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May 2, 2008

Tax Court: IRS Attorneys Committed Fraud on the Court

In an extraordinary 137-page opinion issued yesterday, Hartman v. Commissioner,
T.C. Memo. 2008-124 (5/1/08), Tax Court Judge Beghe held that IRS
attorneys committed fraud on the court in the Kersting tax shelter
project which affected more than 1,300 cases:

Respondent,
Kersting project petitioners, the opinionreading public, and the Court
of Appeals for the Ninth Circuit might well consider this opinion a
surprising about-face from our opinion in Lewis v. Commissioner, T.C. Mem. 2005-205.  We therefore indicate some of the considerations that have led to our change of position. ...
The observation of the Court of Appeals in Dixon V [316 F.3d 1041 (9th Cir. 2003)] that the misconduct of respondent’s
attorneys violated the rights of all petitioner participants in the
Kersting project to a fair trial of the test cases brought home to us
more keenly than we had previously appreciated that our Lewis opinion
would result in disparate treatment of those who have agreed to entry
of stipulated decisions at various times along the way, as compared
with those who have awaited the final outcome. We had a visceral
reaction that our Lewis opinion violated some sense of distributive
justice, whether derived from notions of equality or of fairness, and
that the Dixon V opinion and mandate required a contrary result.
Recognizing the incompatibility of the various formulations of
distributive justice by political philosophers over the years, we
mention those formulations as no more than intimations that we should
reconsider our Lewis position in the light of our rereading of the
Dixon V opinion. Those intimations have led us to reflect on the
various situations of those Kersting project petitioners who were part
of the test case proceedings and who agreed to entry of stipulated
decisions at different times along the way after the test case
proceedings began.
“Men must turn square corners when they deal with the Government.”
... “To say to these appellants, ‘The joke is on you. You shouldn’t
have trusted us,’ is hardly worthy of our great Government.” To tell
Kersting project petitioners they should not have trusted respondent to
try the test cases honestly and fairly and the Tax Court to formulate
an appropriate sanction when respondent failed to do so would be
equally unworthy. ...  “Wisdom too often never comes, and so one ought
not to reject it merely because it comes late.” ...
Respondent’s attorneys committed a fraud on the Tax Court during the
Kersting test case proceedings that was a fraud on the Court in every
case bound by the results of the test cases. Extending to every
petitioner whose case was bound by the results of the Kersting project
test cases, by piggyback agreement or the Court’s order to show cause
procedure, the benefit of the Thompson settlement strikes us as an
appropriate accommodation of the competing considerations; it is a
sanction for the misconduct that is consistent with Dixon V and is “no
more than necessary” to maintain public trust in the judicial process
that employs test case procedures. ... We are protective of the
integrity of our judicial process and concerned about deterrence. We
are “entitled to send a message, loud and clear.” .... We hold that
sanctions should be imposed in the cases of all Kersting project
petitioners in which stipulated decisions were entered on or after June
10, 1985, the date the Kersting project test case proceedings began.
Our holding is limited to the unique and narrow circumstances of
these cases -- where we are imposing sanctions for a fraud committed on
the Court in a test case proceeding that bound more than a thousand
cases.

Update:  Joe Kristan has more here.