Billhartz v. Commissioner ( 2015 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-1216
MARCIA BILLHARTZ, Executor of the
Estate of Warren Billhartz,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
____________________
Appeal from the United States Tax Court.
No. 12999-10 — Maurice B. Foley, Judge.
____________________
ARGUED MAY 28, 2015 — DECIDED JULY 23, 2015
____________________
Before FLAUM, KANNE, and SYKES, Circuit Judges.
FLAUM, Circuit Judge. Warren Billhartz left over $20 mil-
lion to his four children when he died. When his Estate filed
its estate tax return with the IRS, it claimed a deduction for a
large portion of that amount—over $14 million. The IRS dis-
allowed the deduction in full and issued the estate a notice
of deficiency. The Estate then petitioned the United States
Tax Court for redetermination of the deficiency, and a trial
date was set. Before trial, though, the Estate and the Com-
2 No. 14-1216
missioner of Internal Revenue (“Commissioner”) agreed to a
settlement, under which the Commissioner conceded 52.5%
of the claimed deduction. Soon after the settlement, howev-
er, Billhartz’s children sued the Estate in state court; the chil-
dren claimed that they were entitled to a larger portion of
their father’s fortune and that their prior acceptance of a
lesser amount had been obtained fraudulently. At that point,
the Estate asked the Tax Court to vacate the settlement on
the basis that, were the children to prevail in state court, the
settlement would bar the Estate from claiming an estate tax
refund for any additional amount paid to the children. The
Tax Court rejected the Estate’s arguments, and entered a de-
cision reflecting the terms of the settlement agreement.
We affirm. The Tax Court did not abuse its discretion by
refusing to set aside the settlement.
I. Background
Warren Billhartz (“Billhartz”) married his first wife,
Norma, in 1955. They had three daughters (Jan, Jean, and
Susan) and one son (Ward). Billhartz and Norma divorced in
1978. In connection with the divorce, they entered into a
Marital Settlement Agreement, which they filed with the
Circuit Court for Madison County, Illinois. Only one part of
that agreement is relevant to this appeal—the statement that
“Husband covenants and agrees with Wife that an amount
equal to one-half of the estate of Husband will be given in
his Will to the children of the parties described in this
Agreement, in equal shares.”
Billhartz married his second wife, Marcia, in 1979, and
they remained married until his death, in 2006. Following
his remarriage, Billhartz executed a will and a trust. At the
No. 14-1216 3
time of his death, virtually all of his assets were either held
in the trust or in joint tenancy with Marcia. The trust named
Marcia and Ward as co-trustees. Under the terms of the trust,
the trustee was to set aside an amount sufficient to purchase
an annuity that would pay Norma $3,000 monthly. Of the
remaining funds, 6% was left to each of Billhartz’s three
daughters, and 16% was left to Ward; the rest went to Marcia
and to Billhartz’s sister. To summarize: According to the
Marital Separation Agreement, the four children were to re-
ceive 50% of Billhartz’s “estate” (an undefined term), divided
evenly. In the end, though, they cumulatively ended up with
less than 34% of Billhartz’s assets, divided unevenly. None-
theless, after receiving notice of this discrepancy, all four
children executed an agreement (the “2007 Waiver Agree-
ment”), in which they accepted the lesser shares set out for
them in the trust and waived all potential claims they may
have been able to assert against either the Estate or the trust.
The payments to the children totaled approximately $20 mil-
lion; each daughter received about $3.5 million, while Ward
received $9.5 million.
The Estate filed its estate tax return, signed by Marcia
and Ward as co-executors, on May 21, 2007. Among other
deductions, the Estate claimed a deduction of approximately
$14 million for amounts passing to the children, equal to $3.5
million per child (even though Ward actually received signif-
icantly more). The Estate does not explain why it did not de-
duct the full amount paid to Ward, though we suspect it has
to do with Billhartz’s promise in the Martial Settlement
Agreement to leave his children equal shares of his estate.
The Estate claimed the deduction under 26 U.S.C.
§ 2053(a)(3), which permits deductions of claims against the
Estate for an indebtedness founded on a promise or agree-
4 No. 14-1216
ment that was contracted bona fide and supported by ade-
quate consideration. See id. § 2053(c)(1)(A). According to the
Estate, the amounts paid to the children through the trust
were paid in settlement of a debt owed to them by Billhartz
pursuant to his contractual obligation under the Marital Set-
tlement Agreement.
The Commissioner issued the Estate a notice of deficien-
cy that disallowed in full the $14 million deduction and de-
termined a tax deficiency of about $6.6 million. The Estate
then petitioned the Tax Court for a redetermination of the
deficiency amount. A trial date was set for April 18, 2012. But
before trial, on April 5, the Estate accepted the Commission-
er’s settlement offer, in which the Commissioner agreed to
concede 52.5% of the original $14 million deduction. The
parties notified the Tax Court of the settlement the next day,
and the trial was removed from the docket. On April 24, af-
ter a conference call with the parties, the court ordered them
to submit by July 24 a decision document reflecting the
terms of the settlement.
The next relevant events took place in Illinois state court,
where, on June 12, 2012, Warren’s daughters filed two law-
suits against the Estate, contending that the 2007 Waiver
Agreement had been procured by fraud; Ward, after resign-
ing as co-trustee, filed a similar lawsuit. The children argued
that Marcia had intentionally and fraudulently concealed
documents from them and had threatened to withhold any
of the trust money from the children unless they signed the
waiver. And, even though the 2007 Waiver Agreement men-
tioned the terms of the Marital Settlement Agreement, the
children asserted that they did not became aware of their
No. 14-1216 5
right to 50% of the estate, and of the value of the estate, until
the Estate brought the Tax Court case in 2012.
On July 6, 2012, because of the new state court lawsuits,
the Estate asked the Tax Court for an extension of time to
submit the decision document, and the court granted a 90-
day extension. Then, on October 1, the Estate moved to re-
store the case to the general docket, arguing that it should be
entitled to deductions under 26 U.S.C. § 2053 for any addi-
tional payments to the children arising from the state court
litigation, and therefore that the settlement amount would
have to be recalculated in the event of additional payments.
The Commissioner opposed that motion, and instead moved
for entry of a decision consistent with the terms of the par-
ties’ settlement agreement. The Estate opposed entry of a de-
cision, arguing that the agreement had been predicated on a
mutual mistake of fact—i.e., that the amount owed by the
Estate to the children had been finally determined by the
2007 Waiver Agreement. The Estate also argued that the set-
tlement should be set aside because the Commissioner knew
that Billhartz’s daughters were thinking of suing the Estate
in state court; by not providing the Estate with that infor-
mation, the Estate argued, the Commissioner committed
fraudulent misrepresentation. The Estate conceded, howev-
er, that it had knowingly and voluntarily entered into the
settlement agreement with the Commissioner.
While these motions were pending in the Tax Court, the
Estate reached a settlement with the children in their state
court lawsuits. As part of that settlement, the Estate agreed
to pay each of the daughters an additional $1,450,000. The
Estate informed the Tax Court of this development.
6 No. 14-1216
On June 14, 2013, the Tax Court denied the Estate’s mo-
tion to restore the case to the general docket and granted the
Commissioner’s motion for entry of decision. The Tax Court
also denied the Estate’s subsequent motion to vacate the de-
cision and order. The Estate now appeals, invoking our ju-
risdiction to review the decisions of the Tax Court. See 26
U.S.C. § 7482(a)(1).
II. Discussion
We review the Tax Court’s decision to enforce a settle-
ment agreement for an abuse of discretion. Wilson v. Wilson,
46 F.3d 660, 664 (7th Cir. 1995) (noting that a district court’s
decision to enforce a settlement agreement is reviewed for
an abuse of discretion); see also Freda v. Comm’r, 656 F.3d 570,
573 (7th Cir. 2011) (“We review decisions of the tax court in
the same manner and to the same extent as decisions of the
district courts in civil actions tried without a jury.” (internal
quotation marks omitted)). The Tax Court’s denial of a mo-
tion to vacate a final decision is also reviewed for an abuse of
discretion. Drobny v. Comm’r, 113 F.3d 670, 676 (7th Cir.
1997).
Before delving into the Estate’s legal arguments, some
background is helpful to understanding why it wants the set-
tlement set aside. By settling this case, the parties essentially
determined once and for all the total amount that the Estate
could deduct as a result of its payments to Billhartz’s chil-
dren. That is because of 26 U.S.C. § 6512(a), which provides
that, once the Tax Court’s jurisdiction is invoked with respect
to an estate tax return, no claim for a refund may be filed
with respect to any future matter related to that return. That
provision did not overly concern the Estate when it took this
case to the Tax Court, as it didn’t anticipate having to make
No. 14-1216 7
future refund claims—it believed that there would be no
more payments to the children. When the children sued,
however, the Estate was suddenly faced with the possibility
that it would have to pay the children more money; even
worse, § 6512 would bar the Estate from obtaining a refund
for those payments, assuming that they were deductible. 1
The Estate’s settlement with the Commissioner allows the
Estate to deduct 52.5% of the $14 million the Estate originally
thought it could deduct based on the 2007 Waiver Agree-
ment. But, since the Estate ended up paying the children
more than it expected to (an additional $1,450,000 to each
daughter), it now seeks to deduct more.
It is important to understand, however, that the opera-
tion of § 6512 does not make this case unique. When parties
to a civil suit reach a settlement, they are usually barred
from later tearing up that agreement or filing a new lawsuit
when they learn new information—not because of statute,
but because of the terms of the settlement. And, of course,
for cases that make it to trial, the doctrine of res judicata
blocks future legal action based on the same claims. Settle-
ments are meant to substitute certainty for risk, but that does
not make them risk free. By settling, parties close the door to
new information; that’s risky, because they do not know
whether new information will be helpful or harmful. A party
may later come to believe that it received a bad (or good)
deal, but only rarely will that provide grounds for setting
aside the settlement.
1We express no opinion as to whether the Estate’s payments to Warren
Billhartz’s children are rightly deductible under § 2053(a)(3).
8 No. 14-1216
For these reasons, courts should be hesitant to set aside
settlements that are reached knowingly and voluntarily by
the parties. See Glass v. Rock Island Refining Corp., 788 F.2d
450, 454–55 (7th Cir. 1986). The Tax Court has its own test,
laid out in Dorchester Industries Inc. v. Commissioner, for de-
termining when to set aside a settlement. 108 T.C. 320, 335
(1997), aff’d, 208 F.3d 205 (3d Cir. 2000). When, as here, a “set-
tlement agreement ha[s] led to the vacation of the trial date
and would have led to entry of [a] decision[] had the parties
complied with their agreement,” a motion to vacate a settle-
ment agreement will be denied “[a]bsent a showing a lack of
formal consent, fraud, mistake, or some similar ground.” Id.
The Estate presents two grounds that it contends meet
this standard. First, it relies on the doctrine of mutual mis-
take of fact, arguing that “the parties’ belief that the Estate’s
debt to the Children had been finally determined” by the
2007 Waiver Agreement “was a basic factual assumption un-
derlying the April 2012 Settlement.” It was a basic factual
assumption, the Estate argues, because “the parties negotiat-
ed the April 2012 Settlement as a percentage of the Original
Deduction that arose directly out of the” 2007 Waiver
Agreement. As it turns out, the Estate argues, the amount
actually paid by the Estate to the children was not finalized
by the 2007 Waiver Agreement, and so the settlement was
reached while the parties were mistaken about a key “fact.”
A contract can be voided under the doctrine of mutual
mistake if, at the time the contract was made, both parties
were mistaken “as to a basic assumption on which the con-
tract was made,” and the mistake “has a material effect on
the agreed exchange of performances.” United States v. Wil-
liams, 198 F.3d 988, 944 (7th Cir. 1999) (citing Restatement
No. 14-1216 9
(Second) of Contracts § 151(1) (1981)). Here, though, we
struggle to see how the finality of the Estate’s payments to
the children could have been a basic factual assumption un-
derlying the settlement when the amount the Estate wanted
to deduct ($14 million) was different from the amount the
Estate agreed to pay the children in the 2007 Waiver Agree-
ment ($20 million). (Recall that the Estate attempted to de-
duct less than the full amount that it paid to Ward.) The Es-
tate has not explained how or why it chose the $14 million
amount, so we don’t know how or even if it would have
changed if the amount originally paid to the children had
been different.
More fundamentally, though, “rules governing rescission
for either mutual or singular mistake are inapplicable where,
as here, a party’s erroneous prediction or judgment about
future events is involved.” United States v. Sw. Elec. Coop.,
Inc., 869 F.2d 310, 315 (7th Cir. 1989). The Estate failed to
foresee the children’s lawsuit; there was no fact about which
the parties were both mistaken at the time they reached the
settlement. The Estate had made a $14 million deduction
claim. Both parties knew this at the time, and it was a key
background fact when the settlement was reached. It was
true at the time, and the fact that the Estate now wants to
claim a larger deduction does not render the previous de-
duction amount false. And that $14 million claim—not the
amount actually paid to the children—was the basis for the
Commissioner’s settlement offer. The Commissioner surely
did not care how much was actually paid to the children or
whether that amount was final; rather, he cared only about
the amount claimed by the Estate as a deduction.
10 No. 14-1216
Second, as we alluded to above, the Estate’s argument is
contrary to the very nature of settlements. Consider a law-
suit arising out of a car accident, in which the plaintiff, after
consulting with an auto mechanic, initially claims $1000 in
damages. The defendant does not think he is actually liable,
but fears a large jury verdict and offers to settle for 40% of
the plaintiff’s claim ($400). The plaintiff accepts the settle-
ment, but a couple of weeks later her car breaks down, and
she discovers that the damage from the accident was more
extensive than she initially thought—closer to $2000. Under
the Estate’s theory, the plaintiff could then try to vacate the
settlement because the parties were “mistaken” as to a
“fact”—i.e., that the amount of damage to the plaintiff’s car
had been finally determined at the time of the settlement.
But, of course, that’s not right: by agreeing to a settlement,
the plaintiff waived any right to later argue that she actually
deserved more than she previously asked for. It makes no
difference that the settlement was calculated as a percentage
of the amount claimed by the plaintiff—all monetary settle-
ment amounts can be expressed as a percentage of the
amount claimed by the plaintiff.
The Estate’s second argument in favor of setting aside the
settlement is its claim that the Commissioner made a mis-
representation during settlement negotiations by knowingly
omitting a material fact—specifically, that the children
“might initiate a new lawsuit against the estate.” The Estate
asserts that, at some time between February and April 2012
(before the settlement was reached), the Commissioner’s
counsel spoke with Billhartz’s daughter Jean, and Jean stated
that she was considering consulting with an attorney to see if
she could sue the Estate.
No. 14-1216 11
An alleged misrepresentation by omission will only void
a contract when the omitting party “knows that disclosure of
the fact would correct a mistake of the other party as to a
basic assumption on which the party is making the con-
tract.” Jordan v. Knafel, 880 N.E.2d 1061, 1071–72 (Ill. App. Ct.
2007) 2 (citing Restatement (Second) of Contracts § 161(b)
(1981)). All the Commissioner knew, however, was that Jean
might sue. The Estate, of course, knew that as well—anyone
might sue at any time, especially people who have a colora-
ble argument that they were shorted millions of dollars from
their father’s estate. Jean’s statement was far too nebulous to
cause the Commissioner to know that disclosure of the
statement would correct any mistaken assumption made by
the Estate; a plan to consider speaking to a lawyer is a far cry
from a concrete plan to sue. Moreover, regardless of what
the Commissioner knew about Jean’s plans, he did not know
the Estate’s beliefs regarding the likelihood that she would
sue, and therefore he could not have known that disclosing
Jean’s plans would have corrected a mistaken belief held by
the Estate.
Additionally, the Estate was in a much better position
than the Commissioner to anticipate the children’s litigation,
meaning that the Commissioner’s omission likely wouldn’t
have changed the Estate’s views regarding the likelihood of a
lawsuit. In their state court suits, the children claimed that
the Estate had fraudulently induced them into accepting the
2007 Waiver Agreement. If those claims were valid, the Es-
tate should have expected a lawsuit; if it committed fraud, it
certainly would have known. On the other hand, it is possi-
2Both parties agree that Illinois law applies to the contract aspects of this
case.
12 No. 14-1216
ble that the children’s claims were meritless. In that case, it is
possible that the lawsuits came as a surprise to the Estate
and that the Commissioner’s knowledge regarding Jean’s
plans could have alerted the Estate to the possibility of a
suit. But, in that scenario, the Commissioner’s omission
would have been harmless, as the Estate would not have had
to make further payments to the children. 3
Finally, aside from the Dorchester test, the Estate argues
that the Tax Court, by refusing to delay entry of its decision
until after the state court cases had been adjudicated, violat-
ed Treasury Regulation § 20.2053-4(a)(2), which states,
“Events occurring after the date of a decedent’s death shall
be considered in determining whether and to what extent a
deduction is allowable under section 2053.” As is clear from
its plain language, however, this regulation was irrelevant in
this case, as the Tax Court never made a determination as to
“whether and to what extent a deduction [was] allowable.”
Rather, the parties’ settlement conclusively established the
amount that the Estate could deduct. It was not the province
of the Tax Court to determine whether this amount was cor-
rect. 4
3 There was, of course, ultimately a settlement in the children’s cases, but
that does not change the analysis. Perhaps no fraud occurred, and the
Estate chose to settle in order to dispose of the cases. The Estate’s choice
to voluntarily pay the children extra money should not affect the Com-
missioner’s right to what was agreed upon in the settlement in this case.
Or, perhaps there was fraud, and the children gave up the possibility of a
larger payday in favor of a settlement. In that case, the Estate should
have predicted the suit, meaning that any omission by the Commissioner
was harmless.
4 The Estate also argues that the Tax Court abused its discretion by not
stating its reasons for rejecting the Estate’s claims of mutual mistake and
No. 14-1216 13
III. Conclusion
The Tax Court did not abuse its discretion in denying the
Estate’s motion to vacate the parties’ settlement. The judg-
ment of the Tax Court is therefore AFFIRMED.
misrepresentation. This argument was raised for the first time in the Es-
tate’s reply brief, and therefore we will not consider it, as “it is well-
settled that arguments first made in the reply brief are waived.” TAS Dis-
trib. Co., Inc. v. Cummins Engine Co., Inc., 491 F.3d 625, 630 (7th Cir. 2007).