
or about September 22, 2002, petitioners authorized Montgomery to
petition the Court with respect to this notice. On September 26,
2002, Montgomery filed such a petition with the Court, seeking a
redetermination of unreported income, business expenses, personal
- 7 -
deductions, additions to tax under section 6651(a), and
accuracy-related penalties under section 6662(a). The Court
calendared the resulting case for trial on the Court’s regular 2-
week session in San Diego, California, commencing on October 20,
2003 (regular San Diego session), and notified the parties of
this action on May 22, 2003. Montgomery did not prepare to try
petitioners’ case at the regular San Diego session but assured
Ms. Keil that he would cause the case to be continued until the
spring of 2004. Early in October 2003, Ms. Keil called
Montgomery to ask him about the scheduled trial, and she inquired
into whether he was going to prepare petitioners for it. He
reiterated that he was going to have the case continued, and he
asked Ms. Keil to give him a good reason to continue the case.
He added that the case was not ready to be tried during the
regular San Diego session.
Pursuant to Montgomery’s request, petitioners presented him
with a two-sentence letter from a medical doctor stating that “I
am treating Mr. Keil for an episode of Major Depression. He is
being treated with an antidepressant, Paxil, and cognitive
psychotherapy”. Montgomery attached this letter to a motion for
continuance. In relevant part, he asserted in that motion that
Mr. Keil was suffering from depression and that Mr. Keil was
critical to petitioners’ case because he was more actively
involved with the business’s income and expenses than was Ms.
- 8 -
Keil. Montgomery filed that motion with the Court at the call of
the calendar of the regular San Diego session. The Court denied
this motion and informed the parties’ counsel that petitioners’
case would be tried during the second week of the regular San
Diego session. Montgomery told Ms. Keil that this motion was
denied. He did not tell her that petitioners’ case was set for
trial during the second week of the regular San Diego session.
Near the end of the first week of the regular San Diego
session, the Court concluded that wildfires in the San Diego area
could be dangerous during the remainder of that session. On
October 27, 2003, the Court sua sponte continued the trial of
petitioners’ case to December 16, 2003, and notified the parties
of the same. On November 28, 2003, Montgomery filed with the
Court a motion to continue petitioners’ case from December 16,
2003, asserting that he would be outside the United States on a
family vacation during that time. Montgomery informed Ms. Keil
that this motion would be granted, and she and Mr. Keil made
separate plans to be in the States of Hawaii and Washington,
respectively, over the new trial date. The Court denied
Montgomery’s motion on December 1, 2003. Montgomery never
informed petitioners of this action, and petitioners traveled
pursuant to their plans.
Subsequently, Montgomery and respondent settled all issues
in the case before December 16, 2003. They filed the first
- 9 -
stipulation of settled issues on December 10, 2003, that
reflected their settlement of approximately 45 out of 50 issues.
The first stipulation of settled issues stated that the only
issues remaining in dispute were (1) whether petitioners could
deduct for 1993 contract labor in excess of $463,577, (2) whether
Continuum (and thus petitioners) could deduct business expenses
for 1994 in excess of $871,480, (3) whether petitioners could
deduct for 1994 a stock loss under section 1244 as to Quest
Therapy, Inc. (Quest), (4) whether petitioners were liable for
the section 6662(a) accuracy-related penalty determined by
respondent for 1993, and (5) whether petitioners were liable for
the section 6662(a) accuracy-related penalty determined by
respondent for 1994. Montgomery did not inform either petitioner
that he had agreed to and signed the first stipulation of settled
issues on December 9, 2003, or that he had caused it to be filed
with the Court the next day, nor did either petitioner expressly
authorize him to do any of those acts. On or before Sunday,
December 14, 2003, without seeking or receiving the approval of
either petitioner, Montgomery settled the five remaining issues.
Afterwards on December 14, 2003, Montgomery called Ms. Keil
in Hawaii to obtain her acceptance of the settlements. He told
her that the settlements were a “proposal” that she need not
accept but, if she declined to do so, that petitioners would have
to try their case in the spring of 2004. Ms. Keil did not accept
- 10 -
the “proposal” because she did not understand it. She told
Montgomery that this was so and that she wanted to discuss the
“proposal” with her accountant, Joann Ong Tan (Tan), before
acting on it. Montgomery asked Ms. Keil if he could talk to Mr.
Keil about the “proposal”. Ms. Keil replied that the matter was
between her and Montgomery, and she reminded him that she had to
agree to any settlement on her part. She also told him that she
might not necessarily agree with a settlement accepted by Mr.
Keil. Following this conversation, Montgomery transmitted to Ms.
Keil in Hawaii an 18-page facsimile that included an unsigned
copy of the second stipulation of settled issues and Montgomery’s
analysis of the terms of that second stipulation. He also at or
about that time transmitted by facsimile to Tan the same 18
pages, but for a slight change in the message on the cover sheet
and an alteration or deletion of a paragraph concerning payment
concerns, and he stated on the cover sheet addressed to her that
the second stipulation of settled issues represented a “proposed
IRS settlement”. Also on December 14, 2003, petitioners
discussed with each other the status of the case and, more
specifically, the facsimile that Ms. Keil had received from
Montgomery. Mr. Keil expressed no opinion on the second
stipulation of settled issues but stated that he wanted an
accountant first to review it. At or about the same time, Ms.
Keil also spoke by telephone with Tan and explained that
- 11 -
respondent had made a “proposal” to petitioners. Ms. Keil asked
Tan to review Montgomery’s analysis of the “proposal” and to
discuss it with her.
On December 15, 2003, Montgomery spoke for the first time
with Tan. Later that day in the evening, Montgomery spoke with
Tan a second time for at least 2 hours. During the later call,
Montgomery and Tan discussed the second stipulation of settled
issues and Montgomery’s analysis of it. During no time on that
date (or at any other time) did Montgomery inform Tan that he had
already accepted the settlements on behalf of petitioners, or
that he had signed the first stipulation of settled issues
approximately 1 week before.
Also on December 15, 2004, before he had spoken to Tan in
the evening of that day, Montgomery called Mr. Keil in Washington
to attempt to persuade him to accept the settlements on behalf of
petitioners. The two spoke for approximately 25 minutes, with
Montgomery referring to the second stipulation of settled issues
as a “proposal” and recommending that Mr. Keil accept it. Mr.
Keil responded that he first wanted the “proposal” to be reviewed
by an accountant. In an attempt to persuade Mr. Keil to accept
the second stipulation of settled issues at that time, Montgomery
stated that his law firm would remedy any error reflected in that
stipulation, if one in fact existed. When Mr. Keil continued to
resist, Montgomery threatened to resign as petitioners’ counsel
- 12 -
unless Mr. Keil accepted the settlements. Mr. Keil did not
accept any part of the settlements, and he did not instruct
Montgomery to settle any part of the case on behalf of either
petitioner. Nor did Mr. Keil tell Montgomery that Mr. Keil would
get Ms. Keil to accept the second stipulation of settled issues.
On the morning of December 16, 2003, Montgomery spoke to Tan
briefly and concluded their conversation by stating that he had
to go to court. When this case was called for trial at 10 a.m.,
on December 16, 2003, neither Montgomery nor petitioners were
present. Respondent’s counsel, Karen Nicholson Sommers
(Sommers), appeared on behalf of respondent and informed the
Court that she had spoken to Montgomery that morning. She stated
that Montgomery had told her that he would be transmitting to her
office by facsimile a signed stipulation that reflected their
resolution of all issues in the case. She stated that she had
recently verified that this document was then in her office. She
informed the Court that the parties had settled all issues in the
case but that Montgomery had told her that he would like 30 days
to file the settlement stipulation so that petitioners’
accountant could review the tax computations shown therein.4 The
4
As we understood it then and continue to understand it
today, the accountant’s review related only to the calculation of
petitioners’ tax liability that would be shown in the settlement
stipulation; the accountant’s review was not a contingency to the
settlement of any of the issues underlying that stipulation. To
be sure, the settlement stipulation, set forth infra pp. 16-17,
(continued...)
- 13 -
Court granted this request and again confirmed with Sommers that
the parties had resolved all issues arising out of the notice of
deficiency issued to petitioners. Respondent at that time also
lodged with the Court a signed (by Montgomery and Sommers) copy
of the second stipulation of settled issues. The second
stipulation of settled issues was generally a copy of the first
stipulation of settled issues modified to state the terms of the
settlement of the five issues which were listed in the first
stipulation of settled issues as then still in dispute. The
lodged document stated as to these five issues that (1) for 1993,
petitioners could deduct $158,320 of contract labor in excess of
the $463,577 referenced in the first stipulation of settled
issues (i.e., a total deduction of $621,897), (2) for 1994,
Continuum (and thus petitioners) could not deduct any business
expenses in excess of the $871,480 referenced in the first
stipulation of settled issued, but that Continuum (and thus
petitioners) had to realize additional income of $225,411,
(3) for 1994, petitioners could not under section 1244 deduct any
stock loss as to Quest, (4) for 1993, petitioners were liable for
the section 6662(a) accuracy-related penalty, and (5) for 1994,
4
(...continued)
merely states the amount of petitioners’ tax liability for the
relevant years and makes no mention of any specific issue
underlying that liability. The parties’ settlement of the issues
underlying the settlement stipulation, on the other hand, was set
forth in the first stipulation of settled issues and the second
stipulation of settled issues.
- 14 -
petitioners were liable for the section 6662(a) accuracy-related
penalty.
During the afternoon of December 16, 2003, Montgomery held a
telephonic conference with Ms. Keil and Tan, and he tried to
persuade Ms. Keil to accept the settlements. He told Ms. Keil
and Tan that if they later found any mistake in his computations,
his law firm and his insurance carrier would pay for the mistake,
the accounting fee, and the tax bill. Ms. Keil refused to accept
the settlements.
Near the end of this conference, Montgomery asked Tan to
hang up so that he could speak privately with Ms. Keil. After
Tan did so, Montgomery asked Ms. Keil if she was proceeding with
her plans to divorce Mr. Keil. Ms. Keil replied that she was and
that Mr. Keil would be served with divorce papers in January
2004. Montgomery replied that the divorce was good news in that
either petitioner alone could now settle petitioners’ case and
then, if either petitioner wanted, argue later that the resulting
decision should be vacated because neither petitioner was
entitled to settle on behalf of both petitioners due to their
pending divorce. Montgomery suggested that he (on her behalf)
could then accept the settled amount or see if he could get a
better deal. Ms. Keil declined this offer. Later that evening,
Montgomery spoke to Tan for approximately 2 hours. Montgomery
relayed to Tan his scheme of filing with the Court a stipulated
- 15 -
decision authorized by only one petitioner, believing that
petitioners could later attack it as improperly authorized by
only one of them while they were undergoing a divorce.
At midnight of that evening, Montgomery called Tan again and
spoke to her for 3 hours trying to convince her that the
settlements were good for petitioners. Tan did not have any of
petitioners’ 1993 or 1994 financial records, and she told
Montgomery that she required those records before opining on the
settlements. During the morning of December 17, 2003, Montgomery
drove approximately 2 hours to Tan’s office to hand deliver
petitioners’ files to her and to discuss the settlements. He met
with Tan from approximately 11 a.m. to 4 p.m. Tan informed
Montgomery at the end of that meeting that she still was unable
to opine on the settlements because she was uncomfortable with
the accuracy of certain numbers used by his accountant in
computing amounts reflected in the settlements. Montgomery told
Tan not to worry because his insurance carrier would cover any
expense resulting from an inaccurate computation by him or his
accountant. Tan continued to decline to opine at that time.
Also on December 17, 2003, Montgomery spoke to Mr. Keil for
approximately 10 minutes. During that call, Montgomery again
tried to convince Mr. Keil to approve the settlements and stated
that any mistake in them would be remedied by his law firm. Mr.
Keil declined to accept the settlements. Montgomery informed Mr.
- 16 -
Keil that petitioners could review the settlements with Tan while
Montgomery was away on vacation and that he and petitioners could
then discuss the settlements when he returned in January 2004.
On December 18, 2003, Montgomery left the United States on
his scheduled vacation. After he returned, he signed both the
settlement stipulation and the stipulated decision on January 6,
2004. After he returned to the United States, he did not first
talk to either petitioner or Tan as to the matter. Sommers
signed both of those documents on January 13, 2004, and the
parties filed the settlement stipulation with the Court on
January 14, 2004. The settlement stipulation stated:
It is hereby stipulated that the following
statement shows petitioners* income tax liability for
the taxable year 1993:
Tax Liability, computed without allowance
for net operating loss carryback from
taxable year 1995 to taxable year 1993 $168,045.00
Tax assessed: $64,718.00
Payments (April 15, 1994) $20,500.00
(April 15, 1995) $ 1,751.00
(November 28, 1997) $ 5,000.00
(January 22, 1998) $ 5,000.00
Paid $32,251.00
Not paid $32,467.00
Deficiency, without allowance for net
operating loss carryback $103,327.00
Reduction-in liability due to net
operating loss carryback $86,904.00
- 17 -
Deficiency, after allowance for net
operating loss carryback $16,423.00
No net operating loss carryback claim filed.
It is further stipulated that there is a
deficiency in income tax due from petitioners for the
taxable year 1994 in the amount of $238,769.00.
It is further stipulated that there are additions
to tax due from petitioners for the taxable years 1993
and 1994, under the provisions of I.R.C. § 6651(a)(1),
in the amounts of $25,831.75 and $47,869.80,
respectively.
It is further stipulated that there are penalties
due from petitioners for the taxable years 1993 and
1994, under the provisions of I.R.C. § 6662(a), in the
amounts of $20,665.40 and $47,753.80.
It is further stipulated that interest will be
assessed as provided by law on the deficiencies,
penalties, and additions to tax due from petitioners.
On January 27, 2004, the Court entered the stipulated decision.
The stipulated decision reflected the amounts shown in the
settlement stipulation.
On February 4, 2004, Montgomery called Tan on a different
matter. During that conversation, she learned that he had
settled petitioners’ case in full. Tan then notified Ms. Keil
that petitioners’ case had been settled. On February 27, 2004,
petitioners moved the Court to vacate the stipulated decision and
to set aside the related stipulations of settlement. Petitioners
asserted in their motion that this action should be taken because
Montgomery was unauthorized to agree to the settlements on their
behalf.
- 18 -
On March 16, 2004, the Court ordered Montgomery to file with
the Court a statement as to his understanding of his authority to
settle this case. Montgomery responded that he had been
authorized by Mr. Keil to settle this case in accordance with the
amounts shown in the stipulated decision, that petitioners had
been clients of his for approximately 4 years, and that
petitioners had previously allowed one of them to speak on behalf
of (and bind) both of them. Montgomery also stated that on
December 15, 2003, he had explained the second stipulation of
settled issues to Mr. Keil and recommended its acceptance, Mr.
Keil had authorized Montgomery on behalf of petitioners to accept
the settlements reflected in that stipulation, and Mr. Keil had
informed him that Mr. Keil would obtain Ms. Keil’s acceptance of
the settlements.
OPINION
Petitioners argue that the Court should vacate the
stipulated decision and set aside the related stipulations of
settlement because Montgomery was not authorized to agree to the
settlements on their behalf. Petitioners bear the burden of
proving that Montgomery lacked the requisite settlement
authority. See Dahl v. Commissioner, T.C. Memo. 1995-179, affd.
85 F.3d 643 (11th Cir. 1996). We presume that a duly licensed
attorney appearing in this Court is authorized to act on behalf
of a litigant whom the attorney purports to represent. Id.
- 19 -
However, as the United States Supreme Court has observed as to
such a presumption:
the utter want of power of an attorney, by virtue of
his general retainer only, to compromise his client’s
claim, cannot, we think, be successfully disputed.
A judgment entered upon such a compromise is
subject to be set aside on the ground of the lack of
authority in the attorney to make the compromise upon
which the judgment rests. Prima facie, the act of the
attorney in making such compromise and entering or
permitting to be entered such judgment is valid,
because it is assumed the attorney acted with special
authority, but when it is proved he had none, the
judgment will be vacated on that ground. Such judgment
will be set aside upon application in the cause itself
if made in due time or by a resort to a court of equity
where relief may be properly granted. [United States
v. Beebe, 180 U.S. 343, 352 (1901).]
Absent a stipulation to the contrary, an appeal of this case
lies to the Court of Appeals for the Ninth Circuit. See sec.
7482(b)(1)(A). That court has held that settlement agreements
are contracts whose enforceability is governed by “familiar
principles of contract law”. Jeff D. v. Andrus, 899 F.2d 753,
759 (9th Cir. 1989); see also Harrop v. W. Airlines, Inc.,
550 F.2d 1143, 1145 (9th Cir. 1977). These “familiar principles”
are drawn from the local law that applies to the general
interpretation of contracts. Jeff D. v. Andrus, supra at 759.
The applicable local law, California contract law, invokes the
law of agency to determine whether Montgomery was authorized to
settle all or part of petitioners’ case, with the important
caveat that only express authority from petitioners suffices to
- 20 -
confer the requisite settlement authority upon Montgomery. See
Levy v. Superior Court, 896 P.2d 171 (Cal. 1995); Blanton v.
Womancare, Inc., 696 P.2d 645, 649-653 (Cal. 1985); see also
Harrop v. W. Airlines, Inc., supra at 1145 (“an attorney has no
authority, either actual or implied, to settle an action without
the express permission of his client”).5
Respondent argues primarily that Montgomery during his
December 15, 2003, telephone conversation with Mr. Keil received
express settlement authority. We disagree. Whether Montgomery
at that time obtained express authority to settle some or all of
petitioners’ case is a question of fact. Adams v. Commissioner,
85 T.C. 359, 369-372 (1985). The facts at hand support a
conclusion contrary to that argued by respondent. Although
5
We also note a recent observation by the U.S. Supreme
Court in Banks v. Commissioner, 543 U.S. , 125 S. Ct. 826
(2005). There, the Court stated:
The relationship between client and attorney,
regardless of the variations in particular compensation
agreements or the amount of skill and effort the
attorney contributes, is a quintessential
principal-agent relationship. * * * The client may
rely on the attorney’s expertise and special skills to
achieve a result the client could not achieve alone.
That, however, is true of most principal-agent
relationships, and it does not alter the fact that the
client retains ultimate dominion and control over the
underlying claim. The control is evident when it is
noted that, although the attorney can make tactical
decisions without consulting the client, the plaintiff
still must determine whether to settle or proceed to
judgment and make, as well, other critical decisions.
[Id. at , 125 S.Ct. at 832-833.]
- 21 -
Montgomery testified that he believed that Mr. Keil during the
telephone conversation of December 15, 2003, authorized him to
settle this case on behalf of both petitioners, we find this
testimony incredible when viewed against the record as a whole.
Before that conversation, Montgomery had been dealing exclusively
with Ms. Keil as to petitioners’ 1993 and 1994 income taxes, and
Montgomery had never spoken directly to Mr. Keil as to that
matter.6 Given our additional finding that the December 15,
2003, telephone conversation between Montgomery and Mr. Keil
lasted 25 minutes at the most, we decline to find on the basis of
Montgomery’s uncorroborated and incredible testimony that Mr.
Keil authorized Montgomery during their brief conversation to
accept any settlement on behalf of both petitioners.7 See Ruark
v. Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg. per
curiam T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d 698,
708-709 (9th Cir. 1959), affg. in part and remanding on another
ground T.C. Memo. 1957-129.
6
While Montgomery testified in one breath that he met with
both petitioners at the start of the audit and discussed the
audit with them at that time, he testified adamantly in a second
breath that he never had a face-to-face meeting with petitioners.
7
Even if Montgomery had received Mr. Keil’s consent on
Dec. 15, 2003, as he claimed, that day was at least 1 day after
Montgomery agreed to the second settlement and 6 days after he
agreed to the first settlement. Of course, the mere fact that
the parties filed the settlement stipulation with the Court on
Jan. 14, 2004, does not mean that a settlement occurred only on
that date. See Dorchester Indus., Inc. v. Commissioner, 108 T.C.
320 (1997), affd. 208 F.3d 205 (3d Cir. 2000).
- 22 -
Such is especially so given our finding that Mr. Keil
testified credibly that he never discussed the subject matter of
the audit with Montgomery before December 15, 2003, that he never
had a face-to-face meeting with Montgomery, and that he never
authorized Montgomery to settle this “complex” case. Ms. Keil
also testified credibly that she repeatedly informed Montgomery
that she had to approve any settlement in this case, and
Montgomery had for all practical purposes been retained by her to
represent petitioners as to this matter. Even Montgomery
testified that he always understood that he needed consent from
both petitioners to settle their tax matters and that Ms. Keil
never expressly agreed to settle the case.8
While Montgomery testified that he had established a
relationship with both petitioners where the word of one was
sufficient to bind both, we do not find that such was so. In
addition to the fact that this testimony is inconsistent with the
testimony just noted in the last sentence of the prior paragraph,
the record does not persuade us that Ms. Keil ever allowed Mr.
Keil to speak on behalf of her or to bind her to any agreement
that he made on her behalf. Indeed, the fact that Montgomery
repeatedly called Ms. Keil as to the settlements supports our
contrary finding that he knew that he needed the approval of Ms.
8
We also note that Tan’s testimony was consistent with the
testimony of each petitioner and that Tan during the testimony of
both petitioners was sequestered pursuant to Rule 145(a).
- 23 -
Keil for any settlement and that she was the spokesperson for
petitioners.
We conclude on the basis of documentary evidence and the
testimony of petitioners and Tan, witnesses whom we find to be
more reliable than Montgomery, that at no time did either
petitioner, by word or deed, authorize Montgomery to agree to
either of the settlements. Because we find that Montgomery acted
without authority when he agreed to those settlements, and we do
not find that petitioners ratified that action after the fact, we
shall vacate the stipulated decision and set aside the related
stipulations of settlement.9
We have considered all arguments made in this case and have
rejected those arguments not discussed herein as without merit.
Accordingly,
An appropriate order will
be issued.
9
We also note our disagreement with respondent’s argument
that petitioners cannot prevail as to their motion because they
have not proven that vacating the decision will result in a
lesser liability to them. Suffice it to say that our conclusion
that Montgomery was unauthorized to agree to the settlements on
behalf of petitioners is sufficient under the facts herein to
vacate the stipulated decision. See United States v. Beebe,
180 U.S. 343, 352 (1901).