Tax Court: IRS Attorneys Committed Fraud on the Court

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

Respondent, Kersting project petitioners, the opinionreading public, and the Court of Appeals for the Ninth Circuit might well consider this opinion a surprising about-face from our opinion in Lewis v. Commissioner, T.C. Mem. 2005-205. We therefore indicate some of the considerations that have led to our change of position. ...

The observation of the Court of Appeals in Dixon V [316 F.3d 1041 (9th Cir. 2003)] that the misconduct of respondent’s attorneys violated the rights of all petitioner participants in the Kersting project to a fair trial of the test cases brought home to us more keenly than we had previously appreciated that our Lewis opinion would result in disparate treatment of those who have agreed to entry of stipulated decisions at various times along the way, as compared with those who have awaited the final outcome. We had a visceral reaction that our Lewis opinion violated some sense of distributive justice, whether derived from notions of equality or of fairness, and that the Dixon V opinion and mandate required a contrary result. Recognizing the incompatibility of the various formulations of distributive justice by political philosophers over the years, we mention those formulations as no more than intimations that we should reconsider our Lewis position in the light of our rereading of the Dixon V opinion. Those intimations have led us to reflect on the various situations of those Kersting project petitioners who were part of the test case proceedings and who agreed to entry of stipulated decisions at different times along the way after the test case proceedings began.

“Men must turn square corners when they deal with the Government.” ... “To say to these appellants, ‘The joke is on you. You shouldn’t have trusted us,’ is hardly worthy of our great Government.” To tell Kersting project petitioners they should not have trusted respondent to try the test cases honestly and fairly and the Tax Court to formulate an appropriate sanction when respondent failed to do so would be equally unworthy. ... “Wisdom too often never comes, and so one ought not to reject it merely because it comes late.” ...

Respondent’s attorneys committed a fraud on the Tax Court during the Kersting test case proceedings that was a fraud on the Court in every case bound by the results of the test cases. Extending to every petitioner whose case was bound by the results of the Kersting project test cases, by piggyback agreement or the Court’s order to show cause procedure, the benefit of the Thompson settlement strikes us as an appropriate accommodation of the competing considerations; it is a sanction for the misconduct that is consistent with Dixon V and is “no more than necessary” to maintain public trust in the judicial process that employs test case procedures. ... We are protective of the integrity of our judicial process and concerned about deterrence. We are “entitled to send a message, loud and clear.” .... We hold that sanctions should be imposed in the cases of all Kersting project petitioners in which stipulated decisions were entered on or after June 10, 1985, the date the Kersting project test case proceedings began.

Our holding is limited to the unique and narrow circumstances of these cases -- where we are imposing sanctions for a fraud committed on the Court in a test case proceeding that bound more than a thousand cases.

Update: Joe Kristan has more here.