### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 14

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M ARCIA B ILLHARTZ , Executor of the Estate of Warren Billhartz
, Petitioner

- Appellant
,

v.

C OMMISSIONER OF I NTERNAL R EVENUE , Respondent

- Appellee

.

____________________ Appeal from the United States Tax Court

. No. 12999

- 10

— Maurice B. Foley
, Judge

.

____________________
A RGUED M AY 28, 2015

— D ECIDED J ULY 23
, 2015

____________________

Before F LAUM , K ANNE , and S YKES , Circuit Judges

. F LAUM , Circuit Judge

. Warren Billhartz left over $20 mi llion to his four children when he died. When his E state filed its estat e tax return with the IRS, it claimed a deduction for a large portion of that amount

— over $14 million. The IRS di sallowed the deduction in full and issued the estate a notice of deficiency. The E state then petitioned the United States Tax Court for redetermination of the deficiency, and a trial date was set. Before trial, though, the E state and the Co m-2 No. 14

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missioner of Internal Revenue (“Commissioner”) agreed to a settlement, under which the Commissioner conceded 52.5% of the claimed deduction. Soon after the settlement , howe ver, Billhartz’ s children sued the Estate in state court; the chi ld ren claimed that they were entitled to a larger portion of their father’s fortune and that their prior acceptance of a lesser amount had been obtained fraudulently. At that point, the E state asked the Tax Court to vacate the settlement on the basis that, w ere the children to prevail in state court, the settlement would bar the E state from claim ing an estate tax refund for any additional amount paid to the children. The Tax Court rejected the E state’s arguments , and entered a d ecision reflecting the terms of the settlement agreement

. We affirm. The Tax Court did not abuse its discretion by refusing to set aside the settlement. I. Background

Warren Billhartz (“Billhartz”) married his first wife, Norma, in 1955. They had three daughters (Jan, Jean, and Susan) and one son (Ward). Billhartz and Norma divorced in 1978. In connection with the divorce, they entered into a Marital Settlement Agreement, which they filed with the Circuit Court for Madison County, Illinois. Only one part of that agreement is relevant to this appeal

— the statement that “Husband covenants and agrees with Wife that an amount equal to one

- half of the estate of Husband will be given in his Will to the children of the parties described in this Agreement, in equal shares .”

Billhartz married his second wife, Marcia, in 1979, and they remained married until his death, in 2006. Following his remarriage, Billhartz executed a will and a trust. At theNo. 14

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time of his death, virtually all of his assets were either held in the trust or in joint tenancy with Marcia. The trust named Marcia and Ward as co

- trustees. Under the terms of the trust, the trustee was to set aside a n amount sufficient to purchase an annuity that would pay Norma $3,000 monthly. Of the remaining funds, 6% was left to each of Billhartz’s three daughters, and 16% was left to Ward ; the rest wen t to Marcia and to Billhartz’s sister

. To summarize: According to the Marital Separation Agreement, the f our children were to r eceive 50% of Billhartz’s “estate” (an undefined term), divided evenly. In the end, though, they cumulatively ended up with less than 34% of Billhartz’s assets , divided unevenly. Non ethe less, after receiving notice of this discrepancy , all four children executed an agreement (the “2007 Waiver Agre ement ” ), in which the y accepted the lesser shares set out for them in the trust and waived all potential claims they may have been able to assert against either the E state or the trust. The payments to the children totaled approximately $20 mi llion; each daughter received about $3.5 million, while Ward received $9.5 million.

The E state filed its estate tax return, signed by Marcia and Ward as co

- executors, on May 21, 2007. Among other deduc ti ons, the E state claimed a deduction of approximately $14 million for a mounts passing to the children , equal to $3.5 million per child (even though Ward actually received signi ficantly more). The E state does not explain why it did not d educt the full amount paid to Ward , though we suspect it has to do with Billhartz’s promise in the Martial Settlement Agreement to leave his children equal shares of his estate

. The E state claimed the de duction under 26 U.S.C. § 2053(a)(3), which permits de ductions of claims a gainst the E state for an indebtedness founded on a promise or agre e-4 No. 14

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ment that was contracted bona fide and supported by ad equate consideration. See id . § 2053(c)(1)(A). According to the E state, the amounts paid to the children through the trust

were paid in settlement of a debt ow ed to them by Billhartz pursuant to his contractual obligation under the Marital Se ttlement Agreement.

The Commissioner issued the E state a notice of deficie ncy that disallowed in full the $14 million deduction and d etermined a tax deficiency of about $6.6 million. The E state then petitioned the Tax Court for a redetermination of the deficiency amount. A trial date was set for April 18, 2012. But before trial, o n April 5, the E state accepted the Co m mi s sio ner’s settlement off er, in which the Commissioner agreed to concede 52.5% of the original $14 million dedu c tion. The parties notified the Tax Court of t he settlement the next day, and the trial was removed from the docket. O n April 24, a fter a conference call with the partie s, the court ordered them to submit by July 24 a decision document r e flecting the terms of the settlement

. The next relevant events took place in Illinois state court, where, on June 12, 2012, Warren’s daughters filed two la wsuits against the E state, contending that the 2007 Waiver Agreement had been procured by fraud; Ward, after resig ning as co

- trustee , filed a similar lawsuit. The children argued that Marcia had intentionally and fraudulently concealed documents from them and had threatened t o withhold any of the trust money from the children unless they signed the waiver. And, e ven though the 2007 Waiver Agreement me ntioned the terms of the Marital Settlement Agreement
, the children asserted that they did not became aware of theirNo. 14

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right to 50 % of the estate, and of the value of the es tate, until the E state brought the Tax Court case in 2012. On July 6, 2012, because of the new state court lawsuits, the E state asked the Tax Court for an extension of time to submit the decision document , and th e court granted a 90

- day ex tension. Then, on October 1, the E state moved to r estore the case to the general docket, arguing that it should be entitled to deductions under 26 U.S.C. § 2053 for any add itional payments to the children arising f rom the state c ourt litigation, and therefore that the settlement amount would have to be recalculated in the event of additional payments. The Commissioner opposed that motion, and instead moved for entry of a decision consistent with the terms of the pa rties’ settlemen t agreement. The E state opposed entry of a d ecision, arguing that the agreement had been predicated on a mutual mistake of fa ct

— i.e., that the amount owed by the E state to the children had been finally determined by the 2007 Waiver Agreement

. The Estate also argued that the se ttlement should be set asi de because the Commissioner knew that Billhartz’s daughters were thinking of suing the Estate in state court; by not providing the Estate with that info rmation, the Estate argued, the Commissioner committed fraudulent misrepresentation. The E state conceded, howe ver, that it had knowingly and voluntarily entered into the settlement agreement with the Commissioner. While these motions were pending in the Tax Court, the Estate reached a settlement with the chil dren in their state court lawsuits. As part of that settlement, the Estate agreed to pay each of the daughters an additional $1,450,000. The Estate informed the Tax Court of this development.6 No. 14

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On June 14, 2013, the Tax Court denied the E state’s m otion to re store the case to the general docket and granted the Commissioner’s motion for entry of decision. The Tax Court also denied the Estate’s subsequent motion to vacat e the d ecision and order. T he Estate now appeals , invoking our j urisdiction to review the dec isions of the Tax Court. See 26 U.S.C. § 7482(a)(1).

II. Discussion

We review the Tax Court’s decision to enforce a settl ement agreement for an abuse of discretion. Wilson v. Wilson
, 46 F.3d 660, 664 (7th Cir. 1995) ( noting that a district court’s decision to enforce a settlement agreement is reviewed for an abuse of discretion); see also Freda v. Comm’r , 656 F.3d 570, 573 (7th Cir. 2011) (“We review decisions of the tax court in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury.” (internal quota tion marks omitted ) ). The Tax Court’s denial of a m otion to vacate a final decision is also reviewed for an abuse of discretion

. Drobny v. Comm’r , 113 F.3d 670, 676 (7th Cir. 1997). Before delving into t he Estate’s legal arguments, some background is helpful to understand ing why it wants the se ttlement set aside

. By settling this case , the parties essentially determined once and for all the total amount that the Estate could deduct as a result of its paym ents to Billhartz’s chi ldren . That is because of 26 U.S.C. § 6512(a), which provides that, once the Tax Court’s jurisdiction is invoked with respect to an estate tax return, no claim for a refund may be filed with respect to any future matter related to th at return. That provision did not overly concern the Estate when it took this case to the Tax Court, as it didn’t anticipate having to makeNo. 14

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future refund claims

— it believed that there would be no more payments to the children. When the children sued, howev er, the Estate was suddenly faced with the possibility that it would have to pay the children more money; even

worse, § 6512 would bar the Estate from obtain ing a refund for those payments , assuming that they were deductible. 1 The Estate’s settlement with the Commissioner allows the Estate to deduc t 52.5% of the $14 million the Estate originally thought it could deduct based on the 2007 Waiver Agre ement. But, since the Estate ended up paying the children more than it expected to (an additional $1,450,000 to each daughter), it now seeks to deduct more. It is important to understand, however, that the oper ation of § 6512 does not make this case unique. When parties to a civil suit reach a settlement , they are usually barred from later tearing up that agreeme nt or filing a new lawsuit when they learn new information

— n ot because of statute, but because of the terms of the settlement. And, of course, for case s that make it to trial, the doctrine of res judicata blocks future legal action based on the same claims

. Settl ements are meant to substitute certainty for risk, b ut that does not make them risk free

. B y settling, parties close the door to new information; that’s risky, because they do not know whether new information will be helpful or harmful. A party
may later come to believe that it received a bad (or good) deal, but only rarely will that provide grounds for setting aside the settlement.

1 We express no opinion as to whether the Estate’s payments to Warren Billhartz’s children are rightly deductible under § 2053(a)(3).8 No. 14

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For th e se reasons, courts should be hesitant to set aside settlements that are reached knowingly and voluntarily by the parties. See Glass v. Rock Island Refining Corp. , 788 F.2d 450, 454

– 55 (7th Cir. 1986). The Tax Court has its own test, laid out in Dorchester Industries Inc. v. Commissioner
, for d etermining when to set aside a settlement. 108 T.C. 320, 335 (1997), aff’d , 208 F.3d 205 (3d Cir. 2000). When, as here, a “se ttlement agreement ha[s] led to the vacation of the trial date and would have led to entry of [a] decision[] had the parties complied with their agreement,” a motion to vacate a settl ement agreement will be denied “ [a]bsent a showing a lack of formal consent, fraud, mistake, or some similar ground .” Id

. The Estate presents two grounds that it contend s meet this standard. First, it relies on the doctrine of mutual mi stake of fact, arguing that “the par ties’ belief that the Estate’s debt to the Children had been finally determined” by the 2007 Waiver Agreement “ was a basic factual assumption u nderlying the April 2012 Settlement. ” It was a basic factual assumption, the Estate argues, because “ the parties negotia ted the April 2012 Settlement as a percentage of the Original Deduction that arose directly out of the ” 2007 Waiver Agreement. As it turns out, the Estate argues, the amount actually paid by the Estate to the children was not finalized by the 2007 W aiver Agreement , and so the settlement was reached while the parties were mistaken about a key “fact.”

A contract can be voided under the doctrine of mutual mistake if, at the time the contract was made, both parties were mistaken “as to a basic assumption on which the co ntract was made,” and the mistake “has a material effect on the agreed exchange of performances.” United States v. Wi lliams , 198 F.3d 988, 944 (7th Cir. 1999) (citing RestatementNo. 14

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(Second) of Contracts § 151(1) (1981)). Here, though
, we st ru ggle to see how the finality of the Estate’s payments to the children could have been a basic factual assumption u nderlying the settlement when the amount the Estate wanted to deduct ( $14 million ) was different from the amount the Estate agreed to pay the children in the 2007 Waiver Agre ement ($20 million) . (Re call that the Estate attempted to d educt less than the full amount that it paid to Ward.) T he E state has not explained how or why it chose the $14 million amount, so we don’t know how or even if it would have changed if the amount originally paid to the children had been different. More fundamentally, though, “rules governing rescission for either mutual or singular mistake are inapplicable where, as here, a party’s erroneous prediction or judgment about future events is involved.” United States v. S w

. Elec. Co op., Inc. , 869 F.2d 310, 315 (7th Cir. 1989). The Estate failed to foresee the chi ldren’s lawsuit; there was no f act about which the parties were both mistaken at the time th ey reached the
sett lement. The Estate had made a $14 million deduction claim. Both parties knew this at the time, and it was a key background fact when the settlement was reached

. It was true at the time, and the fact that the Estate now wants to claim a larger deduction doe s not render the previous d eduction amount false. And that $14 million claim

— not the amount actually paid to the children

— was the basis for the Commissioner’s settlement offer

. The Commissioner surely did not care how much was actually paid to the children or whether that amount was final; rather, he cared only about the amount claimed by the Estate as a deduction.10 No. 14

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Second, as we alluded to above, the Estate’s argument is contrary to the very nature of settlements. Consider a la wsuit arising out of a car ac cident
, in which the plaintiff, after consulting with an auto mechanic, initially claims $1000 in damages. The defendant does not think he is actually liable, but fears a large jury verdict and offers to settle for 40% of the plaintiff’s claim ( $400 )

. The plaintiff accepts the settl ement, but a couple of weeks later her car breaks down, and she discovers that the damage from the accident was more extensive than she initially thought

— closer to $2000. Under the Estate’s theory, the plaintiff could then try to vacate the settlement because the parties were “mistaken” as to a “fact”

— i.e., that the amount of damage to the plaintiff’s car had been finally deter mined at the time of the settlement

. But, of course, that’s not right : by agreeing to a settlement, the p laintiff waived any right to later argue that she actually deserved more than she previously asked for. It makes no difference that the settlement was calculated as a percentage of the amount claimed by the plaintiff

— all monetary settl ement amounts can be expressed as a percentage of the amount claimed by the plaintiff

. The Estate’s second argument in favor of setting aside the settlement is its claim that the Commissioner made a mi srepresentation during settlement negotiations by knowingly omitting a mate rial fact

— specifically, that the children “might initiate a new lawsuit against the estate.” The E state asserts that, at some time between February and April 2012 (before the settlement was reached), the Commissioner’s counsel spoke with Billhartz’s daught er Jean, and Jean stated that she was considering consulting with an attorney to see if she could sue the Estate.No. 14

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An alleged misrepresentation by omission will only void a contract when the omitting party “knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which the party is making the co ntract.” Jordan v. Knafel , 880 N.E.2d 1061, 1071

– 72 (Ill. App. Ct. 2007) 2 (citing Restatement (Second) of Contracts § 161(b) (1981)). All the Commissioner knew, however
, was that Jean might sue. The Estate, of course, knew that as well

— anyone might sue at any time, especially people who have a color able argument that they were shorted millions of dollars from their father’s estate. Jean’s statement was far too nebulous to cause the Commissioner to know that disclosure of the statement would correct any mistaken assumption made by the Estate ; a plan to consider speaking to a lawyer is a far cry from a concrete plan to sue

. Moreover, regardless of what the Commissioner kne w about Jean’s plans, he did not know the Estate’s beliefs regarding the likelihood that she would sue, and therefore he could not have known that disclosing Jean’s plans would have corrected a mistaken belief held by the Estate. Additionally, the Estate was in a much better position than the Commissioner to anticipate the children’s litigation
, meaning that the Commissioner’s omission likely wouldn’t have changed the Estate’s views regarding the likelihood of a lawsuit. In their state court suits, the chi ldren claimed that the Estate had fraudulently induced them into accepting the 2007 Waiver Agreement. If those claims were valid, the E state should have expected a lawsuit; if it committed fraud, it certainly would have known. On the other hand, it is poss i-

2 Both parties agree that Illinois law applies to the contract aspects of this

case.12 No. 14

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ble that the children’s claims were meritless. In that case, it is possible that the lawsuits came as a surprise to the Estate and that the Commissioner’s knowledge regarding Jean’s plans could have alerted the Estate to the possibility of a suit. But , in that scenario, the Commissioner’s omission would have been harmless, as the Estate would not have had to make further payments to the children. 3 Finally, aside from the Dorchester test, the Estate argues that the Tax Court, by refusing to delay entry of i ts decision until after the state court cases had been adjudicated, viola ted Treasury Regulation § 20.2053

- 4(a)(2), which states, “Events occurring after the date of a decedent’s death shall be considered in determining whether and to what extent a deducti on is allowable under section 2053.” As is clear from its plain language, however, this regulation was irrelevant in this case, as the Tax Court never made a determination as to “whether and to what extent a deduction [was] allowable.” Rather, the parties’ settlement conclusively established the amount that the Estate could deduct . It was not the province of t he Tax C ourt to determine whether this amount was co rrect. 4

3 There was, of course, ultimately a s ettlement in the children’s cases, but that does not change the analysis. Perhaps no fraud occurred, and the Estate chose to settle in order to dispose of the cases. The Estate’s choice to voluntarily pay the children extra money should not affect the Co mm issioner’s right to what was agreed upon in the settlement in this case. Or, perhaps there was fraud, and the children gave up the possibility of a larger payday in favor of a settlement. In that case, the Estate should have predicted the suit, meaning tha t any omission by the Commissioner was harmless.

4 The Estate also argues that the Tax Court abused its discretion by not stating its reasons for rejecting the Estate’s claims of mutual mistake andNo. 14

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III. Conclusion

The Tax Court did not abuse its discretion in denying the Estate’s motion to vacate the parties’ settlement. The jud gment of the Tax Court is therefore A FFIRMED

.

misrepresentation. This argument was raised for the first time in the E state’s reply brief, and therefore we will not consider it
, as “it is well

settled that arguments first made in the reply brief are waived.” TAS Di strib

. Co., Inc. v. Cummins Engine Co., Inc. , 491 F.3d 625, 630 (7th Cir. 2007).