Dorchester Industries Incorporated v. Commissioner ( 1997 )

108 T.C. No. 16UNITED STATES TAX COURT
DORCHESTER INDUSTRIES INCORPORATED, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 20515-93, 20572-93, Filed April 29, 1997.
27121-93, 23092-94.
R has moved for entry of decisions based on an
agreement with Ps to settle these cases. Two Ps argue
that they never agreed to settle these cases and, even
if they did, they have repudiated that agreement.
Held: Ps entered into a settlement agreement with
R. R's motions for entry of decision will be granted
with respect to all dockets (except with regard to W).
Cole v. Commissioner, 30 T.C. 665 (1958), affd. 272
F.2d 13 (2d Cir. 1959), will not be followed to the
extent that it indicates that a party to a settlement
agreement that is not filed as a stipulation may
repudiate that agreement up until (and including) the
time the case is called for trial.
1
Cases of the following petitioners are consolidated
herewith: Frank H. Wheaton, Jr., and Mary B. Wheaton, docket
Nos. 20572-93, 27121-93, and 23092-94.
- 2 -
Paul R. Porreca, Darryl S. Caplan, and Ian M. Comisky, for
petitioner Dorchester Industries, Inc., docket No. 20515-93.
Ian M. Comisky, Todd C. Simmens, and Darryl S. Caplan, for
petitioner Frank H. Wheaton, Jr., docket Nos. 20572-93,
27121-93, and 23092-94.
Robert D. Comfort, Gregg W. Winter, and Marc Sonnenfeld, for
petitioner Mary B. Wheaton, docket Nos. 20572-93, 27121-93, and
23092-94.
Patrick Whelan, William S. Garofalo, Leon St. Laurent, and
Daniel K. O'Brien, for respondent.
HALPERN, Judge: Respondent has determined deficiencies in
Federal income tax and additions to tax in the following cases:
Docket No. Petitioner(s) Tax Years
20515-93 Dorchester Industries 1981, 1982, 1985, 1986
Inc.
20572-93 Frank Wheaton, Jr., 1979-1988
and Mary Wheaton
27121-93 Frank Wheaton, Jr., 1989
and Mary Wheaton
23092-94 Frank Wheaton, Jr., 1990
and Mary Wheaton
Respondent has moved for entry of decision with respect to
each of those cases. Subsequent to respondent’s moving for entry
of decisions in the cases at docket Nos. 20572-93, 27121-93, and
23092-94, respondent and petitioner Mary Wheaton (Mary Wheaton)
reached an agreement on and stipulated to the fact that Mary
- 3 -
Wheaton is an innocent spouse within the meaning of section
6013(e). On that basis, respondent has conceded all deficiencies
in income tax, additions to tax, and penalties determined with
respect to Mary Wheaton. We accept respondent’s concession and
shall enter decisions accordingly.
Respondent asks that we enter decisions with respect to
petitioners Dorchester Industries Inc. (Dorchester) and Frank
Wheaton, Jr. (Frank Wheaton), based on a settlement agreement
that respondent claims those petitioners entered into on November
6, 1995. We must determine whether Dorchester and Frank Wheaton
did, in fact, enter into such an agreement and, if so, the
consequence thereof. Respondent asks that we enter decisions
with respect to Dorchester and Frank Wheaton as follows:
Docket No. 20515-93 (Dorchester Industries)
Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(2) 6661
1981 $92,643 $46,322 None None
1
1982 89,411 44,706 None
1
1985 230,360 115,180 $57,590
1
The addition to tax under I.R.C. sec. 6653(b)(2) is
50 percent of the interest payable under I.R.C. sec. 6601 with
respect to the portion of the underpayment which is attributable
to fraud, which is the entire deficiency for each of the taxable
years 1982 and 1985.
Additions to Tax
Sec. Sec.
Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B)
1
1986 $1,376 $1,032
1
The addition to tax under I.R.C. sec. 6653(b)(1)(B) is
50 percent of the interest payable under I.R.C. sec. 6601 with
respect to the portion of the underpayment which is attributable
- 4 -
to fraud, which is the entire deficiency for the taxable year
1986.
Docket No. 20572-93 (Frank H. Wheaton, Jr.)
Additions to Tax
Sec.
Year Deficiency 6653(b)
1979 $65,558 $32,779
1980 1,026,785 513,393
1981 926,036 463,018
Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6653(b)(1) 6653(b)(2) 6661
1
1982 $1,191,646 $595,823 $297,912
1
1983 587,593 293,797 146,898
1
1984 886,466 443,233 221,617
1
1985 1,145,974 572,987 286,494
1
The addition to tax under I.R.C. sec. 6653(b)(2) is
50 percent of the interest payable under I.R.C. sec. 6601 with
respect to the portion of the underpayment which is attributable
to fraud, which is the entire deficiency for the taxable years
1982, 1983, 1984, and 1985.
Additions to Tax
Sec. Sec. Sec. Sec.
Year Deficiency 6653(b)(1)(A) 6653(b)(1)(B) 6661 6662
1 --
1986 $1,141,552 $856,164 $285,388
1
1987 940,833 533,332 177,777 $45,945
--
1988 559,806 419,855 None 139,952
1
The addition to tax under I.R.C. sec. 6653(b)(1)(B) is
50 percent of the interest payable under I.R.C. sec. 6601 with
respect to the portion of the underpayment which is attributable
to fraud, which is the entire deficiency for the taxable year
1986 and $711,109 of the deficiency for the taxable year 1987.
Docket No. 27121-93 (Frank H. Wheaton, Jr.)
Year Deficiency Sec. 6662
1989 $235,948 $47,189.60
Docket No. 23092-94 (Frank H. Wheaton, Jr.)
Year Deficiency Sec. 6662
1990 $230,981 $46,196
- 5 -
Unless otherwise noted, all section references are to the
Internal Revenue Code in effect for the years in issue, and all
Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Introduction
Frank Wheaton is married to Mary Wheaton, and they resided
in Millville, New Jersey, at the time their petitions in these
cases were filed. They made joint returns of income for the
taxable (calendar) years 1979 through 1990.
Dorchester is a New Jersey corporation. It is engaged in
shipbuilding and repair. Dorchester’s mailing address was in
Dorchester, New Jersey, at the time its petition in this case was
filed. Dorchester is a calendar-year taxpayer.
At all times relevant to the issues in these cases, Frank
Wheaton was the sole shareholder of Dorchester. Frank Wheaton
has been the president of Dorchester since at least 1991.
The Scheduled Trial
By order of the Chief Judge dated January 19, 1995, the
cases at docket Nos. 20515-93, 20572-93, and 27121-93 (the 1993
docketed cases) were assigned to Judge James S. Halpern for
disposition. By order dated February 14, 1995, the 1993 docketed
cases were consolidated and set on a special trial calendar to
commence in Philadelphia, Pennsylvania, on October 30, 1995. By
order dated October 19, 1995, the 1993 docketed cases were set
- 6 -
for a pretrial conference on October 26, 1995, in Washington,
D.C. At that conference, the Court was informed that the trial
in those cases would take approximately 3-1/2 weeks. The
parties’ pretrial memoranda set forth more than 70 issues;
respondent, alone, listed 60 witnesses. Thousands of hours had
gone into trial preparation. The Court conducted a lengthy
discussion of the issues to be tried, and the Court determined
that both the Court and the parties would benefit if, before
commencing trial, the parties could discuss their differences
with an impartial third party, who might suggest a basis for
settlement of some or all of the items in issue. Accordingly, by
order dated October 27, 1995, the Court continued the cases for
trial from October 30, 1995, to November 8, 1995. The parties
were directed to meet with Chief Special Trial Judge Peter J.
Panuthos to discuss their differences and determine whether any
or all of the items in issue might be disposed of by settlement.
A meeting with Chief Special Trial Judge Panuthos commenced
on November 2, 1995, in Washington, D.C. Respondent was
represented by attorney William Garofalo (Garofalo). Dorchester
and the Wheatons were represented by attorneys William Gilson
(Gilson) and Gary Wodlinger (Wodlinger). Neither Frank nor Mary
Wheaton attended the meeting, although Frank Wheaton was present
in Washington, D.C. On the evening of November 2, 1995, after
their initial meeting with Chief Special Trial Judge Panuthos,
Gilson and Wodlinger met with Frank Wheaton at his hotel in
- 7 -
Washington, D.C., and expressed doubt as to the persuasiveness of
certain of their key arguments. Frank Wheaton told Gilson and
Wodlinger that he would not appear or testify at trial. Gilson
informed Frank Wheaton that he was the principal witness in about
90 percent of the issues in the cases and that, without him,
Gilson and Wodlinger had no chance. Gilson informed Frank
Wheaton that, if he did not testify, there would be a default and
a judgment for $41 million--“$40 million against you
[personally]”. Frank Wheaton again said that he would not show
up for trial. He said that he did not have $40 million, he was
not spending any more money, and he was getting back to business.
Frank Wheaton instructed Gilson and Wodlinger to get a settlement
number from the Internal Revenue Service (IRS). He did not
instruct Gilson and Wodlinger to set any conditions on the
settlement.
On the morning of November 3, 1995, Gilson and Wodlinger met
with Garofalo and Chief Special Trial Judge Panuthos. Gilson
advised Garofalo that Frank Wheaton wished to settle the cases.
Garofalo told Gilson that (1) he would prepare a settlement offer
based on the amount of tax and penalties for which respondent
believed petitioners were liable, (2) respondent would only
settle the instant cases if Gilson submitted to respondent
written settlement documents prior to 11:00 a.m., on Monday,
November 6, 1995, and (3) he had no authority to settle any
dispute with Frank and Mary Wheaton for 1991, a year not then
- 8 -
before the Court. Subsequently, Frank Wheaton, Gilson,
Wodlinger, and Garofalo left Washington, D.C.
Later on November 3, 1995, Garofalo transmitted a letter via
facsimile to Gilson (the November 3 letter). The November 3
letter contains attachments setting forth respondent’s proposed
settlement figures with respect to the 1993 docketed cases. In
addition, the attachments contain figures to settle the case at
docket No. 23092-94, which involves the tax liability of Frank
and Mary Wheaton for 1990 (the 1993 docketed cases and the case
at docket No. 23092-94 hereafter referred to together as the
docketed cases). The November 3 letter required a response by
11:00 a.m., on Monday, November 6, 1995. The settlement figures
proposed by respondent in attachments to the November 3 letter
are substantially the same as the figures contained in
respondent’s motions for entry of decision, except that the
attachments contain calculations of interest that are not part of
respondent’s motions for entry of decision. Including interest,
the attachments show amounts due in excess of $40 million.
Richard F. Riley (Riley) and K. Martin Worthy (Worthy) are
experienced tax attorneys associated with the law firm of Hopkins
& Sutter as partner and senior counsel, respectively. They had
been retained by Frank Wheaton to consult with his trial counsel,
Gilson and Wodlinger, regarding the docketed cases. At Frank
Wheaton’s request, Gilson and Wodlinger conferred by telephone
with Riley and Worthy during the weekend of November 4 and 5,
- 9 -
1995, concerning the proposed settlement. During that weekend,
Frank Wheaton also spoke with Riley and Worthy and, separately,
with Wodlinger. As a result of those conversations, a consensus
was formed among the various attorneys and Frank Wheaton to make
a counteroffer to the Government’s proposal contained in the
November 3 letter; the counteroffer was to be 75 percent of the
amounts proposed by the Government. Frank Wheaton and his
attorneys realized, however, that the Government might not accept
that counteroffer. On the morning of Monday, November 6, 1995,
before speaking by telephone with Garofalo, Gilson telephoned
Frank Wheaton and asked for instructions if the Government were
to refuse the 75-percent counteroffer. Frank Wheaton instructed
Gilson that, in that circumstance, he was to proceed and take the
Government’s number. Frank Wheaton answered “yes” when Gilson
asked him if he realized that there would be a $40 million
judgment. Although there had been a discussion among the
attorneys and a discussion between the attorneys and Frank
Wheaton regarding Frank Wheaton’s inability to pay $40 million
and the possibility of negotiating some final payment obligation
for both the docketed cases and other years under examination
(but not yet petitioned to the Tax Court), Frank Wheaton did not
attach any condition to his instruction to Gilson that, if the
Government would not compromise, he was to take the Government’s
number.
- 10 -
On the morning of November 6, 1995, after speaking with
Frank Wheaton, Gilson spoke by telephone with Garofalo, who
rejected the 75-percent counteroffer. Garofalo then told Gilson
of certain minor changes to the Government’s proposed settlement
figures. Gilson made a note of those numbers. Gilson informed
Garofalo that the Government’s proposals were acceptable. At
some point during the morning of November 6, 1995, Garofalo or
his secretary transmitted by facsimile, and Gilson received, a
letter (the November 6 letter), which made the changes to the
Government’s proposed settlement figures that had previously been
communicated by Garofalo to Gilson by telephone and that reduced
the settlement amount slightly. The November 6 letter was signed
by Patrick E. Whelan, Assistant District Counsel for the IRS.
The November 6 letter required a response by 1:00 p.m. Also at
some point during the morning of November 6, 1995, Garofalo, by
telephone, informed Gilson that (1) in light of Gilson’s
statement that the Government’s proposals were acceptable, he
need not worry about the 1:00 p.m., deadline and (2) he should
get his written response to Garofalo as soon as possible.
Later, on November 6, 1995, Gilson faxed to Frank Wheaton a
letter (the November 6 letter to Wheaton) that begins: “This
letter will confirm the authority given to us to resolve the
pending United States Tax Court matters involving calendar years
1979 through 1990." The November 6 letter to Wheaton then
summarizes the events and discussions of the few days prior to
- 11 -
the letter. It states that, earlier that day, a report by
telephone had been made by Gilson to Frank Wheaton of the
morning’s telephone conversation between Gilson and Garofalo and
that Frank Wheaton had instructed Gilson to continue to settle
the matter. It also states that, consistent with the telephone
report and resulting instruction, correspondence accepting the
Government’s settlement proposal had been faxed simultaneously to
Garofalo and to Frank Wheaton. In addition, the November 6
letter to Wheaton states that Riley’s office will take the lead
in “an offer in compromise” and that it would be necessary for
Frank Wheaton to provide a list of assets to the IRS at some time
in the future.
At 3:30 p.m., on November 6, 1995, Gilson faxed a letter to
Garofalo (the November 6 response) accepting the revised
settlement proposal “as set forth in your revised offer of this
morning, November 6, 1995.” The November 6 response requests
that Garofalo advise the Court of the settlement in order to
avoid the necessity of appearing for trial on Wednesday,
November 8, 1995, in Philadelphia, Pennsylvania.
Garofalo informed the Court of the settlement. By order
dated November 6, 1995, upon information that the parties had
reached a basis for settlement, the Court struck the 1993
docketed cases from the November 8, 1995, Philadelphia,
Pennsylvania, special trial session and ordered the parties to
- 12 -
submit settlement documents to the Court on or before December 4,
1995.
Subsequent Events
Sometime after November 8, 1995, Frank Wheaton changed his
mind. On November 21, 1995, Garofalo mailed decision documents
to Gilson, which reflected the basis for the settlement that had
been reached. Frank Wheaton refused to execute those decision
documents. As a result, respondent moved for entry of decision
in each of the docketed cases.
Representation
Gilson and Wodlinger entered their appearances as counsel
for Dorchester on April 11, 1994. They entered their appearances
as counsel for Frank and Mary Wheaton in the remaining docketed
cases by subscribing the petitions in those cases.
Prior to entering their appearances in those remaining
docketed cases, Gilson and Wodlinger met with Frank and Mary
Wheaton to discuss representation with respect to Frank and Mary
Wheaton’s 1979 through 1989 taxable years. Gilson and Wodlinger
raised the question of separate counsel for Frank and Mary
Wheaton and for Dorchester. Frank Wheaton advised Gilson and
Wodlinger that he did not want to retain additional attorneys and
that he wanted Gilson and Wodlinger to represent all three
parties. Mary Wheaton stated that she did not want separate
counsel and directed Gilson and Wodlinger to take their
instructions from Frank Wheaton. Gilson and Wodlinger raised the
- 13 -
question of an innocent spouse defense for Mary Wheaton. Mary
Wheaton said that she did not want to raise that defense. Frank
Wheaton said that he was not going to have that defense raised.
Gilson and Wodlinger have withdrawn as counsel in all of the
docketed cases.
OPINION
I. Introduction
Respondent has moved for entry of decision in each of these
consolidated cases in accordance with a settlement agreement of
the parties. Because respondent and petitioner Mary Wheaton
(Mary Wheaton) have since reached an agreement on and have
stipulated to the fact that Mary Wheaton is an innocent spouse
within the meaning of section 6013(e), there are no issues with
respect to Mary Wheaton that we must address. With respect to
petitioners Dorchester Industries Inc. (Dorchester) and Frank
Wheaton, Jr. (Frank Wheaton), we must determine whether those
parties and respondent, in fact, entered into a settlement
agreement and, if so, the consequences thereof.
At the conclusion of an evidentiary hearing that commenced
on July 26, 1996 (the hearing), the parties (other than Mary
Wheaton) were directed to file briefs setting forth proposed
findings of fact and argument. The Court set page limitations on
the argument portions of the opening and answering briefs of
25 and 15 pages, respectively. The Court stated that, if
additional pages for argument were desired, a party would have to
- 14 -
request leave of Court to exceed the page limitations. The
argument portion of Frank Wheaton’s opening brief consists of
25 pages; however, at its beginning, it carries a footnote
stating that, due to the page limitations imposed by the Court,
Frank Wheaton incorporates by reference arguments contained in
certain previously filed papers. Frank Wheaton did not ask for
leave to exceed the page limitations imposed by the Court.
Accordingly, the Court will not incorporate into his brief the
referenced arguments and deems him to have failed to raise any
arguments not set forth plainly in either his opening or
answering brief.
Dorchester has failed to file an opening brief. By its
counsel, Paul Porreca, Dorchester has given notice of its
adoption of Frank Wheaton’s reply brief. We assume that
Dorchester wishes to adopt the arguments made by Frank Wheaton in
his opening brief.
II. Settlement Agreement
A. Introduction
A controversy before this Court may be settled by agreement
of the parties. Recently, we have stated some general
propositions regarding settlement agreements:
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
- 15 -
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
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.
Manko v. Commissioner, T.C. Memo. 1995-10.
B. Authority
If a settlement agreement was reached here, it was not
reached by Frank Wheaton negotiating directly on his own behalf
and on behalf of Dorchester. Respondent was represented by
- 16 -
attorney William Garofalo (Garofalo), and Dorchester and Frank
Wheaton were represented by attorneys William Gilson (Gilson) and
Gary Wodlinger (Wodlinger). No question has been raised as to
Frank Wheaton's authority to act on behalf of Dorchester, of
which he was president and sole shareholder. Frank Wheaton and
Dorchester do question, however, the authority of Gilson to enter
into any settlement agreement on their behalf.
Whether an attorney has authority to act on behalf
of a taxpayer is a factual question to be decided
according to the common law principles of agency.
Adams v. Commissioner, 85 T.C. 359, 369-372 (1985);
Kraasch v. Commissioner, 70 T.C. 623, 627-629 (1978).
Under common law principles of agency, authority may be
granted by express statements or may be derived by
implication from the principal's words or deeds. Dahl
v. Commissioner, T.C. Memo. 1995-179; DiSanza v.
Commissioner, T.C. Memo. 1993-142, affd. 9 F.3d 1538(2d Cir. 1993); Casey v. Commissioner, T.C. Memo. 1992-
672; John Arnold Executrak Systems, Inc. v.
Commissioner, T.C. Memo. 1990-6.
Estate of Quirk v. Commissioner, T.C. Memo. 1995-234.
We have no doubt that Gilson received express authority from
Frank Wheaton to settle the cases at docket Nos. 20515-93, 20572-
93, 27121-93, and 23092-94 (the docketed cases) on the basis
presented by the Government. Indeed, Frank Wheaton conceded at
the hearing that he authorized Gilson and Wodlinger to enter into
an agreement with the Internal Revenue Service (IRS). Frank
Wheaton testified:
They [Gilson and Wodlinger] said they had talked to
Mr. Riley and they all agreed that the best thing for
us to do was to agree to the statements of the IRS and
that would amount to a $40 million fine * * *. But I
said as long as Mr. Riley and you two [Gilson and
- 17 -
Wodlinger] think that's the thing to do, you're my
counsel, I guess we'll have to do so. [Emphasis
added.]
In response to questioning by the Court, Frank Wheaton testified
that he instructed Gilson to enter into a settlement agreement on
the terms presented by the Government and then subsequently
decided that he did not want to settle the cases. Frank Wheaton
also testified that he understood that the settlement agreement
would encompass the docketed cases and would not affect
petitioners' tax liabilities with respect to any tax years not
before the Court. Under these circumstances, we find that Gilson
possessed express authority to enter into the settlement
agreement on behalf of Dorchester and Frank Wheaton.
C. Offer and Acceptance
On November 3, 1995, Garofalo transmitted a letter via
facsimile to Gilson (the November 3 letter). The November 3
letter contains respondent’s proposed settlement figures for the
docketed cases. The November 3 letter required a response by
11:00 a.m., on Monday, November 6, 1995. In a telephone
conversation with Gilson during the morning of that Monday,
Garofalo told Gilson of certain changes to those proposed
settlement figures. Gilson told Garofalo that the Government’s
proposals were acceptable. At some point during the morning of
November 6, 1995, Garofalo or his secretary transmitted by
facsimile, and Gilson received, a letter (the November 6 letter),
which made the changes to the Government’s proposed settlement
- 18 -
figures that were previously communicated by Garofalo to Gilson
by telephone and which reduced the settlement amount slightly.
The November 6 letter required a response by 1:00 p.m. Also by
telephone during the morning of November 6, 1995, Garofalo
extended the 1:00 p.m., deadline contained in the November 6
letter. At 3:30 p.m., on November 6, 1995, Gilson faxed a letter
to Garofalo (the November 6 response) accepting respondent’s
revised offer of November 6, 1995.
Dorchester and Frank Wheaton point to some uncertainty in
Garofalo’s testimony concerning whether he faxed the November 6
letter to Gilson or whether he had his secretary fax that letter.
Dorchester and Wheaton conclude that respondent has failed to
prove that the November 6 letter was transmitted to Gilson on
November 6, 1995. They view the November 3 letter as a proposal
and not a definite offer. They argue:
A prerequisite to the formation of an agreement is
the manifestation of mutual assent to material terms by
all the parties. Lamborn v. Commissioner, T.C. Memo.
1994-5[1]5. Consequently, there must be a “meeting of
the minds” on material terms in order to reach an
agreement. Olefins Trading, Inc. v. [Han Yang Chem.]
Corp., 9 F.3d 282 (3d Cir. 1993). This intended
agreement [the November 3 letter] purports to conclude
cases involving eleven calendar years, between 133 and
155 issues and numerous penalties. This document
outlined above simply does not show a settlement was
ever reached of a case of this complexity and
magnitude.
The attachments to the November 3 letter contain a great
amount of detail supporting respondent’s proposed settlement
figures for the docketed cases. On the morning of November 6,
- 19 -
1995, by telephone, Garofalo made certain minor changes to those
proposed settlement figures, which changes were confirmed by the
November 6 letter. The November 6 letter was faxed to and
received by Gilson during the morning on November 6, 1995. We
base that finding principally on Garofalo’s testimony that he
believed that the November 6 letter was faxed to Gilson at
11:30 a.m., on November 6, 1995, and Gilson’s testimony that he
recollects reviewing the November 6 letter on November 6, 1995.
Moreover, the November 6 response refers to Garofalo’s “revised
offer of this morning, November 6, 1995.” We are convinced that
the proposed settlement figures conveyed to Gilson by way of the
November 3 letter and modified somewhat on November 6, 1995, by
way of the November 6 letter constitute the definite and material
terms of an offer to settle the docketed cases, and we so find.
Dorchester and Frank Wheaton argue that the November 6
response, faxed by Gilson to Garofalo at 3:30 p.m., was too late
and, thus, no agreement was reached. We do not agree. First,
Gilson accepted the Government’s proposals during his telephone
conversation with Garofalo during the morning of November 6,
1995. The November 3 letter, however, called for a written
acceptance. The November 6 letter extended the time for the
written acceptance to 1:00 p.m. By telephone during the morning
of November 6, 1995, Garofalo extended the 1:00 p.m., deadline
contained in the November 6 letter. It is hornbook law that, if
an acceptance fails to comply with a time requirement in an
- 20 -
offer, the time requirement may be waived. E.g., 1 Jaeger,
Williston on Contracts, sec. 53, at 171 (3d ed. 1957):
Not infrequently an offeror who has imposed a limit of
time in his offer does not care to insist upon it and
by further negotiations may indicate a continued
willingness to stand by the terms of his offer. Any
such manifestation of continued willingness is in
effect a new offer, which may be accepted and if
accepted will ripen into a new contract. [Fn. ref.
omitted.]
We have no doubt that the time requirement contained in the
November 6 letter was waived and that the November 6 response was
a timely acceptance of an offer made by respondent, and we so
find. Indeed, respondent relied on that response in informing
the Court that no trial was necessary.
The contractual prerequisites of offer and acceptance are
present: The November 3 letter, the November 6 letter, the
November 6 response, and the surrounding circumstances constitute
the objective manifestation of mutual assent to the essential
terms of a settlement agreement. The agreement that was reached
is the agreement proposed in the November 3 letter, as modified
during the morning telephone conversation of November 6, 1995,
which is all set forth in the November 6 letter. We believe that
the parties entered into a contract to settle the docketed cases,
and we so find.
D. Repudiation
By order dated November 6, 1995, upon information that the
parties had reached a basis for settlement, the Court struck the
- 21 -
cases at docket Nos. 20515-93, 20572-93, and 27121-93 (the 1993
docketed cases) from the November 8, 1995, Philadelphia,
Pennsylvania, special trial session (the November 8 special trial
session) and ordered the parties to submit settlement documents
to the Court on or before December 4, 1995. On November 21,
1995, Garofalo mailed decision documents (the decision documents)
to Gilson. The decision documents address not only the 1993
docketed cases but also the case at docket No. 23092-94 (the 1994
docketed case), which deals with Frank and Mary Wheaton’s 1990
tax year (the 1993 docketed cases and the 1994 docketed case
being referred to together as the docketed cases). Frank Wheaton
refused to execute the decision documents. At the hearing, the
Court asked Frank Wheaton why he believed the trial did not start
on November 8, 1995. He answered that he assumed that the trial
did not start because he had agreed to the Government’s
settlement proposals. He testified that the reason he had
refused to execute the decision documents was because he had
changed his mind about the settlement sometime after November 8,
1995. Dorchester and Frank Wheaton argue that Frank Wheaton was
free to repudiate his agreements with the Government when he was
presented with the decision documents some time soon after
November 21, 1995.
Among the general propositions set forth above (section
II.A) are that (1) a settlement is a contract and (2) a valid
settlement, once reached, cannot be repudiated by either party.
- 22 -
Nevertheless: “The law is well established that a court has some
power to set aside a settlement stipulation filed with it but its
discretion will not be exercised unless good cause is shown.”
Saigh v. Commissioner, 26 T.C. 171, 176 (1956). In Adams v.
Commissioner, 85 T.C. 359, 375 (1985), we set forth criteria
appropriate for determining when we should exercise our
discretion to modify or set aside a settlement stipulation:
The party seeking modification * * * must show that the
failure to allow the modification might prejudice him.
* * * Discretion should be exercised to allow
modification where no substantial injury will be
occasioned to the opposing party; refusal to allow
modification might result in injustice to the moving
party; and the inconvenience to the Court is slight.
* * * [Citations omitted.]
In Himmelwright v. Commissioner, T.C. Memo. 1988-114, we
faced a situation similar to that which we face with respect to
the 1993 docketed cases. In the Himmelwright case, we had
canceled a trial in reliance on the representation of counsel for
one of the parties that a settlement agreement had been reached.
We enforced that agreement, memorialized in a letter from the
taxpayer’s counsel to the Commissioner’s counsel, by analogizing
the taxpayer’s request to be relieved of the agreement to a
motion to vacate a settlement agreement filed on the eve of
trial. In Stamm Intl. Corp. v. Commissioner, 90 T.C. 315 (1988),
the Commissioner moved to vacate a settlement agreement
negotiated shortly before trial was scheduled to commence. We
stated that the settlement agreement had led to the vacation of
- 23 -
the trial date and would have led to entry of decisions had the
parties complied with their agreement and the Court’s order with
respect to settlement documents. Id. at 321. Because of those
circumstances, we stated that more stringent standards were
applicable than the criteria set forth in Adams v. Commissioner,
supra. We stated that the moving party had to satisfy standards
akin to those applicable in vacating a judgment entered into by
consent: “In such cases, the parties are held to their agreement
without regard to whether the judgment is correct on the merits.”
Id. at 322. Absent a showing of lack of formal consent, fraud,
mistake, or some similar ground, a judgment entered by consent
will be upheld. E.g., Swift & Co. v. United States, 276 U.S.
311, 324 (1928). Those same principles are applicable here. The
Court struck the 1993 docketed cases from the November 8 special
trial session in reliance on the representation made by the
parties that they had reached a basis for settlement. Dorchester
and Frank Wheaton have failed to prove fraud, mistake, or some
similar ground; accordingly they are bound by the terms of the
settlement with respect to the 1993 docketed cases.
The situation is different with respect to the case at
docket No. 23092-94 (the 1994 docketed case), which deals with
Frank and Mary Wheaton’s 1990 tax year. The 1994 docketed case
was not set for trial at the November 8 special trial session.
It was noticed for trial on May 13, 1996, in Philadelphia,
Pennsylvania (which trial was continued). Trial was not imminent
- 24 -
on November 6, 1995, when respondent and Frank Wheaton entered
into the settlement agreement. The 1994 docketed case is, thus,
unlike Himmelwright v. Commissioner, supra, and we need not apply
the stringent eve-of-trial standards of Stamm Intl. Corp. v.
Commissioner, supra. For good cause shown, we may refuse to
implement the settlement agreement as it applies to the 1994
docketed case. Cf. Saigh v. Commissioner, supra at 176 (stating
that rule with respect to a settlement stipulation). We apply
the criteria set forth in Adams v. Commissioner, supra.
Since the settlement agreement entered into by respondent
and petitioners amounts to a virtual capitulation by petitioners,
it does not appear that respondent gave up much of anything to
get a settlement of the 1994 docketed case or would be
substantially injured were we to modify the settlement agreement
with respect to the 1994 docketed case. Respondent might be
forced to try that case, but that possibility exists for any
decision to set aside a settlement agreement. If attention is
focused only on the 1994 docketed case, the Court has not been
unduly inconvenienced. Nevertheless, Frank Wheaton has failed to
prove that a failure to modify the settlement agreement would
result in an injustice being done to him. He consulted with four
attorneys after receiving respondent’s settlement proposal. Two
of those attorneys, Richard F. Riley and K. Martin Worthy, are
experienced tax attorneys. Frank Wheaton has not alleged that
respondent tried to deceive him by including the 1994 docketed
- 25 -
case in the settlement proposal; indeed, it appears that the 1994
docketed case was included in the settlement proposal at Frank
Wheaton’s request in order to settle as many tax years as
possible. Frank Wheaton cannot assert that he was not fully
cognizant of the terms for settling the 1994 docketed case or
that he did not approve that settlement. In fact, beyond the
assignments of error and averments in the petition, he has failed
to argue that there is any merit to his claims with respect to
the 1994 docketed case. He has not informed us what witnesses he
would call, what they would testify to, or what other evidence he
would present. All we know is that Frank Wheaton changed his
mind with respect to settling that case. Frank Wheaton has
failed to prove that any injustice would result by holding him to
his bargain, and he has failed to convince us that we should
exercise our discretion to modify the settlement agreement as it
applies to the 1994 docketed case.
Finally, we are not compelled to allow Frank Wheaton to
repudiate the settlement agreement with respect to the 1994
docketed case because of what we said in Cole v. Commissioner, 30
T.C. 665, 674 (1958), affd. 272 F.2d 13 (2d Cir. 1959). In the
Cole case, we refused to redetermine deficiencies in accord with
certain proposed stipulations that we found had not been executed
by the Commissioner and had not been filed in the Court as
stipulations. After finding that the proposed stipulations had
- 26 -
not been accepted or signed on behalf of the Commissioner, we
added:
Moreover, even if it be assumed that either
stipulation had been signed, petitioner would not be
entitled to have an order entered disposing of the case
upon the basis of such document. This Court will, of
course, enter an order adjudicating liability in
accordance with an agreement of the parties, for the
existence of such agreement shows that there is no
longer any controversy between them. And once a
stipulation is filed by both sides, it is binding upon
them. Cf. Fred M. Saigh, Jr., 26 T.C. 171. But where,
for whatever reason, the parties are not in agreement
at the time the case is called for trial, it is wholly
irrelevant in this connection that they may have been
in agreement at some earlier time. The inquiry into
whether respondent’s Chief Counsel had “signed” the
stipulations in this case is therefore beside the
point. Furthermore, the mere signing of a paper, while
retaining custody of it, does not necessarily render it
an operative document. Until it is delivered or until
some appropriate action is taken with respect thereto,
it is far from clear that the signer may not scratch
out his signature.
Id. (emphasis added). In Estate of Jones v. Commissioner, 795
F.2d 566, 573 (6th Cir. 1986), affg. T.C. Memo. 1984-53, the
Court of Appeals for the Sixth Circuit (the Sixth Circuit) upheld
this Court’s determination that a settlement was not validly
executed because it had not been filed with the Court and had not
been signed by or on behalf of the Chief Counsel, although it had
been approved by an IRS Appeals officer. This Court had relied
on the Cole case, which the Sixth Circuit quoted in part,
beginning its quotation with the underscored language set forth
above. The Sixth Circuit acknowledged that, had it been passing
on a settlement agreement independently reached “by ordinary
- 27 -
litigation”, it might well have concluded that such agreement
should be enforced. It concluded, however, that this Court had
not erred as a matter of law in reaching its conclusion. This
Court, however, has not been consistent in interpreting (or even
acknowledging) the Cole case. For example, in Nelson Bros., Inc.
v. Commissioner, T.C. Memo. 1991-52, we cast doubt on whether an
agreement could be repudiated before trial. We emphasized what
we had said in the Cole case about the mere signing of a proposed
stipulation not always being sufficient evidence that the parties
were in agreement. We continued:
Instead, delivery of the stipulation or other
appropriate action would be needed in order for this
Court to accept that a binding agreement was reached by
the parties. Therefore, [in the Cole case] we did not
state that the parties, while in agreement before
trial, could cancel the agreement if they were no
longer in agreement when the case was called for trial.
* * *
Id. In Haiduk v. Commissioner, T.C. Memo. 1990-506, we enforced
a settlement agreement evidenced only by an exchange of letters
between the parties. We did not even mention the Cole case. The
repudiation language in the Cole case does not recite a rule of
contract law. Cf. Estate of Jones v. Commissioner, supra at 573.
It appears to implement this Court’s inherent power to regulate
what will be tried before it. See Saigh v. Commissioner, 26 T.C.
at 176. We have reconsidered the Cole case, and we can see no
reason to empower a party to a settlement agreement with the
authority unilaterally to set that agreement aside. Upon a
- 28 -
showing of sufficient cause, we have the power to modify the
agreement. Saigh v. Commissioner, supra. In light of those
considerations, we will not follow the Cole v. Commissioner,
supra, case to the extent it indicates that a party to a
settlement agreement that is not filed as a stipulation may
repudiate that agreement up until (and including) the time the
case is called for trial.
E. Setting Aside the Agreement
Dorchester and Frank Wheaton argue that each was ill-served
because, in addition to representing them, Gilson and Wodlinger
represented Mary Wheaton. Dorchester and Frank Wheaton claim
that Gilson and Wodlinger faced a “blatant” and “nonwaivable”
conflict of interest in representing both Mary and Frank Wheaton.
That conflict, they claim, arises because Mary Wheaton had
available to her an “innocent spouse” defense under section
6013(e), and one element of that defense is that the
understatement of tax on the joint return be attributable to
“grossly erroneous” items of Frank Wheaton. See sec.
6013(e)(1)(B), (e)(2).
Certainly, one spouse’s claim that she (he) is an innocent
spouse can present a conflict of interest to counsel trying to
represent both spouses. If, indeed, the spouses do have
differing interests with respect to any issue in a case, our
rules provide that counsel must secure informed consent of the
client, withdraw from the case, or take whatever other steps are
- 29 -
necessary to obviate the conflict of interest. Rule 24(f). On
rare occasion, we require separate representation of persons with
differing interests, even if an apparent waiver has been
obtained. E.g., Para Techs. Trust v. Commissioner, T.C. Memo.
1992-575.
Although Gilson and Wodlinger may have believed that there
was some chance that Mary Wheaton could succeed with an innocent
spouse defense, they were far from convinced that such a claim
would succeed. Wodlinger testified that he believed that Mary
Wheaton failed two of the tests for innocent spouse relief.
Gilson and Wodlinger discussed both the innocent spouse defense
and separate representation with Mary Wheaton, and she stated
that she did not want separate counsel and did not want to raise
the innocent spouse defense. She instructed Gilson and Wodlinger
to take their instructions from Frank Wheaton. Frank Wheaton
directed Gilson and Wodlinger not to raise an innocent spouse
defense.
We believe that Gilson and Wodlinger did obtain informed
consent from Mary Wheaton to represent both her and Frank Wheaton
with respect to the 1993 docketed cases, and we so find.
Moreover, nothing in the record puts these cases into the same
category as Para Techs. Trust v. Commissioner, supra, so that we
would require separate counsel even with an apparent waiver.
Although Mary Wheaton and respondent did, on July 1, 1996,
stipulate that Mary Wheaton is an innocent spouse for tax years
- 30 -
1979 through 1990, we do not take that stipulation as
determinative of the fact that Frank and Mary Wheaton had a
nonwaivable conflict.
Dorchester and Frank Wheaton also argue that, besides a
conflict of interest, Gilson and Wodlinger had no authority to
enter into a joint settlement because they had no authority to do
so on behalf of Mary Wheaton. We do not believe that Gilson and
Wodlinger lacked authority with respect to Mary Wheaton. First,
Mary Wheaton had told Gilson and Wodlinger to take their
direction from Frank Wheaton. We have found that Frank Wheaton
authorized a settlement of the docketed cases. Second, Mary
Wheaton has stipulated with respondent that Gilson and Wodlinger
had authority to enter into a settlement of the docketed cases on
her behalf (Mary Wheaton’s authority stipulation), “which
settlement was set forth in an exchange of correspondence between
the parties dated November 6, 1995.” In Mary Wheaton’s response
to respondent’s motions for entry of decision (Mary Wheaton’s
response), she avers that she was neither consulted with respect
to the settlement nor did she authorize the purported settlement
or have any knowledge of it. In Mary Wheaton’s response, she
also claims that she has been in poor health during the period of
this litigation and has relied “totally” on her husband. From
the various papers filed in these cases by Frank Wheaton and by
Mary Wheaton and from other evidence in the record, we conclude
that Mary Wheaton did not involve herself in these cases and
- 31 -
relied on her husband for leadership and direction. Indeed, in
his affidavit attached to Mary Wheaton’s response, Frank Wheaton
states: “She [Mary Wheaton] has never been involved in any of my
many business ventures. She has very little, if any, knowledge
of any of these ventures, or of this proceeding.” We believe
that Mary Wheaton gave Frank Wheaton full authority to represent
her interests in these cases and to make decisions on her part.
That reflects the instruction that Mary Wheaton gave to Gilson
and Wodlinger, that they take their instructions from Frank
Wheaton. We find that Gilson and Wodlinger had authority to
enter into a settlement with respect to the docketed cases on
behalf of Mary Wheaton.
We have found that Gilson and Wodlinger obtained an informed
waiver from Mary Wheaton and had authority to enter into a joint
settlement. We also find that there was no showing of prejudice
to either Dorchester or Frank Wheaton on account of the
simultaneous representation of Mary Wheaton. Dorchester has not
favored us with a brief, so we have no idea what it might claim.
Frank Wheaton claims that his representation was materially
limited. He states that, in November 1995, he was totally
unaware that, if his wife claimed to be an innocent spouse, her
assets would not be available should they settle: He “depended
on their existence and availability should the parties settle.”
First, we do not believe that Frank Wheaton was unaware of the
innocent spouse defense. He is the one that stated to Gilson and
- 32 -
Wodlinger that “he was not going to have that defense raised.”
Second, he has not demonstrated to us that his wife had any
substantial separate assets or, even if she did, that he would
have any claim to those assets should respondent choose to pursue
him for the full amount of the settlement figures in the docketed
cases in which he and Mary Wheaton are petitioners. In any
event, section 6013(d)(3) imposes joint and several liability for
the tax on spouses making a joint return of income, and,
therefore, Frank Wheaton’s liability is independent of the
existence of Mary Wheaton’s separate assets.
F. Rescission
Lastly, Dorchester and Frank Wheaton argue that respondent
has rescinded her agreement with Dorchester and Frank Wheaton by
entering into a subsequent agreement with Mary Wheaton allowing
her to claim innocent spouse relief (the innocent spouse
agreement). Dorchester and Frank Wheaton claim that Mary
Wheaton’s assets are no longer available to satisfy the
“$40 million settlement”: “Respondent’s counsel has unilaterally
pulled the rug out from under Mr. Wheaton.”
As a preliminary matter, we fail to see how that argument
benefits Dorchester. On the facts as we understand them, nothing
in the Code or the settlement agreement makes either Mary or
Frank Wheaton responsible for Dorchester’s liability or vice
versa. Dorchester has failed to show any protected right or
interest that is affected by respondent’s agreement with Mary
- 33 -
Wheaton. Dorchester is entitled to no relief on account of
respondent’s agreement with Mary Wheaton.
Also, we fail to see that any protected right or interest of
Frank Wheaton is affected by the innocent spouse agreement.
First, nothing in either the November 3 letter, the November 6
letter, or the November 6 response makes Frank Wheaton’s income
tax liability contingent in any way upon Mary Wheaton’s
continuing to be liable for her joint return liability. Second,
section 6013(d)(3) provides that the signers of a joint return
are jointly and severally liable for any tax due. That fact was
a significant factor in our denying relief to taxpayers making
claims similar to Frank Wheaton’s in Himmelwright v.
Commissioner, T.C. Memo. 1988-114, and Garvey v. Commissioner,
T.C. Memo. 1993-354. Frank Wheaton’s primary concern appears to
be economic; he expected Mary Wheaton to contribute to payment of
the deficiency. As explained in Estate of Ravetti v.
Commissioner, T.C. Memo. 1989-45, however, the right of
contribution with which Frank Wheaton is concerned is a matter to
be resolved under State law. Frank Wheaton is entitled to no
relief on account of respondent’s agreement with Mary Wheaton.
III. Conclusion
Dorchester, Frank Wheaton, and respondent entered into a
settlement agreement in the docketed cases. For the reasons
stated, we shall (1) grant respondent’s motion with respect to
Dorchester in docket No. 20515-93, (2) grant respondent’s motions
- 34 -
with respect to Frank Wheaton in docket Nos. 20572-93, 27121-93,
and 23092-94. We shall deny respondent’s motions to the extent
that they ask for entry of decisions with respect to Mary
Wheaton, and we shall enter decisions with respect to Mary
Wheaton in docket Nos. 20572-93, 27121-93, and 23092-94 in
accordance with the innocent spouse agreement.
Appropriate orders and
decisions will be entered.
Reviewed by the Court.
COHEN, CHABOT, SWIFT, JACOBS, GERBER, WELLS, RUWE, COLVIN,
BEGHE, CHIECHI, LARO, VASQUEZ, and GALE, JJ., agree with this
majority opinion.
WHALEN, J., did not participate in the consideration of this
opinion.
- 35 -
PARR, J., concurring: I agree with the result reached in
this case. I write separately, however, to emphasize that
nothing in the majority opinion should be understood to limit the
sound discretion of the Court to reject an agreement between the
parties, where good cause is shown and the interests of justice
require it.
It is easy to imagine a situation, not here present, where
an agreement between the parties may not be in the interests of
justice. For instance, agreements that would abuse the process
of this Court, would usurp the Court’s control over its calendar,
or that would be contrary to sound public policy should not be
enforced. Adams v. Commissioner, 85 T.C. 359, 370-371 (1985).
CHABOT, JACOBS, and LARO, JJ., agree with this concurring
opinion.
- 36 -
FOLEY, J., dissenting: With respect to the three 1993
docketed cases, I agree with the majority. We should hold the
parties to their stipulation. If, however, a stipulation has not
been filed with, or relied upon by, the Court, and either party
objects to its enforcement, the stipulation generally should not
be enforced. In Cole v. Commissioner, 30 T.C. 665, 674 (1958),
affd. 272 F.2d 13 (2d Cir. 1959), we stated:
once a stipulation is filed by both sides, it is
binding upon them. Cf. Fred M. Saigh, Jr., 26 T.C.
171. But where, for whatever reason, the parties are
not in agreement at the time the case is called for
trial, it is wholly irrelevant in this connection that
they may have been in agreement at some earlier time.
* * *
I agree. With respect to the 1994 docketed case, we should not
enforce the parties' prior agreement.