T.C. Memo. 2008-279
UNITED STATES TAX COURT
DAVID C. AND WENDY CLARK, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 4092-05, 4296-05, Filed December 15, 2008.
4589-05, 4592-05,
5161-05, 5162-05,
5163-05.
Paul E. Kent, for petitioners.
Catherine G. Chang and Jon D. Feldhammer, for respondent.
1
Cases of the following petitioners are consolidated
herewith: American Synergy Asbestos Removal Services, Inc.,
a.k.a. Synergy Environmental, Inc., docket No. 4296-05; Clark C.
Trust a.k.a. Clark C. Family Trust, Reed Humpherys, Trustee,
docket No. 4589-05; American Synergy Corporation, docket No.
4592-05; American Synergy Financial Co. Trust, R. Jacobsen,
Trustee, docket No. 5161-05; Synergy Environmental Co. Trust
a.k.a. American Synergy Co. Trust, David C. Clark, Trustee,
docket No. 5162-05; and Synergy Environmental Co. Trust, Steve
Shallenberger, Trustee, docket No. 5163-05.
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MEMORANDUM OPINION
HAINES, Judge: These cases are before the Court on
respondent’s motions for entry of decision and petitioners’
motions to reform stipulation of settled issues.
Background
Because the parties anticipated a lengthy trial, these cases
were set for trial at a special session of the Court to commence
on March 24, 2008, in San Francisco, California.
On March 11, 2008, respondent’s counsel met with petitioner
David Clark and petitioners’ counsel to discuss a possible
settlement. On March 14, 2008, respondent wrote petitioners a
letter detailing a comprehensive settlement offer addressing all
issues raised in the notices of deficiency on which these cases
are based.
One pertinent term of the settlement offer was that
petitioners David and Wendy Clark, docket No. 4092-05, would
concede all adjustments determined in their notice of deficiency
with the exception of a delinquency addition to tax for 1997.
Those adjustments included a rental income adjustment which was
associated with American Synergy Asbestos Removal Services, Inc.
(ASARSI), docket No. 4296-05.
Another term of the proposed settlement was that any penalty
or addition to tax amounts asserted in the notice of deficiency
against ASARSI would be adjusted relative to the new deficiency
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amount unless the penalty or addition to tax was specifically
conceded in respondent’s pretrial memorandum. Respondent’s
letter informed petitioners that the offer would be held open
until March 17, 2008, at 12 p.m.
On March 17, 2008, petitioners discussed with respondent the
delinquency additions to tax under section 6651(a)(1) which were
not conceded in respondent’s pretrial memorandum. Petitioners
consistently maintained that ASARSI had timely filed its 1998
Federal income tax return after receiving an extension to file.
However, respondent had no record of the extension, nor did
petitioners produce any such evidence. Nevertheless, in the
interest of settlement, respondent revised his settlement offer
by offering to reduce the addition to tax from 25 percent of the
related deficiency to 12.5 percent. The revised offer was held
open until March 18, 2008, at 8 a.m. On March 18, 2008,
petitioners accepted the revised offer.
Later that day the parties informed the Court of the
settlement during a conference call. The Court promptly canceled
the March 24, 2008, trial session. The parties completed a
stipulation of settled issues incorporating the terms of the
settlement including the reduced delinquency addition to tax with
respect to ASARSI and the rental income adjustment. The
stipulation of settled issues was filed with the Court on April
15, 2008.
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Respondent then prepared and sent to petitioners deficiency,
penalty, and addition to tax computations as well as proposed
decision documents according to the terms of the stipulation of
settled issues. During the week of May 5, 2008, petitioners
contacted respondent and stated that petitioners disagreed with
respondent’s computations. On June 1, 2008, respondent received
several documents from petitioners including an Application for
Automatic Extension of Time to File Corporate Income Tax Return
for ASARSI’s 1998 taxable year. However, petitioners failed to
explain the disagreement with respondent’s computations. On July
1, 2008, the Court filed respondent’s motions for entry of
decision, which asked the Court to enter decisions in accordance
with the terms of the stipulation of settled issues.
On September 2, 2008, the Court filed petitioners’ motions
to reform stipulation of settled issues. Petitioners’ motions
ask the Court to modify the stipulation in two respects: First,
petitioners ask the Court to modify the stipulation because the
rental income assigned to David and Wendy Clark was also assigned
to ASARSI; second, petitioners ask the Court to modify the
stipulation to eliminate the delinquency addition to tax asserted
against ASARSI for its 1998 tax year because ASARSI requested an
automatic extension of time to file.
A hearing on the motions was held on November 4, 2008, in
San Francisco, California.
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Discussion
A settlement is a contract and, consequently, general
principles of contract law determine whether a settlement has
been reached. Dorchester Indus. Inc. v. Commissioner, 108 T.C.
320, 330 (1997), affd. without published opinion 208 F.3d 205 (3d
Cir. 2000). In settling a case each party agrees to concede some
rights which may have been asserted against the opposing party as
consideration for those secured in the settlement agreement.
Saigh v. Commissioner, 26 T.C. 171, 177 (1956).
A valid settlement, once reached, cannot be repudiated by
either party; and after parties have entered into a binding
settlement agreement, the actual merits of the settled
controversy are without consequence. Dorchester Indus. Inc. v.
Commissioner, supra at 330. This Court has declined to set aside
a settlement duly executed by the parties and filed with the
Court in the absence of fraud, mutual mistake, or other similar
ground. Stamm Intl. Corp. v. Commissioner, 90 T.C. 315 (1988);
Spector v. Commissioner, 42 T.C. 110 (1964). Where the parties’
settlement leads to the vacating of an imminent trial date, the
Court applies stringent standards to modify or set aside the
settlement. Dorchester Indus. Inc. v. Commissioner, supra at
335; Stamm Intl. Corp. v. Commissioner, supra at 321. In such
cases the moving party must satisfy standards akin to those
applicable in vacating a judgment entered into by consent.
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Dorchester Indus. Inc. v. Commissioner, supra at 335; Stamm Intl.
Corp. v. Commissioner, supra at 322; see Swift & Co. v. United
States, 276 U.S. 311, 324 (1928). The Court has discretion to
set aside a settlement agreement filed with it, but its
discretion will not be exercised unless good cause is shown.
Saigh v. Commissioner, supra at 176.
Petitioners seek to set aside the stipulation as it relates
to a delinquency addition to tax asserted against ASARSI. During
the settlement negotiations petitioners contended that ASARSI
received an extension of time to file. However, they were unable
to find a copy of the application for extension. Petitioners
argue that they were told if they could provide the application
for extension the entire addition to tax would be conceded by
respondent. Respondent agrees he would have conceded the entire
addition to tax but only if the application for extension was
provided before the execution of the stipulation. Petitioners
were not able to provide a copy of the application for extension
until June 2008, more than 2 months after the settlement was
reached. Nothing in the stipulation of settled issues indicates
that the parties intended to leave the issue open after the
stipulation was filed with the Court, nor have petitioners shown
that the parties intended to do so. Accordingly, the stipulation
regarding ASARSI’s delinquency addition to tax is binding on the
parties.
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Petitioners next ask the Court to modify the stipulation as
it relates to certain rental income arguably attributed to
multiple parties. Petitioners claim that after careful
examination of the notices of deficiency and their tax returns
they discovered an erroneous duplication of income in the
stipulation of settled issues.2 Even assuming that petitioners
are correct that income was duplicated, the Court declines to
modify the stipulation. The settlement stipulation was a
compromise, and the mere fact that petitioners now feel more
confident or knowledgeable on this issue than they did while
stipulating the deficiencies is not sufficient grounds for
voiding the settlement agreement. See Saigh v. Commissioner,
supra at 177.
If petitioners made a mistake in agreeing to the settlement,
respondent contends, and the Court agrees, it was not mutual but
unilateral. This Court has previously held that a party may be
bound by its agreement although it has made a unilateral mistake
in the calculation of a deficiency. Stamm Intl. Corp. v.
Commissioner, supra.3 Petitioners have not shown that respondent
2
It is not clear on the face of the stipulation of settled
issues whether there was a duplication of income.
3
In Pack v. United States, 992 F.2d 955 (9th Cir. 1993), the
U.S. Court of Appeals for the Ninth Circuit, to which an appeal
in this case would ordinarily lie, set aside a closing agreement
between taxpayers and the Commissioner. In Pack the court held
that the terms of the closing agreement could not be relied on by
the taxpayers to support their contention that waivers suspended
(continued...)
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committed fraud or otherwise improperly induced petitioners to
agree to the offer. The parties spent considerable time
developing these cases and engaging in settlement discussions.
They were aware or should have been aware of the issues they
compromised. Petitioners, represented by competent counsel, had
the opportunity to review the stipulation before signing it, and
presumably they did. Furthermore, the stipulation of settled
issues is in accord with respondent’s settlement offer accepted
by petitioners. Accordingly, the Court will not modify the
stipulation on the basis of a unilateral mistake.
Petitioners further argue that David Clark was the only one
who could accurately review the figures in the stipulation, but
he was out of the country when it was signed and thus unable to
review the figures. The stipulation was executed by petitioners’
counsel, and petitioners do not argue that he lacked the
authority to do so. Furthermore, David Clark was present at the
parties’ settlement discussions and thus was aware of the terms
3
(...continued)
the assessment of interest because the waiver was contrary to the
Internal Revenue Code (Code) and the closing agreement
specifically stated that its terms were subject to the Code and
the closing agreement did not expressly create the waiver. Id.
at 959-960. The reasoning of the court in Pack is not applicable
in this case. The settlement agreement entered into by
respondent and petitioners does not state that its terms are
subject to the Code. In fact, respondent made several
concessions which are in contravention of the Code. Petitioners
do not seek to set those aside.
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of the settlement. Accordingly, the Court will not set aside the
stipulation on this basis.
In his settlement offer respondent made significant
concessions which ultimately led to petitioners’ acceptance. By
accepting the offer, petitioners chose to concede some of the
rights they might have asserted in consideration for respondent’s
concessions. Petitioners may not now avoid their own concessions
while receiving the benefits of respondent’s.
To reflect the foregoing,
Orders denying petitioners’
motions will be issued, and orders
and decisions granting
respondent’s motions will be
entered.