Lovenguth v. Comm'r

T.C. Memo. 2007-70
UNITED STATES TAX COURT
GEORGE A. LOVENGUTH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9708-02. Filed March 27, 2007.
Charles A. Simmons and David Bunning, for petitioner.
Robert W. Mopsick, for respondent.
MEMORANDUM OPINION
HOLMES, Judge: George Lovenguth is a U.S. Marine and a
combat veteran of the Vietnam War. He left the service with an
honorable discharge and a crippling case of posttraumatic stress
disorder. This disability has led him to endure long periods of
homelessness punctuated by stays at Department of Veterans
Affairs (VA) mental health facilities. It has also brought him
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tax trouble--important notices from both the IRS and this Court
have failed to reach him, and the accrual of interest led a small
tax debt to grow into a large one. In an effort to win abatement
of that interest, he filed a petition in this Court; representing
himself, he agreed to stipulations that would amount to conceding
his case. Pro bono counsel have now entered an appearance on his
behalf, and they have moved to relieve him of this stipulation
and have the case proceed to a reasonable settlement or trial on
the merits.
Background
Lovenguth enlisted in the U.S. Marine Corps in January 1969
when he was only 17. He fought as a helicopter gunner in
Vietnam, receiving a Combat Action Ribbon and Air Medal. In
1971, however, he was discharged after developing severe
psychological problems, since diagnosed as posttraumatic stress
disorder (PTSD). A return to civilian life did not cure him.
Though he seems to have earned some income in 1988 and 1989,1 by
1990 his illness overwhelmed him and he became homeless for
several months before being involuntarily hospitalized. It was
during his hospitalization that he was diagnosed as having PTSD,
which led the VA to classify him as a 100-percent service-
1
The IRS has long since destroyed its records on Lovenguth
for those years, leaving behind only the notices of deficiency
that it sent him and the record of the assessments that they led
to.
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connected disabled veteran. This triggered a large, lump-sum
payment (much of which Lovenguth set aside for his son’s future
education) followed by periodic disability checks. He remained
hospitalized off and on until early 1994.
During this time, the Commissioner sent him two notices of
deficiency: the first, sent in December 1991, asserted a
deficiency of a little over $1,000 for 1988; the second, sent in
May 1992, asserted a deficiency of about $4,000 for 1989.
Lovenguth apparently never received the notice of deficiency for
1988, and so he never filed a petition. He did manage to file a
timely petition for the 1989 year. Although a notice for
Lovenguth’s court date was sent, Lovenguth claims that he never
received it. Given that he was involuntarily committed when it
was sent, this is at least plausible. Our own records show that
we dismissed his case when he failed to appear after it was
called from the calendar. Though the merits of the notices of
deficiency for both the 1988 and 1989 tax years were never
adjudicated, the Commissioner assessed both deficiencies under
the default rules in the Code.
After making these assessments, the Commissioner sent
several notices to Lovenguth’s last known address to try to
collect. His last known address, though, was the home that he
had shared with his former wife many years before. Their
relationship had not improved with his mental illness and
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homelessness--even if she had cared to forward his mail, it is
likely that she was in touch with him only very rarely.
Lovenguth plausibly claims not to have received any further
communications from the Commissioner until May 2000, when the
Commissioner sent him a letter reminding him of the balance due
and telling him that collection might entail seizing his wages
and property, though the Commissioner seems never to have sent
him a collection due process notice. Lovenguth reacted by
selling the bonds he had bought with his lump-sum disability
payment, and sending almost $18,000 (interest having compounded
for over a decade) to the IRS to pay his entire tax liability--
simply to “stop the bleeding” as he put it. He then filed a
claim for refund and request for abatement of interest--the
interest having become the overwhelming majority of the amount he
paid. The Commissioner denied them. Lovenguth then timely filed
a request for review of that determination in this Court pursuant
to section 6404(e).2
Lovenguth, who was acting pro se, was apparently unclear
about his relationship with Commissioner’s counsel. A comment
made during a conference call led him to believe that the IRS
counsel was there to help, rather than represent the
2
Unless otherwise noted, all section references are to the
Internal Revenue Code; all Rule references are to the Tax Court
Rules of Practice and Procedure.
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Commissioner. He was also led to believe that he had to sign the
stipulation of facts immediately or he would not be able to do so
later. It was only when Commissioner’s counsel informed
Lovenguth in a later telephone conversation that he would “eat
[him] up in court” that Lovenguth realized he was mistaken.
Much of the resulting stipulation of facts is in the form
that our Court sees in nearly every case--a list describing
attached documents, noting that the “truth of assertions in
stipulated exhibits is not necessarily agreed to and may be
rebutted or corroborated by additional evidence.” Such
stipulations of routine evidence are essential to orderly
procedure in a high-volume court like ours.
But these stipulations also include a number of paragraphs
aimed at stating what Lovenguth’s testimony would be--not its
truthfulness, simply what it would be. Even Lovenguth’s
documents that were attached to the stipulation were included not
for the truth of any statements they contained but as
“indicating” that those statements were made in the documents
themselves.
A motion to submit the case as fully stipulated under Rule
122 was filed at the same time as the stipulation of facts.
However, the stipulations do little to prove Lovenguth’s case--
they actually prohibit Lovenguth from pointing to any useful
evidence--and if the order granting the Rule 122 motion were not
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vacated, it would force the Court to decide the case solely on
this paltry record. Noting the extreme disparity in legal
skills3 and its probable effect on the ability of the judicial
process to reach a just result, pro bono counsel stepped in to
represent Lovenguth. Those counsel completed their review of the
spotty record and have now moved to vacate or modify the
stipulations so that the case can be decided on its merits.
As reformulated by counsel, Lovenguth bases his claim for
interest abatement on three arguments. The first is that he was
incompetent to attend to his daily living activities, let alone
litigation in this court, when his original deficiency case was
dismissed for lack of prosecution. The second is that the
Commissioner failed to make the necessary efforts to contact him,
which resulted in a large portion of the interest Lovenguth was
forced to pay. His third claim, which is an extension of the
second, is that because his VA benefits were paid out of Treasury
funds and the IRS is part of the Treasury, the Commissioner
should have been able to locate him. Lovenguth believes that had
the Commissioner contacted him in a timely manner, he would have
been able to satisfy both his tax liability and the then much
smaller interest liability out of his lump-sum VA payment.
3
Here, for instance, is Lovenguth’s entire brief on the
merits, which he wrote in longhand: “I request my abatement of
be approved. The Dept. Treasury have been sending me my
compensation payment for 100 percent service-connection since
1991. IRS clearly knew my addresses.”
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There are also other possible issues in this case that are
untouched by the stipulations in their present condition:
! Should the Commissioner’s communications with Lovenguth
after the enactment of the IRS Restructuring and Reform
Act of 1998, Pub. L. 105-206, 112 Stat. 685, have
triggered a collection due process notice and hearing?
! Is section 6511(h)--suspending the running of the
statute of limitations when an individual “is unable to
manage his financial affairs” if even a part of a tax
liability remains unpaid--relevant to this case? and,
! Is section 6334(a)(10) implicated if Lovenguth in fact
paid these taxes from assets traceable to disability
payments?
We list these not as issues about which we’ve formed any
conclusions, but as issues noticeable to a trained eye that went
unnoticed by a petitioner suffering from severe disability yet
trying to represent himself. Unless the Court sets aside the
stipulations and vacates its order submitting the case for
decision under Rule 122, Lovenguth will not be able to present
the facts and make the arguments that could prove his case.
Discussion
The stipulation process is the bedrock of Tax Court
practice. Branerton Corp. v. Commissioner, 61 T.C. 691, 692
(1974). Because we are a high-volume court, we use the
stipulation process to encourage settlement and streamline trials
by requiring parties to “stipulate, to the fullest extent to
which complete or qualified agreement can or fairly should be
reached, all matters not privileged which are relevant to the
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pending case.” Rule 91(a). Put another way, the stipulation
process requires the “voluntary exchange of necessary facts,
documents, and other data between the parties * * *.” Branerton,
61 T.C. 692. The process works because the parties are bound
by the stipulations. Rule 91(e). And this means that we “will
not permit a party to a stipulation to qualify, change, or
contradict a stipulation * * * [unless] justice requires.” Id.
With “justice” as our standard, we do have broad discretion
to determine when it is appropriate to set aside a stipulation.
Blohm v. Commissioner, 994 F.2d 1542, 1553 (11th Cir. 1993),
affg. T.C. Memo. 1991-636; Estate of Eddy v. Commissioner, 115
T.C. 135, 137 n.4 (2000). However, our discretion is tempered by
the importance of making stipulations stick--we enforce
stipulations unless not just “injustice,” but “manifest
injustice” would result. See Bokum v. Commissioner, 992 F.2d
1132, 1135-36 (11th Cir. 1993), affg. 94 T.C. 126 (1990).
The Commissioner cites Saigh v. Commissioner, 26 T.C. 171,
177 (1956); Bakare v. Commissioner, T.C. Memo. 1994-72, and
similar cases as additional constraints on our discretion.
In Saigh, 26 T.C. 177, we restated the general rule that a
“stipulation is in all essential characteristics a mutual
contract by which each party grants to the other a concession of
some rights as a consideration for those secured and the
settlement stipulation is entitled to all of the sanctity of any
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other contract.” We do regard settlement stipulations as
contracts, requiring proof of mutual mistake, coercion, duress,
or some other contractual defenses before we would choose not to
enforce them. See, e.g., Korangy v. Commissioner, 893 F.2d 69,
72 (4th Cir. 1990) (unilateral mistake), affg. T.C. Memo. 1989-2;
Saigh, 26 T.C. 180 (reliance on false representation of the
other party).
But in this case Lovenguth has asked us to set aside only a
“stipulation of fact” drafted in preparation for trial. And, as
we noted in Stamm Intl. Corp. v. Commissioner, 90 T.C. 315, 321
(1988), “more stringent standards” should be applied to motions
to vacate a settlement agreement than to pretrial stipulations of
fact. We do allow relief from both types under general
principles of contract law, see Mathia v. Commissioner, T.C.
Memo. 2007-4; Markin v. Commissioner, T.C. Memo. 1989-665, but
the plain language of our rule governing pretrial stipulations--
allowing relief from stipulations if justice requires--allows us
to consider factors that might not be sufficient to upset a
contract.
The most common situation is where the stipulation is
contrary to facts brought out at trial. See Blohm, 994 F.2d at
1553; Jasionowski v. Commissioner, 66 T.C. 312, 318 (1976). It
is true that there has been no trial here, but such cases are
still relevant for showing that something less than a contractual
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defense is a permissible ground for letting one party to a
pretrial stipulation out of his agreement. Courts have
identified numerous factors, and their importance is almost
always dependent on the particular context. One such factor is
whether both sides were represented by counsel when agreeing to
the stipulation. See, e.g., Associated Beverages Co. v. P.
Ballantine & Sons, 287 F.2d 261, 263 (5th Cir. 1961); Jenkins v.
Commissioner, T.C. Memo. 1988-326. This makes sense--the
participation of attorneys in drafting stipulations is more
likely to result in a fair and balanced presentation of the
facts, even as their participation in creating a trial record
presumably makes it more likely that relevant and material
evidence will be admitted.
Another factor is whether the party opposing a motion for
relief from stipulations can point to evidence that has been lost
or to arguments that might have been made but no longer can be.
Courts are thus especially unlikely to grant relief from
stipulations when the request is made for the first time in a
posttrial brief, see La. Land & Exploration Co. v. Commissioner,
90 T.C. 630, 649 (1988), or on appeal, see United States v.
3,788.16 Acres, 439 F.2d 291, 296 (8th Cir. 1971).
And even apart from whether a party was represented during
the drafting of stipulations and whether prejudice would result
from granting relief is the question of whether the stipulations
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were entered into after careful negotiations or through
inadvertence or honest lack of ability. Courts are unlikely to
grant relief from stipulations arrived at through bargaining and
“considerable negotiation,” Associated Beverages, 287 F.2d at
263, or stipulations which were “negotiated extensively,” Markin,
T.C. Memo. 1989-665. But when a party has stipulated
inadvertently and honestly, courts may justifiably grant him
relief. See, e.g., United States v. Montgomery, 620 F.2d 753,
757 (10th Cir. 1980); Jenkins, T.C. Memo. 1988-326.
This case--at least before counsel stepped in to help
Lovenguth--falls more on the side of Jenkins and Montgomery.
Lovenguth was not represented when the stipulations were being
drafted; the stipulations themselves were not so much negotiated
as given to him to sign; and all this happened well before
posttrial briefing or appeal.
The Commissioner argues that Lovenguth should have to show
that a failure to modify the stipulations would prejudice him.
See Adams v. Commissioner, 85 T.C. 359, 375 (1985). The
Commissioner reasons that deciding the case with the current
stipulations would not prejudice Lovenguth because he has offered
no new evidence that would change the result of the case and all
of the pertinent facts are included in the current stipulation.
These arguments fail to persuade us.
Consider the argument that Lovenguth will not be prejudiced
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because “[a]ll of the pertinent facts which the petitioner wishes
to include at trial are already stated within the stipulation of
facts as it is presently constituted.” This argument might be
persuasive if the stipulations were the product of real
negotiation, but as far as we can tell, the Commissioner’s
counsel wrote the stipulations himself and included Lovenguth’s
arguments by guessing what he would testify to at trial. Having
the opposing party decide what factors are pertinent is not the
voluntary exchange we had in mind in Branerton. This is
especially true given that Lovenguth’s new counsel has identified
new issues that were omitted from the stipulation.
We think, though, that the decisive factor here is that
Lovenguth did not understand the stipulation process itself. We
do agree that he understood that he faced a deadline to enter the
stipulation of facts--Commissioner’s counsel called him more than
a dozen times in two weeks to remind him. But Lovenguth learned
only two days before the deadline that the person calling him was
not his friend, but someone who was going to “eat [him] up in
court.” Lovenguth responded to this pressure, and his fears, by
signing the stipulation that he thought the Commissioner’s
counsel was assisting him with. We also acknowledge that, on a
human level, Commissioner’s counsel was faced with a pro se
litigant who was “confrontational and belligerent”--reasonably
leading him to think that writing the stipulations himself was
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doing better by Lovenguth than moving for a dismissal of the case
for failing to properly prosecute. See generally Levy v.
Commissioner, 87 T.C. 794 (1986) (discussing effects of case
dismissal).
But we must also look at the process from Lovenguth’s
perspective. And in doing so, we must remember that Lovenguth
has no legal training and is suffering from a weakened mental and
physical condition. This case is not the first time Lovenguth
tried to challenge the IRS in our Court. Some of his attempts
were unsuccessful because he missed deadlines, and when he
learned that his untimeliness was partly responsible for his tax
liability tripling, he was understandably fearful.
The Commissioner nevertheless argues that Lovenguth always
knew that the IRS was his adversary and never believed that he
was being assisted. We agree that Lovenguth did know the IRS was
his adversary in that it was trying to collect a debt from him.
But Lovenguth also knew that the IRS offered help, because he had
actually been referred to the IRS’s Taxpayer Advocate Service at
one time. And so we find it reasonable that Lovenguth believed
that the Commissioner’s counsel was assisting him and not just
playing the role of his adversary.
The Commissioner finally argues that Lovenguth has capacity
to enter into the stipulation because he is “cognizant enough” to
request an abatement of interest. The Commissioner argues that
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if Lovenguth has been competent enough to “handle his own
affairs” since leaving the VA hospital in 1995, then he is
competent enough to enter into a stipulation of facts. See
Bakare, T.C. Memo. 1994-72.
To suggest that Lovenguth understood the consequences of
signing the stipulation of fact just because he is no longer
institutionalized would be too high a hurdle. The Rule tells us
to look not at whether a petitioner has the bare competence
sufficient to avoid involuntary commitment, but to the justice of
the particular situation. We do wish to stress that we do not
believe that IRS counsel is in any way guilty of misconduct--in
an adversarial system, counsel is expected to zealously represent
his client. It is just that in the peculiar circumstances of
this case--with a mentally disabled and sometimes voluble
taxpayer representing himself--it is very easy to create a
situation of deep misunderstanding between the parties. In this
case we conclude that justice requires us to set aside the
stipulation of facts and vacate the order submitting the case for
decision on that stipulation.
An appropriate order will be
issued granting petitioner’s
motion.