T.C. Memo. 2006-187
UNITED STATES TAX COURT
RHETT RANCE SMITH AND ALICE AVILA SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11902-05. Filed August 31, 2006.
Robert J. Stientjes, for petitioners.
Anne W. Durning and Henry N. Carriger, for respondent.
MEMORANDUM OPINION
GERBER, Judge: Petitioners, in a motion filed March 13,
2006, sought the entry of a decision in accord with a purported
settlement of this case.1 Respondent, by means of a notice filed
1
This case is related to several other cases, two of which
involve these same petitioners at docket Nos. 13227-05 and
13228-05.
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April 5, 2006, objected, and the parties presented their views in
documents, the last of which was filed July 3, 2006. The
question presented by the parties’ controversy is whether
petitioners and respondent entered into an enforceable agreement
to settle any part of this case.
Background
Respondent’s examination in this case focused upon whether
petitioners were entitled to certain contribution deductions that
they claimed on their Federal tax return. In the notice of
deficiency, respondent determined that petitioners were not
entitled to deductions for cash contributions claimed on their
2002 joint Federal income tax return. This case was being
handled in Omaha, Nebraska (Omaha case). The examination in the
Omaha case involved only the substantiation of cash contribution
deductions. Respondent had examined earlier taxable years of
petitioners, and in those cases the deductibility of noncash
contributions was in controversy. Respondent’s counsel in the
Omaha case was Henry N. Carriger. At the time of the events we
consider here, petitioners’ earlier tax years that had already
been petitioned to this Court were scheduled for trial in
Phoenix, Arizona, and were being handled by a different counsel
for respondent, Anne W. Durning (Phoenix cases).
On June 28, 2005, petitioners’ petition in the Omaha case
was filed, and their representatives thereafter began working
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with respondent’s Appeals Officer Laura M. Gonzalez in Omaha to
administratively resolve the cash contribution issues determined
in the notice of deficiency and raised by the pleadings. Ms.
Gonzalez requested substantiation of the cash contribution
deductions claimed on petitioners’ return. In particular, she
requested receipts or evidence of payment and information showing
that any entity to which a contribution was made was one that
qualified under section 501(c)(3).2
Following the exchange of multiple letters between the
parties, on January 6, 2006, one of petitioners’ representatives,
Attorney Eric Johnson, sent Ms. Gonzalez a letter which, in
pertinent part, contained the following:
I propose that we settle this case. I think it would
be fair for the government to agree that the taxpayers
may deduct as a charitable contribution the $74,200
paid to Open Heaven Ministries for tax year 2002. As
stated in my letter of August 23, 2005, the itemized
list of contributions made by the taxpayers after the
Service Center contact totals $223,906, which is
somewhat less than the $226,774 reported on the income
tax return, and of that $223,906, the taxpayers are
unable now to produce substantiation for $1,825, which
leaves $222,081 in substantiated contributions. The
taxpayers hereby offer to settle this case on the basis
that they are entitled to $222,081 of the charitable
contribution of $226,774 reported on the return.
If you are not satisfied with various aspects of the
Open Heaven Ministries issue, we would invite a
counter-offer from the government containing a
percentage disallowance of the Open Heaven Ministries
contribution deduction for 2002 reflecting what the
2
Section references are to the Internal Revenue Code as
amended and in effect for the period under consideration.
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government views as its hazards. Although we feel that
the right answer given the facts is that the taxpayers
are entitled to the deduction in full, we recognize
that as a practical matter proving that entitlement at
this point through litigation would likely be cost-
prohibitive.
Please contact me with any questions or to discuss. I
would appreciate a response by the end of the month.
Shortly thereafter, on January 26, 2006, Ms. Durning moved to
continue the trial of the Phoenix cases, and the Court gave
petitioners until February 21, 2006, to respond to respondent’s
continuance motion.3
Between January 6 and February 21, 2006, petitioners’
attorney, on several occasions, unsuccessfully attempted to
contact Ms. Gonzalez by telephone. On February 21, 2006,
Attorney Robert Stientjes, a counsel for petitioners, contacted
Mr. Carriger, counsel for respondent in the Omaha case, to
solicit a response to the January 6, 2006, offer made to Ms.
Gonzalez.
At this point, the parties’ allegations as to what
transpired are diametrically opposed. Petitioners contend that,
during the February 21, 2006, telephone conversation, Mr.
3
Although petitioners attempt to link respondent’s
continuance motion in the Phoenix cases to the Omaha case and the
purported acceptance of their offer to settle, the circumstances
we consider do not support such a connection. Even if
petitioners could show or believe such a connection existed, we
do not find that fact decisive one way or the other with respect
to whether there was a meeting of the minds and a settlement of
the cash contribution issue or the Omaha case.
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Carriger stated to Mr. Stientjes that “[w]e have a settlement.”
Petitioners also allege that during a March 2, 2006, telephone
conversation, Mr. Carriger admitted that he had accepted
petitioners’ settlement offer. Petitioners also admit that
before the March 2 conversation, Mr. Carriger advised Mr.
Stientjes, in a telephone message, that respondent intended to
raise a new issue. Petitioners also contend that Mr. Carriger
attempted, during the March 2, conversation, “to retract his
admissions and claimed that he did not unequivocally accept the
settlement offer during the February 21, 2006 teleconference.”
Respondent, on the other hand, contends that, at the time of
the February 21 conversation, Mr. Carriger was “aware that
Appeals Officer Gonzalez had nearly completed her review of the
documentation submitted for the cash contributions and that a
settlement seemed likely.” Respondent also alleges that Mr.
Carriger was “unaware of the January 6, 2006 offer letter and of
the details of what a settlement might be.” With those
premises, respondent contends that Mr. Carriger, during the
February 21 conversations, “reported to * * * [Attorney]
Stientjes that ‘settlement was looking good.’” In essence,
respondent’s position is that Attorney Carriger “had no basis to
reach a meeting of the minds on the matter as he had not reviewed
the documentation submitted.”
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Respondent, through affidavits from the employees involved,
has stated that at the time of the February 21, 2006, telephone
conference: (1) Ms. Gonzalez and her supervisor had not
recommended or approved a settlement of part or all of the Omaha
case; (2) Mr. Carriger was unfamiliar with the specifics of the
settlement offer and the exchanges between Appeals and
petitioners’ representatives; (3) the provisions of Rev. Proc.
87-24, 1987-1 C.B. 720, direct that Appeals attempt to settle
cases and that Government counsel normally does not settle cases
until the administrative files are returned to Government
counsel; (4) petitioners’ counsel contacted Ms. Gonzales 6 days
after the February 21 telephone conference and asked whether she
had made a determination about the January 6 offer; (5)
petitioners did not confirm the alleged oral settlement by means
of a followup letter or memorandum reflecting the terms thereof;
(6) petitioners’ counsel agreed to a continuance of petitioners’
Phoenix cases on February 15, 2006 (6 days before the February 21
teleconference).
Between the February 21 and the March 2, 2006,
conversations, Mr. Carriger left a message for Mr. Stientjes
advising that, in addition to the cash contribution issue raised
in the notice of deficiency, respondent intended to affirmatively
raise a non-cash-contribution issue in the Omaha case that was
the same as or similar to the issues pending in petitioners’
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Phoenix cases. Petitioners had the same representatives in all
pending cases, whereas respondent was represented by Ms. Durning
in the Phoenix cases and Mr. Carriger in the Omaha case.
Mr. Stientjes (without respondent’s counsels’ knowledge)
made a recording of the March 2, 2006, telephone conversation. A
transcript of the conversation was attached to one of
petitioners’ documents filed in connection with the motion to
enforce settlement and entry of decision. The March 2
conversation began with Mr. Stientjes accusing Mr. Carriger of
being “dishonest” for advising on February 21 “that we have a
settlement” and subsequently advising that respondent is “going
to raise a new issue.” Mr. Carriger, in response to the
accusation, stated that he did not think his actions were
dishonest “because the issue that we thought we had a settlement
on, we do. Which is the cash contribution. At the time
[February 21, 2006] I was not aware that the noncash
contributions were even at issue.”
The next matter of substance was Mr. Stientjes’s observation
to Mr. Carriger that he “can’t tell * * * [Mr. Stientjes that] we
are settling the only issue in the case and then, a week later,
tell * * * [Mr. Stientjes that respondent is] raising a new issue
and we haven’t settled the whole case a week before.” Mr.
Carriger responded that there was no prohibition upon the raising
of an issue after settlement of the sole issue in the case.
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Later in the same conversation, after Mr. Stientjes advised
that he would file a motion to enforce settlement, Mr. Carriger
checked his notes of the February 21 telephone conversation and
contended that he had not told Mr. Stientjes that the case was
settled, but only that “settlement is looking good.” After that
point in the conversation, Mr. Carriger’s supervisor, Attorney
Albert Kerkhove, became active in the conversation. The matter
devolved into a verbal standoff where nothing further was said
that is worthy of consideration. Following these exchanges,
petitioners filed a motion to enforce the purported settlement.
Discussion
Petitioners have moved for entry of decision based on a
purported settlement agreement in this case. The question we
consider is whether petitioners and respondent have an
enforceable agreement that settled either the cash contribution
issue or the entire case, so as to prohibit respondent from
raising the non-cash-contribution issue. Petitioners’ returns
had been audited for earlier tax years, and petitioners had
pending Tax Court cases scheduled for trial in Phoenix involving
non-cash-contribution deductions. The subsequent audit of the
2002 year was being handled in a different office of respondent,
and the examination resulted in a determination that petitioners
were not entitled to cash contribution deductions. The non-cash-
contribution issue was the subject of the cases for earlier
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years. However, while petitioners apparently also claimed non-
cash-contribution deductions on their 2002 return, the issue was
not raised in the examination, nor were the deductions disallowed
in the 2002 deficiency notice.
The 2002 year (Omaha case) moved though the normal
administrative procedures and became docketed in this Court at a
time when the earlier years’ cases (Phoenix cases) were at a more
advanced stage of development. The Omaha and Phoenix cases were
being handled by different Government counsel, and different
cities had been requested for trial. In a routine manner, the
Omaha case was assigned to Appeals for settlement, and, after
exchanges with Appeals, petitioners sent a letter proposing
settlement. Coincidentally, a few weeks later, Government
counsel in the Phoenix cases moved to continue the cases from the
scheduled Phoenix trial session. After not being able to obtain
a response from Appeals to their 2002 year offer, petitioners
contacted Government counsel in Omaha, who was not aware of the
non-cash-contribution issues in the Phoenix cases and was not
familiar with the details of the negotiations or settlement offer
during the Appeals process. When petitioners’ counsel asked
respondent’s Omaha counsel about the status of the settlement
offer, Government counsel made some affirmation that the matter
was settled (per petitioners) or that settlement was likely (per
respondent). Considering that scenario with those two possible
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endings, we must decide whether there was a settlement, and if
so, what was settled; i.e., the cash contribution issue or the
entire case.
The general principles involving settlements have been
effectively set out in the case of Dorchester Indus., Inc. v.
Commissioner, 108 T.C. 320, 330 (1997) (quoting Manko v.
Commissioner, T.C. Memo. 1995-10), affd. without published
opinion 208 F.3d 205 (3d Cir. 2000), as follows:
“For almost a century, it has been settled that
voluntary settlement of civil controversies is in high
judicial favor. Williams v. First Natl. Bank, 216 U.S.
582, 595 (1910); St. Louis Mining & Milling Co. v.
Montana Mining Co., 171 U.S. 650, 656 (1898). A valid
settlement, once reached, cannot be repudiated by
either party, and after the parties have entered into a
binding settlement agreement, the actual merits of the
settled controversy are without consequence. This
Court has declined to set aside a settlement duly
executed by the parties and filed with the Court in the
absence of fraud or mutual mistake. Stamm Intl. Corp.
v. Commissioner, 90 T.C. 315 (1988); Spector v.
Commissioner, 42 T.C. 110 (1964). However, a court
will not force a settlement on parties where no
settlement was intended. Autera v. Robinson, 419 F.2d
1197 (D.C. Cir. 1969).
“A settlement is a contract and, consequently,
general principles of contract law determine whether a
settlement has been reached. Robbins Tire & Rubber Co.
v. Commissioner, 52 T.C. 420, 435-436, supplemented by
53 T.C. 275 (1969). A prerequisite to the formation of
a contract is an objective manifestation of mutual
assent to its essential terms. Heil v. Commissioner,
T.C. Memo. 1994-417; 17A Am. Jur. 2d, Contracts, secs.
27 and 28 (1991); 1 Williston on Contracts, sec. 3:5
(4th ed. 1990). Mutual assent generally requires an
offer and an acceptance. 17A Am. Jur. 2d, Contracts,
sec. 41 (1991). ‘An offer is the manifestation of
willingness to enter into a bargain, so made as to
justify another person in understanding that his assent
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to that bargain is invited and will conclude it.’
1 Restatement, Contracts 2d, sec. 24 (1981).
“In a tax case, it ‘is not necessary that the
parties execute a closing agreement under section 7121
in order to settle a case pending before this Court,
but, rather, a settlement agreement may be reached
through offer and acceptance made by letter, or even in
the absence of a writing.’ Lamborn v. Commissioner,
T.C. Memo. 1994-515. Settlement offers made and
accepted by letters are enforced as binding agreements.
Haiduk v. Commissioner, T.C. Memo. 1990-506; see also
Himmelwright v. Commissioner, T.C. Memo. 1988-114.”
In the circumstances we consider here, the authority to
settle is not the decisive element of whether a binding contract
was formed. Clearly, there was an offer of settlement in the
form of the January 6, 2006, letter from petitioners’ counsel to
Ms. Gonzalez. That offer sought to resolve the only issue then
pending in this case--the cash contributions disallowed in the
notice of deficiency. It is less clear whether that offer was
accepted and/or whether there was a meeting of the minds. It is
certain that Ms. Gonzalez did not make a written or oral
response, and hence did not accept the offer irrespective of
whether she had authority to do so.
To the extent there was an acceptance of the offer,
petitioners contend that it was made by Mr. Carriger. In the
circumstances of this case, we cannot conclude that Mr. Carriger
accepted petitioners’ offer. First, the offer was not made to
Mr. Carriger. Significantly, the negotiations were conducted by
Ms. Gonzalez and not by Mr. Carriger, and he was not aware of the
specifics of the offer. Mr. Carriger’s response to Mr. Stientjes
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during the February 21 conversation was, at best, his
understanding of the intent or actions of another person–-Ms.
Gonzalez or her office. The subsequent discussion between
Messrs. Carriger and Stientjes was essentially an argument about
whether petitioners’ offer of settlement had been accepted.
The essence and focus of the February 21 and March 2, 2006,
telephone conversations indicate that petitioners were more
concerned about avoiding the new issue (noncash contribution)
than merely enforcing the settlement of the cash contribution
issue. We are not compelled to consider this subtlety, because
we hold that there was no acceptance of the offer, and, hence the
entire case could not have been settled. Even though
respondent’s counsel indicated in the March 2, 2006, telephone
conversation that the cash contribution issue was or would be
settled, that was after a new issue (the non-cash-contribution
issue) had been raised. In any event, it is not sufficiently
clear that the cash contribution issue had been settled before
the March 2, 2006, conversation.
Although there is precedent that would permit this Court to
enforce an oral settlement or acceptance of a settlement offer,
it must appear reasonably certain that the parties had agreed or
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intended to agree.4 In this case, we are not able to find that
respondent’s agents or representatives either accepted and/or
intended to accept petitioners’ offer. Accordingly, we hold that
there was no meeting of the minds and no settlement reached by
the parties.
To reflect the foregoing,
An order will be issued
denying petitioners’ motion for
entry of decision.
4
Needless to say, this matter would likely not be before
the Court if both the settlement offer and the acceptance had
been in some way memorialized; i.e., committed to writing.