Equal Treatment for All Taxpayers

BY JEFFREY GILMAN

The Tax Court reversed its prior decision in a “retail tax shelter” case, granting further relief from assessments to approximately 400 taxpayers. It did so because the IRS secretly—and fraudulently—entered into more favorable settlements with some test case litigants before the test cases were decided. The action marked a reversal of the court’s 2005 ruling in Lewis v. Commissioner (TC Memo 2005-205), which had denied relief.

The ruling in Hartman v. Commissioner (TC Memo 2008-124) said the stipulations the 400 taxpayers entered into were less favorable than settlements the IRS gave to other similarly situated taxpayers. The court said the IRS’s secret settlements with test case taxpayers constituted a fraud on the court, and the relief to the taxpayers was an appropriate punishment against the tax collector. The court ordered that all taxpayers whose cases were bound to the test cases should receive the benefit of the more favorable pretrial settlement by having their accounts adjusted within nine months after the ruling.

The cases go back to the 1980s, when hundreds of taxpayers took advantage of a shelter offered by Henry Kersting. The IRS set up test cases to litigate the schemes, and all similarly situated taxpayers who so agreed were supposed to be bound by the outcomes of those cases. Before the test cases were resolved, however, the IRS secretly settled with two of the test case taxpayers on terms more favorable than those generally offered to other taxpayers. In the 1989 trial of the test cases, moreover, an IRS attorney interjected questions to divert a party to the secret settlement from testifying about it and allowed another witness to give misleading testimony that concealed the government’s forgiveness of tax deficiencies in exchange for his testimony and other assistance.

The Tax Court said the separate settlements violated the Service’s duty of good faith and fair dealing toward the taxpayers whose cases were bound to the Kersting test cases. Allowing this action to stand also would violate the principle “that the tax system is administered fairly and impartially.” Furthermore, the failure to disclose all material facts regarding the separate settlements meant the Service was not released from facing the taxpayers’ later claims of misconduct.

Hartman v. Commissioner , TC Memo 2008-124

By JofA staff member Jeffrey Gilman , J.D.

 

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