2000 Tax Ct. Memo LEXIS 133 | Tax Ct. | 2000
Appropriate orders will be issued in docket Nos. 17646-83, 35608-86, 19464-92, 621-94, 7205-94, and 9532-94.
Joe Alfred Izen, Jr., counsel for petitioners in docket Nos.
9382-83, 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979-85,
29643-86, and 35608-86.
Robert Alan Jones, counsel for petitioners in docket Nos. 17646-
83, 19464-92, 621-94, and 9532-94.
Robert Patrick Sticht, counsel for petitioners in docket No.
7205-94.
Milton J. Carter, Jr., counsel for respondent.
SUPPLEMENTAL MEMORANDUM OPINION 2
BEGHE, JUDGE: These cases are before the Court on: (1) Motions for attorney's fees and costs jointly filed by test case and nontest case petitioners represented by Joe Alfred Izen, Jr. (Mr. Izen) and nontest case petitioners represented by Robert Alan Jones (Mr. Jones); (2) motions for sanctions jointly filed by test case and nontest case petitioners represented by Messrs. Izen and Jones; and (3) a motion for sanctions filed by Robert Patrick Sticht (Mr. Sticht) on behalf of petitioners Joe A. and JoAnne Rinaldi in docket No. 7205-94.
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="2" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*134 BACKGROUND 3
These consolidated cases are part of a group of more than 1,300 remaining cases -- more than 500 cases have settled -- arising from respondent's disallowance of interest deductions claimed by participants in various tax shelter programs promoted by Henry F.K. Kersting (Mr. Kersting) during the late 1970's through the 1980's. In 1989, by agreement of the parties and the Court, the merits of the Kersting programs were litigated in a consolidated trial of 14 docketed cases of eight petitioners that had been designated as "test cases". At trial, six of the test case petitioners were represented by Mr. Izen, test case petitioner John R. Thompson was represented by Luis C. DeCastro (Mr. DeCastro), and test case petitioner John R. Cravens appeared pro se. The taxpayers in most of the remaining Kersting project cases signed stipulations to be bound in which they agreed that their cases would be resolved in accordance with the Court's opinion in the test cases.
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="3" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*135 Following the trial of the test cases, the Court issued its opinion sustaining virtually all of respondent's determinations in each of the test cases, and entered decisions against the test case petitioners in accordance with its opinion. See
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="4" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*136 The Court granted respondent's motions to vacate filed in the Thompson and Cravens cases, vacated the decisions entered in those cases, ordered the parties to file agreed decisions with the Court, or otherwise move as appropriate, and denied respondent's request for an evidentiary hearing. At the same time, the Court denied respondent's motion to vacate the decision entered against Mr. Rina on the ground that the testimony, stipulated facts, and exhibits relating to the Thompson and Cravens cases had no material effect on the Court's Dixon II opinion as it related to Mr. Rina.
On appeal, the Court of Appeals for the Ninth Circuit vacated our decisions in the test cases and remanded them for an evidentiary hearing to determine the full extent of the admitted misconduct by the Government attorneys in the handling of the Thompson and Cravens test cases. See
To effectuate a direction of the Court of Appeals to consider on the merits all motions of intervention filed by parties affected by Dixon II, the Court ordered that the cases of 10 nontest case petitioners be consolidated with the remaining test cases for purposes2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="5" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*137 of the evidentiary hearing. One of the nontest cases petitioners was represented by Mr. Izen; each of the remaining nontest case petitioners was represented by either Mr. Jones or Mr. Sticht.
On March 30, 1999, on the basis of the record developed at the evidentiary hearing, the Court issued its
MOTIONS OF MESSRS. IZEN AND JONES
On June 24, 1999, Messrs. Izen and Jones filed motions with supporting memoranda for attorney's fees and costs and for sanctions on behalf of test case and nontest case petitioners. Relying on
Because the decisions in the test cases had not become final by the time that Messrs. Izen and Jones filed their motions, the Court vacated the decisions in the test cases and ordered respondent to file a response to the motions.
Messrs. 2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="7" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*139 Izen and Jones failed to provide the Court with affidavits or documentation specifically setting forth the amounts of attorney's fees and costs incurred by their clients. See Rule 231(d). Over the next several months, the Court issued a series of orders directing Messrs. Izen and Jones to follow the procedure described in
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="8" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*140 Mr. Jones filed a supplement and an additional supplement in response to the Court's orders. Specifically, Mr. Jones executed an affidavit stating that he generally charges his clients $ 200 per hour for his services and $ 80 per hour for paralegal services and estimating that he and his paralegal expended approximately 4,500 hours on behalf of his clients (a group of 43 nontest case petitioners) since June 10, 1992. Mr. Jones purportedly increased the charges to his clients relative to the amount of taxes they had in dispute. Mr. Jones provided the Court with a schedule listing (by amount and date paid) the attorney's fees and costs incurred between June 10, 1992 and August 15, 1999, by the four nontest case petitioners on whose behalf he filed his appearance in the evidentiary hearing, as well as the 39 other nontest case petitioner- participants in Kersting tax shelter programs. The schedule indicates that the Alversons, Baughmans, Cerasolis, and McComases paid attorney's fees and costs totaling $ 13,875, $ 12,450, $ 11,567, and $ 13,100, respectively, during the period in question.
In a supplement to his motions, Mr. Izen stated that he had charged his clients $ 150 per hour2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="9" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*141 and that he had received attorney's fees totaling $ 743,464.49 during the period June 1992 to September 1999. Mr. Izen further stated that petitioners had incurred total attorney's fees of $ 1,196,706.19 during the period in question and that such fees had been paid to a number of attorneys, including himself, Mr. Sticht, L.T. Bradt (Mr. Bradt), 6 Ron Fujiwara, and the law firm of Yempuku and Kugisaki. Mr. Izen reported that a portion of his fees and costs were paid from a fund to which various petitioners have contributed approximately $ 100 per month. Because Mr. Izen did not set forth and identify the amounts of the payments made by his individual clients, or identify the nature and extent of the services that he and the other attorneys named in his supplement had provided to petitioners, the Court ordered Mr. Izen to submit such information in an additional supplement. The Court also directed Mr. Izen to explain Mr. Bradt's role in representing test case and nontest case petitioners.
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="10" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*142 Mr. Izen further supplemented his motion by filing a one paragraph supplement and attaching thereto copies of 15 billing invoices addressed to Mr. Kersting for services rendered during the period January 29, 1991 to October 28, 1998. A number of the entries in these invoices indicate that Mr. Izen was providing legal services to Mr. Kersting during and after the evidentiary hearing.
The Court subsequently ordered Mr. Izen to file a further supplement to his motion for attorney's fees and costs. In response, Mr. Izen filed a further supplement and an affidavit stating that he had received $ 425,352.82 in attorney's fees from the Don Belton Legal Defense Fund (the Belton fund). Mr. Izen also submitted a spread sheet purporting to show the amount of the individual contributions that petitioners and hundreds of other participants in the Kersting tax shelter programs had made to the Belton fund.
On January 4, 2000, Mr. Sticht filed a motion for sanctions and a supporting memorandum on behalf of the Rinaldis. 7 Mr. Sticht contends that the Court should use its inherent power to impose sanctions on respondent, including (1) an award of petitioners' 2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="11" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*143 attorney's fees and costs, (2) an adjustment to petitioners' tax liabilities for taxable years prior to 1987 to reflect a 20-percent settlement offer by respondent that was withdrawn on December 31, 1986, (3) the elimination of petitioners' tax liabilities for taxable years after 1986, and (4) the elimination of petitioners' liability for statutory interest after December 31, 1986. In support of his motion for sanctions, Mr. Sticht submitted a declaration stating that he charged the Rinaldis $ 325 per hour for trial/appellate services and $ 290 per hour for consultation services. Mr. Sticht further stated that Joe A. and JoAnne Rinaldi have paid him legal fees and costs of $ 34,948.43 and $ 15,741.32, respectively. These amounts are exclusive of the Rinaldis' attorney's fees and costs associated with the motion for sanctions. 8
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="12" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*144 RESPONDENT'S OBJECTION
Respondent filed objections to the above-described motions. Respondent contends that none of the petitioners qualifies for an award of attorney's fees pursuant to
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="13" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*145 The Court subsequently directed respondent to file a supplement to respondent's objection including (1) a detailed statement, for each taxable year in issue, of the elements and methodology of respondent's computation of the reduction in petitioners' liability associated with the sanctions that the Court imposed in Dixon III, and (2) a detailed computation of petitioners' liability for interest under sections 6601(a) and 6621(a) for the years before the Court for the period June 10, 1992 (the date the Court filed respondent's motions to vacate the decisions in the Thompson and Cravens cases) through March 30, 1999 (the date the Court issued its opinion in Dixon III). Respondent complied with the Court's order.
Respondent filed a further supplement to respondent's objection to the motions of Messrs. Izen and Jones, specifically challenging the adequacy of the supplemental materials that they filed. With regard to the materials submitted by Mr. Izen, respondent argued that the fees paid by the Belton fund to Mr. Bradt, Ron Fujiwara, and the law firm of Yempuku and Kugisaki between June 10, 1992, and August 15, 1999, should not be included as part of an award of attorney's fees to petitioners2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="14" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*146 because: (1) Mr. Izen failed to substantiate the basis for the payments; and (2) the fees were in fact attributable to legal services provided to Mr. Kersting in personal matters, including, but not limited to, Mr. Kersting's challenges to the Commissioner's assessments of promoter penalties (
With regard to the materials submitted by Mr. Jones, 2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="15" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*147 respondent notes that Mr. Jones failed to submit time sheets or expense statements identifying the nature of the services that he provided to his clients. Respondent also asserts that Mr. Jones failed to bill his clients based upon a coherent fee schedule, making it difficult to determine the proper amount of an award of attorney's fees. Finally, respondent directed the Court's attention to various materials, including one of Mr. Kersting's so-called Dear Friend letters (dated February 6, 1992), which suggest that a portion of Mr. Jones' fees relates to advice that Mr. Jones provided to his clients regarding "asset protection services"; i.e., bankruptcy advice. Respondent asserts that such fees were not incurred as a consequence of the Government misconduct.
Respondent filed a separate objection to Mr. Sticht's motion. Respondent contends that an award of attorney's fees under
Mr. Izen's most recent supplement to his motions included a request for a further extension of time to provide additional materials to the Court. Upon receipt of respondent's objection to his motion for sanctions, Mr. Sticht filed a motion seeking permission to file a reply. Considering the delays associated with petitioners' current motions and counsels' repeated failures to produce the documentation needed to substantiate fully their clients' claims, the Court has concluded that further extensions are unwarranted.
DISCUSSION
Messrs. Izen and Jones jointly filed motions for attorney's fees and costs relying primarily on
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="18" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*150
A proceeding is "commenced" for purposes of the effective date of
Petitioners do not qualify as prevailing parties within the meaning of
Section 911 of the Revenue Act of 1926, ch. 27, 44 Stat. 9, 109, provided for an award of damages to the United States in the event a taxpayer instituted a case in the Board of Tax Appeals for purposes of delay. This provision was later adopted as
Congress amended
costs. -- Whenever it appears to the Tax Court that any attorney
or other person admitted to practice before the Tax Court has
multiplied the proceedings in any case unreasonably and
2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="21" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*153 vexatiously, the Tax Court may require --
* * * * *
(B) if such attorney is appearing on behalf of the
Commissioner of Internal Revenue, that the United States
pay such excess costs, expenses, and attorney's fees in the
same manner as such an award by a district court.
The trial of the test cases began on January 9, 1989, and the Court did not issue its opinion in Dixon II until December 11, 1991. Although Messrs. Sims' and McWade's misconduct began in late 1986, they continued to mislead the Court during the trial of the test cases, throughout the briefing process, and in the submission of erroneous decision documents in the Thompson and Cravens cases. Under the circumstances, we hold that the Government misconduct falls within the effective date of
The Court has not had the occasion2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="22" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*154 to apply
In
In
In
This bad-faith exception permitting an award of attorneys'
fees is not restricted to cases where the action is filed in bad
faith. An inherent power award may be imposed either for
commencing or for continuing an action in bad faith,
vexatiously, wantonly, or for oppressive reasons. "'[B]ad faith'
may be found, not only in the actions that led to the lawsuit,
but also in the conduct of the litigation." * * *
Respondent concedes that Messrs. Sims and McWade engaged in misconduct in the trial of the test cases. We summarized the Government misconduct in Dixon III as follows:
Messrs. Sims and McWade negotiated a series of contingent
settlement agreements with Mr. DeCastro in respect of the
Thompsons' tax liabilities in advance of the trial2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="25" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*157 of the test
cases. The final Thompson settlement agreement provided for a
reduction in the Thompsons' tax liabilities for 1979, 1980, and
1981 for the purpose of generating refunds of tax and interest
that were used to pay Mr. DeCastro's attorney's fees. The
refunds actually made were more than sufficient for this
purpose; the excess was received and retained by the Thompsons.
The Thompson settlement was not based upon or influenced by the
Thompsons' participation in the Bauspar program.
Messrs. Sims and McWade negotiated a contingent settlement
agreement with Mr. Cravens in respect of the Cravenses' tax
liabilities for 1979 and 1980 in advance of the trial of the
test cases. Messrs. Sims and McWade misled Mr. Cravens as to the
nature and legal effect of his settlement and the need for
counsel at the trial of the test cases. In so doing, they
foreclosed the possibility that the Cravenses would become
clients of Chicoine and Hallett, and later, of Mr. Izen. They
thereby reduced the effectiveness of Mr. Cravens' presentations
to the2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="26" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*158 Court from the point of view of all petitioners; the
likelihood that Mr. Cravens would have informed counsel for test
case petitioners that his cases had been settled was also
reduced.
Messrs. Sims and McWade were the only persons in the
Honolulu District Counsel Office with knowledge of the Thompson
and Cravens settlements before and during the trial of the test
cases. Other than Mr. Stevens [Chief of Special Procedures in
the Collection Division of the Honolulu District Director's
Office], no one else within the Internal Revenue Service was
aware of the Thompson and Cravens settlements before or during
the trial of the test cases through the times that the Court
issued its Dixon II opinion and entered the initial decisions in
the test cases.
Before the trial of the test cases, Mr. McWade
intentionally misled the Court, with the complicity of Mr.
DeCastro, by not disclosing the settlement of the Thompson cases
when he moved to set aside the Thompson piggyback agreements. At
the trial of the test cases, Messrs. Sims, 2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="27" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*159 McWade, and DeCastro
intentionally misled the Court regarding the status of the
Thompson cases by not disclosing the settlement of the Thompson
cases. At the trial of the test cases, Messrs. Sims and McWade
intentionally misled the Court in similar fashion regarding the
settlement of the Cravens cases.
Mr. McWade allowed Mr. Alexander to offer misleading
testimony to the Court during the trial of the test cases
regarding his understanding that his tax liabilities would be
reduced in exchange for providing assistance to Mr. McWade.
[
622 to 99-623.]
In sum, Messrs. Sims and McWade intentionally misled the Court before, during, and after the trial of the test cases. Further, the misconduct described above led the Court of Appeals to remand the test cases to this Court for an evidentiary hearing and has caused substantial continuing delay in the resolution of the Kersting project cases. The Court and the parties have expended substantial time, effort, and resources uncovering and analyzing the effects on these2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="28" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*160 proceedings of Messrs. Sims' and McWade's misconduct. What we have found is a deliberate attempt by Messrs. Sims and McWade to manipulate and abuse the trial process of the test cases.
Considering all the circumstances, we conclude that the actions of respondent's counsel Sims and McWade in entering into the secret settlement agreements were undertaken and carried out in bad faith. Further, the circumstances in which those actions were discovered and brought to the attention of the Court and petitioners have had the effect of multiplying the proceedings in these cases "unreasonably and vexatiously". There is no plausible justification for those actions; Messrs. Sims and McWade engaged in a misguided attempt to bolster unfairly the Commissioner's position in cases in which the Commissioner was destined to prevail. Moreover, their misconduct is properly characterized as vexatious; 13 they misled the Court, manipulated the test case process, and caused a multiplication of the proceedings that has resulted in such substantial delay in bringing the Kersting project cases to a close as to amount to an obstruction of justice. 14 The Commissioner's institutional good faith in promptly2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="29" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*161 reporting the misconduct to the Court does not negate or abrogate the bad faith inherent in Messrs. Sims' and McWade's actions. See
The Court shares the concerns expressed by the Court of Appeals for the Ninth Circuit in
Respondent contends that an award of attorney's fees and costs is not justified on the ground that petitioners have already been more than adequately compensated by the sanctions imposed upon respondent in Dixon III. We reject this contention. The sanctions that the Court imposed in Dixon III were directed at time-sensitive additions to tax and increased interest-items of liability that were indirectly compounded by the delay in the resolution of these cases occasioned by the misconduct of the Government's lawyers. In contrast, our decision to award attorney's fees and costs is intended to compensate petitioners for the additional fees and costs that they2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="31" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*163 incurred as a direct consequence of that misconduct.
In
We agree with respondent that Messrs. Izen, Jones, and Sticht have failed, in varying degrees, to provide the Court with sufficient information to determine the exact number of excess hours that they reasonably expended in these cases as a result of the Government misconduct, and that Messrs. Jones and Sticht have neither addressed the reasonableness of their hourly2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="32" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*164 rates nor furnished detailed billing statements. We are particularly troubled by Mr. Izen's persistent failure to produce the documentation requested by the Court despite repeated extensions of time for compliance. Nevertheless, the fact remains that the test case and nontest case petitioners who participated in the evidentiary hearing, as well as many other Kersting petitioners who were not formal participants in the evidentiary hearing but agreed to help fund the effort, incurred substantial attorney's fees and costs following the remand of the test cases by the Court of Appeals. Though presented with less than an ideal record, we shall award attorney's fees to petitioners based upon an approximation of the amount of the excess attorney's fees and costs that petitioners incurred as a consequence of the Government misconduct. See
Mr. Izen has requested an award of attorney's fees of approximately $ 1.2 million on behalf of his clients representing amounts that they paid to the2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="33" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*165 Belton fund. Mr. Izen reported that he had received $ 425,352.82 in attorney's fees from the Belton fund.
It is now evident that only a relatively small fraction of the amounts that Mr. Izen's clients paid to the Belton fund should be considered in determining the amount of the award under
To recapitulate, test case and nontest case petitioners represented by Mr. Izen are entitled only to an award of attorney's fees equal to two-ninths of the amounts that they paid to the Belton fund. We have arrived at this fraction by eliminating from consideration all attorney's fees and costs incurred in providing services to Mr. Kersting, including the two-thirds of the Belton fund payments to Messrs. Bradt and Fujiwara and the law firm of Yempuku and Kugisaki, and one-third of the amount that Mr. Izen received from the Belton fund. 15
Messrs. Jones and Sticht have also failed to prove the amount of attorney's fees that their clients incurred as a consequence of the Government misconduct in the trial of the test cases. Consistent2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="35" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*167 with the preceding discussion, we are prepared to award their clients attorney's fees and costs pursuant to
The Court has inherent power to protect its own proceedings from abuse, oppression, and injustice. See
In addition to requesting an award of attorney's fees and costs, Mr. Sticht contends that we should (1) adjust the Rinaldis' tax liabilities for taxable years prior to 1987 in accord with the 20-percent settlement offer that respondent withdrew on December 31, 1986, (2) eliminate the Rinaldis' tax liabilities for taxable years after 1986, and (3) eliminate the Rinaldis' liability for interest after December 31, 1986. Mr. Sticht bases his requests for relief on the assumptions that, had the Rinaldis been informed of the Thompson and Cravens settlements in late 1986, the Rinaldis would have immediately settled their cases based on the 20-percent settlement offer, thereby avoiding the accrual of additional interest on their liabilities, and2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="37" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*169 the Rinaldis would not have continued to participate in the Kersting programs during the years 1987 through 1991.
We considered and rejected similar claims for relief in Dixon III; there simply is no justification for adjusting the Rinaldis' tax liabilities to account for the 20-percent settlement offer. 17 Messrs. Sims and McWade began offering 20-percent settlements between September and December 1986. During this period, the settlement offer was not widely disseminated. All settlement offers were withdrawn on or about December 31, 1986 -- in advance of the February 1987 Maui session. However, Messrs. Sims and McWade revived the 20-percent settlement offer after developments at the February 1987 Maui session led to a delay in the trial of the test cases. In early 1988, Robert J. Chicoine and Darrell D. Hallett (collectively Chicoine and Hallett), then counsel to a number of test case petitioners, sent letters to the test case petitioners and to other Kersting program participants recommending that they accept the 20-percent settlement offer. At the same time, Mr. Kersting had written a form letter to Kersting program participants denouncing Chicoine and Hallett and the 20-percent2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="38" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*170 settlement offer. Mr. Kersting subsequently fired Chicoine and Hallett for recommending the 20-percent settlement. The 20-percent settlement offer eventually was withdrawn prior to the trial of the test cases in January 1989.
We see no compelling causal link between the Government misconduct and the Rinaldis' failure to accept the 20-percent settlement offer. As discussed above, Chicoine and Hallett strongly recommended in early 1988 that all Kersting program participants accept the 20-percent settlement offer. Unfortunately for the Rinaldis, it appears that they (and many other Kersting program participants) were victims of Mr. Kersting's spurious and self- serving advice that they reject the 20-percent settlement offer and refrain from paying any amounts to the Internal Revenue Service. 18 In any event, there is no indication that Messrs. 2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="39" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*171 Sims and McWade took any affirmative steps to deny the Rinaldis a 20-percent settlement. Consistent with our holding in Dixon III, the Rinaldis are bound by the Court's decision in the test cases. We shall deny so much of Mr. Sticht's motion as requests sanctions other than an award of attorney's fees and costs.
Consistent with the preceding discussion, we shall grant Messrs. 2000 Tax Ct. Memo LEXIS 133" label="2000 Tax Ct. Memo LEXIS 133" no-link"="" number="40" pagescheme="<span class=">2000 Tax Ct. Memo LEXIS 133">*172 Izen's and Jones' motions for attorney's fees and costs and Mr. Sticht's motion for sanctions insofar as we award petitioners attorney's fees and costs as more fully described in this opinion. However, we shall deny Messrs. Izen's and Jones' motions for sanctions, and so much of Mr. Sticht's motion for sanctions as seeks relief beyond attorney's fees and costs. To reflect the foregoing,
Appropriate orders and decisions will be entered in docket Nos. 9382-83, 4201-84, 15907-84, 40159-84, 22783-85, 30010-85, 30979- 85, and 29643-86.
Appropriate orders will be issued in docket Nos. 17646-83, 35608-86, 19464-92, 621-94, 7205-94, and 9532-94.
Footnotes
2. Unless otherwise indicated, section references are to the Internal Revenue Code, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. The complete background of the these cases is set forth in Dixon III and will not be repeated here.↩
4. Prior to the trial of the test cases, the Court had issued an opinion rejecting petitioners' arguments that certain evidence should be suppressed and that the burden of proof should be shifted to respondent. See
Dixon v. Commissioner, 90 T.C. 237">90 T.C. 237↩ (1988) (Dixon I).5. The Court informed Mr. Izen that no consideration would be given to any attorney's fees and costs paid by Mr. Kersting, consistent with the Court's finding in Dixon III that "Initially, Mr. Kersting or the entities that he controlled paid the legal fees associated with the Tax Court litigation. Later, however, some Kersting program participants began paying $ 100 per month to a legal defense fund managed by Mr. Kersting."
Dixon III, T.C. Memo. 1999-101↩ n.19 . The Court does not intend to award petitioners attorney's fees and costs that have been paid by Mr. Kersting out of funds representing the "fees" that Mr. Kersting charged program participants for the interest deductions that respondent disallowed. See Dixon II, 62 T.C.M. at 1506, 1991 T.C.M. (RIA) 91614.6. The record shows that Mr. Bradt served as Mr. Kersting's counsel during the original trial of the test cases, during the evidentiary hearing, and in Mr. Kersting's personal deficiency case assigned docket No. 7448-96.↩
7. In addition to the petition assigned docket No. 7205-94, in which the Rinaldis challenge Kersting-related adjustments affecting their tax liabilities for 1990 and 1991, the Rinaldis have filed petitions challenging Kersting-related adjustments for the tax years 1980 (docket No. 31065-83), 1983 (docket No. 21615-87), 1984 and 1985 (docket No. 6981-89), 1986 and 1987 (docket No. 11439-90), 1988 (docket No. 27556-90), and 1989 (docket No. 14907-93). The other petitioners who participated in the evidentiary hearing through Mr. Sticht's representation were not included in the motion.↩
8. Mr. Sticht has not disclosed the fees paid by his other clients -- neither those who also participated in the evidentiary hearing nor any other Kersting tax shelter program participants that he may represent.↩
9. Respondent's objections included an addendum quantifying the impact of the sanctions that the Court imposed in Dixon III.↩
10. See Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, secs. 1551(a) and (h), 100 Stat. 2085, 2752-2753, applicable to civil actions or proceedings commenced after December 31, 1985; Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. 100-647, secs. 6239(a) and (d), 102 Stat. 3342, 3743-3746, applicable to proceedings commenced after November 10, 1988; Taxpayer
Bill of Rights↩ 2, Pub. L. 104-168, secs. 701-704, 110 Stat. 1452, 1463-1464 (1996), applicable to proceedings commenced after July 30, 1996; Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. 105-34, secs. 1285, 1453, 111 Stat. 788, 1038, 1055, applicable to proceedings commenced after Aug. 5, 1997; and Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3101, 112 Stat. 685, 727, applicable to costs incurred more than 180 days after July 22, 1998 (i.e., Jan. 19, 1999).11. The petition in the Dixon case (docket No. 9382-83) was filed on Apr. 25, 1983.↩
12. Messrs. Izen's and Jones' reliance on
5 U.S.C. sec. 504 (1994) and28 U.S.C. sec. 2412 (1994) is misplaced. Both provisions, which largely mirrorsec. 7430 by providing that an award may only be made to a "prevailing party", state that they are not applicable where an award may be made undersec. 7430 . See5 U.S.C. sec. 504(f) and28 U.S.C. sec. 2412(e) ; see alsoMauerman v. Commissioner, T.C. Memo 1995-237↩ .13. Blacks Law Dictionary 1559 (7th ed. 1999), defines the term "vexatious" as: "(Of conduct) without reasonable or probable cause or excuse; harassing; annoying."↩
14. A court may find an obstruction of justice not only when a miscarriage of justice results but also when the course of justice is unreasonably delayed or burdened. See
United States v. Wells, 154 F.3d 412">154 F.3d 412 , 154 F.3d 412">414↩ (7th Cir. 1998).15. Our orders in these cases will give effect to our holding on this point on the basis of the amounts that Mr. Izen has reported that his clients contributed to the Belton fund.↩
16. Contrary to petitioners' request, we shall not direct respondent to pay immediately the awards in question. We shall simply include the amount of the award in each decision and order referred to above.↩
17. The details concerning the 20-percent settlement offer are set forth in
Dixon III, 77 T.C.M. 1630">77 T.C.M. (CCH) at 1659-1662↩ , T.C.M. (RIA), 99101 at 99-576 to 99-580.18. Contrary to Mr. Kersting's advice, some program participants agreed to settle their cases in full and/or made payments in late 1986 in respect of the deficiencies and interest accrued to that time in order take advantage of the full deductibility of personal interest, which was about to be phased out for 1987 and later years. For those petitioners who paid their deficiencies in full, our decision to award attorney's fees and costs will produce refunds. On the other hand, those petitioners who imprudently followed Mr. Kersting's advice now face enormous liabilities as a result of the inexorable force of compound interest.↩