TAX COURT OPINION

Case: Larry L. Hartman
Docket Number: 1371-85
Judge: Beghe
Opinion Type: memo
Filed: 06/01/2009
Pages: 42

T .C . Memo . 2009-12 4 LARRY L . HARTMAN, ET AL .,' Petitioners V . COMMISSIONER OF INTERNAL REVENUEr, Respondent 2 Docket Nos . 1371-85, 48690-86, 4116-87, 15673-87 , 16761-87, 18551-818, 29429- 88 . Robert Alan Jones and Declan J . O'Donnell , for petitio n Larry L . Hartman in docket Nos . 137.1-85, 4116-87, and 16761- and for petitioners Jesse M . and Lura L . Lewis in docket Nos i 15673-87, 18551-88, and 29429-88 . 'Cases of the following petitioners are consolidated herewith : Wilbert L .F : .and Valarie W . Liu, docket No . 48690 Larry L . Hartman, docket Nos . 4116-87 and 16761-87 ; and Jess and Lura L . Lewis, docket Nos . 15673-87, 18551-88, and 2942 9 86'; M . 88 . 2This opinion supplements and amends Hartman v . Commissioner , T .C . Memo . 2008-124, reconsidering and superse Lewis v . Commissioner , T .C . Memo . 2005-205 . ing JUN -1 2009 Matthew K . Chung , for petitioners Wilbert L .F . and, .Valari e - 2 - W . Liu in docket No . 48690-86 . Henry E . O'Neill , for respondent . SUPPLEMENTAL MEMORANDUM OPINIO N BEGHE, Judge : Pursuant to Rule 161,3 respondent an d petitioners Larry L . Hartman (Mr . Hartman) and Jesse M . and Lura 1 . Lewis (the Lewises) have filed motions for reconsideration of your prior Memorandum Opinion Hartman v . Commissioner , T .C . Memo . , :! 1I 2008-124 .(Hartman I), reconsidering and superseding Lewis v . Commissioner , T .C . Memo . 2005-205 . Respondent's motion or motions for reconsideration comprise four items under two headings : The first and fourth items ,concern issues of implementation and timing of the sanctio n against respondent that we held in Hartman I would lead t o vacating stipulated'decisions in Kersting project cases and ,giving taxpayers in those .cases the benefit of the "Thompson settlement" ; the second and third items embody respondent' s objections to the Court's characterizations of the actions of :respondent's management in formulating and proffering respondent's posttrial settlement offer to Kersting projec t 'Unless otherwise indicated, Rule references are to the Tax (Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code of 1986 as amended . 3 - petitioners and the Court's use of evidence in connection therewith . The motion of Mr . Hartman and the Lewises for reconsideration reflects partial agreement with respondent ' motion or motions regarding implementation of the sanction ; thei r motion also requests extension of the sanction to Kersting t shelter cases that were settled without being docketed in tho Ta x Court . No motion objects to the Court's overall conclusion tha stipulated decisions should be vacated to allow the taxpayer obtain the benefits of the Thompson settlement . In Hartman I we granted petitioners' motions to vacate th e decisions entered in their cases , because of the misconduct 6f respondent's attorneys in implementing the test case procedu' e used by the Court and the parties in the Kersting tax shelt e project . See Dixon v . Commissioner , T .C . Memo . 1991-614 (Di o n II), vacated and remanded sub nom . DuFresne v . Commissioner, 26 ; F .3d 105 (9th Cir . 1994), on remand Dixon v . Commissioner , T C . Memo . 1999-101 (Dixon III), supplemented by T .C . Memo . 2000- 16 I (Dixon IV), revd . .and remanded 316 F .3d 1041 (9th Cir .. 2003 ) (Dixon V), culminating with our disposition of the second reman d in Dixon v . Commissioner , T .C . Memo . 2066-90 .(Dixon VI), supplemented by T .C . Memo . 2006-190 (Dixon VIII), on appeal (9th Cir ., Dec . 28, 2006, and Jan . 3, 2007) . 4 In Dixon V the Court of Appeals for the Ninth Circuit held .that the misconduct of the Government attorneys in the test cas e proceedings was a fraud on the Tax Court that violated the right s of all Kersting project petitioners who had agreed to be bound by the outcome of the test cases to be tried in the Tax-Court .. As a sanction against respondent for the misconduct, the Court o f Appeals mandated that "terms equivalent to those provided in th e settlement agreement with * * * [the Thompsons] and the ;;IRS" b e extended to "Appellants [test case petitioners] and all,-othe r taxpayers properly before this Court" . Dixon V at 1047 . In Hartman I, applying the rationale and holding of the Court of Appeals in Dixon V, we held that the fraud on the Court it committed by respondent's trial attorney and his supervisor i n the test case proceedings constituted fraud on the Court in ever y 4In Dixon v . Commissioner , T .C . Memo . 2006-97 (Dixon VII) and Young v . Commissioner , T .C . Memo . 2006-189, we responded to the supplemental mandate of the Court of Appeals for the Ninth E Circuit in Dixon v . Commissioner , 316 F .3d 1041 (9th Cir . 2003) t(Dixon V), revg . T .C . Memo . 1999-101 (Dixon III), to determine the appellate legal fees to which Kersting project petitioners and their counsel in Dixon V were entitled . In Dixon v : 'Commissioner , 132 T .C . (2009) (Dixon IX), and Gridley v . Commissioner , T .C . Memo . 2009-89, we have acted on motions for attorney's fees and expenses incurred in the Dixon V remand proceedings by or on behalf of petitioners represented by attorneys of the law firm of Porter & Hedges LLP and by Robert Alan Jones . Similar motions by petitioners represented by Michael Lewis Minns and Joe Alfred Izen, Jr ., are pending . case bound by the outcome of the test cases and that"respon ent had an obligation to fully disclose the misconduct, not only t6 , the Court,and 'the test case petitioners, but also to all ,petitioners who had been bound by the outcome of the Kersti n project test cases . We held further that respondent's postt~ria l settlement offer did not adequately disclose the Governmen t attorneys' misconduct to the offerees and did not remedy or,~urg e the fraud from the Kersting project cases . We held that the sanction mandated by the Court of Appeals in Dixon V should e imposed in the cases of all Kersting project petitioners in hich stipulated decisions were entered on or after June 10, 1985, .the commencement date of implementing the test case procedure in th e Kersting project . Our reference to Government attorneys i n Hartman I and in this supplemental opinion is to respondent' trial counsel and his supervisor, and reference to the fraud on i the Court is to the misconduct of those Government attorneys , throughout the test case proceedings . We believed that the most efficient way to implement the sanction would be to allow respondent to adjust administratively the accounts of all Kersting project petitioners, other thaniMr4. Hartman, the Lewises, and petitioners Wilbert L . F . and Vala~ i W . Liu (the Lius), without requiring further action from the Kersting project petitioners . It appeared to the Court that respondent could make such administrative adjustments as 6 - evidenced by the fact that, after stipulated decisions became final in the cases of Kahle v . Commissioner, docket Nos .,24558-8 4 and 38976-84, respondent administratively had partially abated . Mr . Kahle's agreed deficiencies by giving him the benefit of the 7-percent reduction in deficiencies provided .in respondent's posttrial settlement offer . In Hartman I we set forth a procedure to be implemented after the decisions in these cases become final that would give respondent 9 months thereafter t o adjust administratively the accounts of all Kersting project petitioners against whom stipulated decisions had been entered o n ,or after June 10, 1985 . Backgroun d For purposes of this supplemental opinion, we incorporate our findings in Hartman I . For convenience and clarity, we repeat here . the facts necessary to understand the discussion that "follows, and we supplement those facts as appropriate . Respondent determined deficiencies and additions to ta x against petitioners and other taxpayers who participated in tax I~shelter programs promoted by Henry F .K . Kersting . Respondent' s ;determinations resulted in more than 1,800 cases in this Court .arising .from the disallowance of interest deductions claimed b y Kersting program participants . Most petitioners signed . stipulation's with respondent that their cases would be resolved - 7 - in accordance with the Court's opinion and decisions in theltes t cases (piggyback agreements) . After the trial of the test cases, the Court issued it s opinion in Dixon II sustaining virtually all of respondent ' adjustments . After the .Court had issued Dixon II and entere d i decisions in the test cases, respondent's management discovered) and disclosed to the Court and counsel for other test cas e petitioners that before the test cases were tried respondent' trial attorney Kenneth McWade and his supervisor had entered into secret settlements with test case petitioners John R . and Ma de e Thompson (the Thompsons) and John R . and E . Maria Cravens (t I Cravens .es) . The Thompson settlement provided for reduction more that 60 percent of the Thompsons' originally determined deficiencies, as well as elimination of all Kersting-relate d penalties and additions, as a means of creating refunds to paid to the Thompsons' counsel for providing the appearance independent representation in the trial of the test cases . Cravens settlement provided for reduction of about 6 percen t the Cravenses' originally determined deficiencies . In July 1992 respondent's National Office began in-hou s discussions about offering Kersting project petitioners who er e bound by the test cases through piggyback agreements a 7-per en t reduction settlement along the lines of respondent's pretria Kersting project settlement offer . The Department of Justic informed respondent's management that the Department wished t o offer the Kersting project petitioners whose cases were on appeal the same settlement that the Thompsons had received, estimated t o be a,65-percent reduction in deficiencies (a rough approximatio n of the reduction of the Thompsons' originally determined deficiencies from $79,293 .52 to the $30,000 figure finally agreed lpon) . Respondent's management was opposed to settling the appealed cases on that basis, and no settlement offer on tha t basis was made to the test case petitioners on appeal . The first draft of the proposed settlement offer explaine d that the Tax Court had issued Dixon II disallowing the interes t deductions, imposing additions to tax for negligence under section 6653 and substantial understatement of tax under section .6661,_, and finding that the increased interest rate under section 1'6621(c) applied . The first draft stated that five of the test case, petitioners (Dixon, DuFresne, Hongsermeier, Owens, rand Young) were appealing their cases in the Ninth Circuit,,but that the appeals had not yet been resolved . The first draftfurthe r stated that respondent had moved to vacate the decisions in the !Cravens , Rina , and Thompson test cases because settlemen t agreements had been reached with the Cravenses and the Thompsons , who were test case petitioners, before the test cases were tried . "The first draft stated that the Tax Court had (1) granted motions to vacate the decisions in the Thompson and Cravens cases, (2) entered agreed decisions in the Cravens cases reflecting the Cravenses' pretrial acceptance of the standard Kersting settlement offer, (3) in the Thompson cases , where the parti were unable to agree on the decisions, entered decision s requested by the Thompsons, and (4) denied a motion to vacat th e decision in the Rina case because the testimony and evidenc e offered by Thompson and Cravens had no material effect on Di :on; II as it related to Rina and therefore the Court's findings, ) analyses, and conclusions relating,to Rina would remain the ~ame . The first draft stated that the Internal Revenue Service (IR~) I believed that the Court's disallowance of interest deductions an d the imposition of the additions to tax would be upheld on ap)eal . The first draft then stated that'-the IRS had decided to rene~ it s previous offer of the 7-percent settlement including th e "burnout"5 and enclosed a form on which the taxpayer could i indicate his/her acceptance of the offer . The first draft state d h t on a t i ntere s sThe burnout was a change, beneficial to taxpayers, adopted by . respondent's trial attorney in giving effect to responden 'sI pretrial settlement offer for .the Kersting project . The bur ou t applied in cases involving more than 1 tax year . Under the burnout, t e Kersting-related deficiencies . for the first and second years of : tax liability would not begin to accrue until the return due date for the second year . This was accomplished by zeroing out the taxpayer's agreed deficiency for the first year and adding is to the agreed deficiency for the second year . The burnout thus postponed for a year the accrual of interest on the first ye is deficiency, thereby reducing the total interest accrued on t l e taxpayer's Kersting-related deficiencies . Variations of the burnout were used in cases involving more than 2 tax years . t t l u axpayer npa i d o a ' s - 10 - that the offer applied only to adjustments resulting fro m participation in the Kersting programs and that any othe r adjustments raised in the case would be settled or litigated item by item . .A second shorter draft of a settlement proposal gave muc h less detail than the first draft . The second draft (1) referred to the,Tax Court's decision but did not name the case or cit e Dixon II, (2) identified the Cravens case as one of two tes t cases in which "some irregular and undisclosed agreements" had been reached, (3) stated that the Tax Court had concluded tha t the outcome of the trial was unaffected by the irregular activity and that decisions had been entered in the two test case s enforcing the undisclosed agreements, and (4) did not identify any of the other test cases or mention that some of test case s were being appealed . The second draft stated : We believe that the .Cravens situation is indistinguishable from your own . . .We have determined that the Cravens [ sic] in good fait h believed that they had a valid settlement agreemen t prior to the trial . Because they were not represente d by counsel, they could not be expected to have detected any irregularity on our part . Because the Cravens [sic] received the benefit of this offer .even afte r °, trial, we believe that fundamental,fa.irness compels that you should receive the same treatment . Therefore, 'we will apply the benefits of that treatment to your case . - 11 - The second draft stated that the adjustments to the taxpayer' s account with the IRS would be made' administratively and require d no further action by the taxpayer .- A third draft, also less detailed than the-first (1) ci edl Dixon II, (2) stated that two of the test case petitioners h d # t entered into settlement agreements that had not-been disclos d to the other test case petitioners or the Tax Court, (3) did n o identify the test case petitioners who had entered into th e undisclosed settlement agreements or any of the test cases o her .than citing Dixon II, (4) stated that the Tax Court had conc uded that the outcome of the trial was unaffected by the testimon' o f 1 the test case petitioners who had settled their cases and th*t 1 "the opinion of the Tax Court, as it affects you, remain s unchanged", (5) did not disclose that the Dixons and some oflth e other test case petitioners had filed appeals with the Court of t Appeals for the Ninth Circuit . The third draft stated tha t "fundamental fairness dictates that you be afforded an I opportunity to settle your case on similar grounds" . The third! . draft, like the second draft, indicated that if the taxpayer' s case had been settled, the adjustments would be made administratively without' requiring further . action from the taxpayer . If the case was still pending in the Tax Court , taxpayer had 60 days to accept the offer . The third draft s~ate d that acceptance of the offer would "preclude any further i I I I? - 12 - challenges or appeal with respect to the merits of the Dixon opinion as applied to your case(s) . " In January 1993 respondent made mass mailings extending a global settlement proposal to all known Kersting project,, non- test-case petitioners and their counsel (posttrial settlement offer .), . The posttrial settlement offer informed the non-test- case petitioners that the Court had issued its opinion sustainin g all the adjustments and cited Dixon II . It explained that, after ,the trial of the test cases : ii It subsequently came to our attention that two of the test case petitioners had entered into settlement agreements with the Service prior to the trial, and that these agreements were not disclosed to the Tax Court or the other test case petitioners. The settlement agreements provided that these particular test case petitioners could proceed to trial, but would' receive the benefit of the better of their pretrial settlement agreement or the results of the trial . The Tax Court has since been advised of this situation and has concluded that the outcome of the trial was not affected by the testimony of these test case petitioners . This means that the Tax Court opinion, as it pertains to .other Kersting cases, remains unchanged . However, in light of these recent developments, we!,have concluded that in fairness all 'petitioners be afforded an opportunity to settle their cases . ,In general, the posttrial settlement offer represented a irevival of the official project settlement that respondent ha d coffered during 1982-88 . ' It permitted taxpayers to resolve thei r F (cases by agreeing to pay deficiencies that were 7 percent les s than those determined in their deficiency notices . Respondent would impose no penalties or additions to tax, and taxpayers - 1 3 would pay interest only at the generally applicable (i .e ., tax-motivated) rate under section 6621(a) . The posttria l settlement offer did not include the burnout . The posttriall settlement offer further stated : '"Acceptance of this settlement . offer will preclude any further challenge or appeal with respec t I to the Kersting programs or the merits of the Dixon opinion . An y other issues involved in this case will be resolved separatelly .l" Taxpayers were given 60 days within which to accept or reject the posttrial settlement offer . Mr . Hartman had settled his cases with respondent, and stipulated decisions had been entered in his cases in Janua r 1989 before the test cases were tried . The Lewises, through ) their counsel, and the Lius, pro sese, accepted respondent ' posttrial settlement offer, and stipulated decisions were entere d in their cases in March and June 1993, respectively . In Dixon V at 1046, the Court of Appeals held that the misconduct of the Government attorneys in the test case proceedings was a fraud on the Court that violated the right all Kersting project petitioners,who(cid:127)had agreed to be bound the outcome of the Tax Court proceeding, a fraud. on both the Kersting project petitioners and the Tax Court "plainly des i to corrupt the legitimacy of the truth-seeking process" . Th Court of Appeals ordered this Court to sanction respondent b entering decisions in the cases of the remaining test case - 14 - petitioners and other Kersting project petitioners before th e Court of Appeals on terms equivalent to those provided in the Thompson settlement . During the Dixon V remand proceedings, in an order issue d October 12, 2004 (the Dixon order), the . Court allowed the taxpayers' discovery requests for the limited purpose o f ascertaining respondent's understanding of the origins and nature of the Thompson settlement . Evidence of the conduct of respondent's management after Dixon II was excluded because it was not relevant to that purpose . As part of the limitations-on discovery in the Dixon V remand proceedings, the Court took custody, of three boxes for in camera inspection . Two boxes described in item 123 o f respondent's privilege log consisted . of a chronological, file of 16 volumes comprising more than 1,200 items and 5,000 pages created and maintained by respondent's counsel Henry E . O'Neill . The three drafts of the posttrial settlement offer Were included in item 123 . After we completed the inspection, we ordered respondent to produce more than 200 items from the third box (all document s encompassed by respondent's privilege log except item 123) as relevant to the origins and nature of the Thompson settlement . We denied the taxpayers access to the item 123 materials becaus e they provided no guidance on the scope of . the Thompson settlement - 15 - and were not relevant to the Dixon ,V remand . In note 2'of thel Dixon order, however, we noted that materials in item 123 raise d questions regarding the adequacy of respondent's disclosure o the Government attorneys' misconduct and that we might requir e production of those' materials later in connection with motio s1to vacate decisions in which stipulated decisions had been entered ; . See also Dixon VIII n .9 . The,-Court retained custody~of the materials encompassing item 123 of the privilege log . In Dixon VI and Dixon VIII we,responded to the directio and primary mandate of the Court of Appeals in Dixon V to determine how the Thompson settlement would be imposed again respondent in-favor of the test case petitioners and all par properly before\,.the Court . Kersting project-petitioners fil notices of appeal of Dixon VI and Dixon VIII in the test ca s Hongsermeier v . Commissioner , docket No . 29643-86, Young v . Commissioner , docket Nos . 4201-84, 22783-85 , and 30010-85, a Owens v . Commissioner , docket No . 40159-84 , and in the nont e cases of Rosters v . Commissioner , docket No . 17993-95, Hube r Commissioner , docket No . 20119-84, Titcomb v . Commissioner , docket No . 17992-95, and Adair v . Commissioner , docket Nos . 17642- 83, 38965-84 , 35608- 86 ; 479 - 89, and 8070 -90 (collectivoly ± the Hongsermeier appeal) . After the Court of Appeals issued Dixon V, petitioners-Lnd 1 others filed motions for leave to file motions to vacate the - 16 - stipulated decisions entered by this Court in their cases . Petitioners premised their motions to vacate the decisions i n their cases on two grounds . First, petitioners argued that the decisions in their cases were obtained by fraud on the Cour t because, . inasmuch as petitioners were bound by the decisions in it the test-cases, the fraud committed by the Government attorneys .in the test cases necessarily affected and corrupted their cases, and their settlement agreements did not address the fraud o r foreclose the imposition of sanctions against respondent for th e fraud . Second, petitioners argued that there was misconduct of respondent's management in making the posttrial settlement offer ., thatw-suchmisconduct constituted a new fraud on the Court .or continued the fraud on .the Court determined by the Court of Appeals in Dixon V, and that respondent obtained the stipulated decisions through that misconduct . In Lewis v . Commissioner , T .C . Memo . 2005-205, we focused o n the legal consequences of the Lewises' acceptance of respondent's posttrial settlement offer, applying general pr .inciplesiof ,contract law . We denied the Lewises' motions for leave'to file motions to vacate their stipulated decisions on the grounds that they .and their counsel had become aware of the Governmen t attorneys' misconduct and of the pending appeals by test cas e l~petitioners when they, stipulated the decisions . - 1 7 The Lewises filed motions for-reconsideration, which wel granted because we had come to believe that in Lewis we had applied the wrong law, as the Court of'Appeals in Dixon V held w e had in Dixon III and Dixon IV, and that we failed to appreci to I and apply the full scope of the holding of Dixon V in accord nc e with its rationale-. We also-granted the motions for leave file motions to"vacate decisions in the Lewis , Hartman , an d cases . We consolidated the cases because they would all be= appealable to the Court of Appeals for the Ninth Circuit . When we granted petitioners leave to file motions to va ;at e the decisions in .these cases we thought that further proceeding s might be necessary to decide whether respondent's conduct following the trial of the test cases constituted a fraud on1th e I Court warranting additional sanctions against respondent . ordered respondent to show cause it writing why the matter s ould not be set for evidentiary hearing . Respondent filed a response to the Court's order to show cause, opposing the scheduling of an evidentiary hearing on his matter ;-respondent took the position that the Court had before i t the entire evidentiary record in Dixon III-and Dixon VI upo n which to decide the merits of the motions to vacate . Responden t asserted that petitioners' motions could be decided on the D~xo n i VI record and-that another evidentiary hearing would yield only~a 18 - rehash of the(cid:127)evidence already before the Court and unnecessarily l delay bringing the Kersting project to a close . In considering the parties' positions regarding furthe r discovery and an evidentiary hearing, we took counsel from the Court .,,-of Appeals in Dixon V at 1047, where it said : ,'Enormous amounts of time and judicial resources have been wasted . * * * The taxpayers should not be forced to endur e another trial and the IRS should be sanctioned for this extreme misconduct ." We believed that another hearing, including ful l discovery, in these cases should be avoided if possible . j4 .-,In an order of the, Court dated October 31, 2006 (the October 31 order), we informed the parties that we had considered ,petitioners' arguments and agreed that the Court of Appeals in DixonV has determined that the fraud the Government attorneys ,committed on the Court in the test case proceedings affected .and :corrupted every case that was bound by Dixon II, whether .by !;piggyback agreement or otherwise . However, a holding to tha t effect, alone would not resolve the pending motions . We,expressed concern that respondent's current counsel and some of - petitioners' counsel would be witnesses and would have t o withdraw from the proceedings if an evidentiary hearing ., were necessary . We asked the parties to address whether petitioners' motions could be decided without a hearing and posed severa l questions to the parties, including : 19 1 . Once the Government trial attorneys had committed fraud on the Court, could respondent "purge" the fraud from any .cases bound by the test-cases and, if so what action was responde t required to take in order to do so? - 2 . Did respondent have a duty to notify petitioners, f lll y disclose the misconduct to them, arid inform them that Dixon II, was being appealed and the taxpayers were asserting fraud on th e Court? By holding that the remedy,for the fraud on the Court was to entitle all Kersting project petitioners with open cases to the benefits of the Thompson settlement, . did the Court of Appeals in effect require the IRS to make the same disclosure to the Kersting project petitioners that this Court had required th IRS to make in Fisher v . Commissioner , T .C . Memo . 1994-434? , 3 . When making the posttrial settlement offer, di d respondent continue the fraud on the Court or commit a new f :au d by failing to disclose fully to petitioners the Government attorneys' misconduct in the test case ; proceedings and the taxpayers' allegations, on appeal, of fraud on the Court ? 4 . If such disclosures were required, did respondent's filing with the Court of the stipulated, decisions obtained without the disclosures constitute,a fraud on the Court? Se e .g ., Toscano v . Commissioner , 441,F .2d 930, 935 (9th Cir . 1 7 1 ("the original fraud was not upon the Tax Court * * When * Toscano petitioned the Tax Court for redetermination, he caried - 20 - .the fraud into the Tax Court . Thus he was continuing to defrau d the Commissioner * * * But he was doing more ; he was als o perpetrating a fraud upon the Tax Court",), vacating 52 T .C . 295 (1969) . Did respondent have an obligation to file the form of settlement offer letter with the Tax Court when he asked the Court to enter the stipulated decisions obtained through that offer? , 5 . Was our holding in Lewis v . Commissioner , T .C . Memo . 2005-205, analogous to requiring taxpayers to show prejudice as a result of the misconduct such that, under the holding of Dixon V, we applied the wrong law ? 6 Respondent acknowledged that Kersting projec t petitioners whose stipulated decisions were procured and entered after the publication of Dixon II and before the discovery an d disclosure to the Court of the misconduct of respondent' s attorneys are entitled to have their decisions vacated, thereb y conceding that stipulated decisions should be vacated because o f fraud on the Court . Are stipulated decisions entered before the publication of Dixon II also subject to being vacated for fraud on the Court? Were petitioners who settled their cases before the publication of Dixon II entitled in so doing to assume that the test cases would be tried properly ? We stated that we believed that the answers to the question s might, .,eliminate the need for a hearing to establish facts 21 - concerning the posttrial conduct of respondent's management . The Court sought the views of. the parties and their counsel on the questions posed and ordered petitioners and respondent to fil h e responses to the order addressing the Court's questions wit legal reasoning and citations and discussions of legal authorities to support their views . In the October 31 order we also quoted the posttri'a l settlement offer that led to most f the stipulated decisio n that petitioners sought to vacate and commented on material acts that had been omitted . We stated that there was no need to 'old an evidentiary-hearing to conclude that in a number of respects : respondent's settlement offer constituted less than ful l disclosure and was misleading. 1 In the October 31 order we also pointed out that evidence Of alleged continuing misconduct by respondent's management and : representatives following the trial of the test cases had been excluded(cid:127)from all evidentiary hearings . We specifically noted our prior Dixon order and stated : "Footnote 2 of the Dixon (cid:127)rder clearly indicates that . the. Court believed that item 123 was relevant to allegations of respondent's misconduct raised by petitioners in the pending motions . " In an order dated November 15, 2006 (the November 15 or er)I , we posed an additional question, arising from respondent' s concession in Kahle v . Commissioner , docket Nos . 24558-84 ands I i f - 2 2 38976 784, where the stipulated decisions entered in the cases had been negotiated after the trial of the test cases, been executed after Dixon II was issued, and become final before respondent discovered and disclosed to the Court the misconduct of the Government attorneys . In response to an earlier order to show cause, respondent stated that respondent did not oppose vacating the stipulated decisions entered in the Kahle cases, conceding that the decisions in those Kahle cases were arguably obtained b y a!fraud on the Court . In the November 15 order, the Cour t ordered petitioners and respondent to address the implications o f that concession-insofar as it affected stipulated decisions that were entered and/or became final before the Cravenses and the Thompsons settled their cases, (2) after the Cravenses and th e Thompsons settled their cases but before the trial of the test cases, and (3) after the trial of the test cases but befor e publication of Dixon II . The parties timely filed their responses to the October 3 1 and November 15 orders . Although respondent and petitioners took opposing positions on every question, we still wished to avoi d J another expensive and lengthy hearing that might require respondent 's and petitioners ' counsel to withdraw . After considering the parties ' positions , we concluded that admitting into evidence the three drafts of the,posttrial settlement offer , which spoke for themselves , would eliminate the - 23 - need for a hearing . Because we had indicated to respondent n the Dixon order and the October 31 order that documents in i"em 123 were relevant to the issues in these cases, we ordered ti a t the three drafts of .the posttrial settlement offer be marked :fo r identification and received into evidence in these cases as hey Court's Exhibits 1-A, 2-B, and 3-C . In Hartman I we held that the fraud on the Court committed by the Government attorneys in the test case proceedings was a fraud on the Court in all cases bound by the outcome of the test cases and granted the motions to vacate filed by the Lewises, Mr . Hartman, and the Lius . We held further that all Kersting project petitioners against whom stipulated decisions were entered o or after June 10, 1985, are entitled to the benefits of the Tho pso n settlement, thereby . imposing on respondent in all Kersting project cases the sanctions mandated by the Court of Appeals ini Dixon V . We concluded Hartman I by describing a procedure for implementing our holding . Respondent moves the Court to reconsider Hartman I in th e following respects , which-we have regrouped to reflect the o~de r in which we will address them : (1) Reverse all factual findiing s that were based on item 123 concerning communication of th e posttrial settlement offer, (2) strike from the Court's opinion findings of continuing fraud on the Court beyond the original misconduct of the Government attorneys in the test case - 24 - . proceedings, (3) delay implementation of any sanctions in : these cases until after the Court of Appeals issues its mandate in th e Hongse :rmeier appeal (the Hongsermeier mandate), and (4-) substitute respondent's alternative plan for implementing the . sanction . Petitioners move the Court to reconsider the method of implementing the sanctions and to extend the sanction to, participants in the Kersting tax shelters who never filed a petition in the Tax Court to contest the deficiencies . determined against them . Discussio n The granting of a motion for reconsideration rests within the Court's discretion . Estate of Quick v . Commissioner , 110 T .C . 440, 441 (1998) ; see Lucky Stores, Inc . & Subs . v . Commissioner , T .C . Memo . 1997-70, affd . 153 F .3d 964 (9th Cir . 1998) .-! A motion for reconsideration will be denied absent a showing of unusual circumstances or substantial error . Estate o f Quick v . Commissioner , supra ; Alexander v . Commissioner ,,, 95 T .C . 67,,4 ;69 (1990), affd . without published opinion sub nom . Stell Commissioner , 999 F .2d 544 (9th Cir . 1993) . 1 . Findings Concerning Formulation and Communication of Posttrial Settlement Offe r Respondent moves the Court to reconsider Hartman I to reverse all factual findings that were based on .item 123 concerning formulation and communication of the posttrial - 2 5 .settlement offer . Respondent asserts that the Court's actin s i n making drafts of the pretrial settlement offer part of the r cor d without allowing respondent an opportunity to challenge th e evidence or present evidence in opposition are inconsistent it h due process and,the fundamental rights of litigants . The three drafts of the proposed posttrial settlement agreement were documents in respondent'ss records and wer e received into evidence in these cases as the Court's Exhibit 1- A, 2-B, and 3-C . In our view, the progression of the three drafts of the proposed posttrial settlement agreement includ item 123 evidenced efforts by respondent's management,to pro Kersting project petitioners with less rather than mor e information . That progression was relevant to (1) our consideration of whether and to what extent respondent had a obligation to disclose to non-test-case petitioners the fact surrounding the Government attorneys' misconduct during the e s case proceedings, (2) whether respondent's management . misled petitioners or concealed from them facts concerning th e misconduct of the Government attorneys during the test case proceedings, and (3) whether the actions taken by respondent' s .management after discovery of the Government attorneys' misconduct might have mitigated the harm caused by the misconduct . - Z6 - In our view, the mitigating effect of the posttrial settlement offer could not be properly evaluated withou t r consideration of the three drafts . The drafts were documents i n respondent's records subject to discovery that were properly ilncludable in the record in these cases . We had indicated to respondent in the Dixon order and the October 31order that documents in item 123 were relevant to the issues in the motions to vacate . Because the drafts speak for themselves, we ordered them received into evidence as the Court's exhibits, rather than setting the matter for a hearing and commencing discovery procedures . In so doing, we avoided the need for additiona l discovery and an evidentiary hearing, which respondent vehemently opposed . Petitioners, who had requested a hearing, have .no objections to the exhibits . it Respondent's requestthatthe Court reverse all factual findings that were based on item 123 on the issue of respondent' s intent in formulating and-communicating the posttrial settlement offer is denied . II . 14 Continuing Misconduct Beyond the Fraud on the Court'of the Government Attorneys During the Test Case Proceeding s 'Petitioners premised their motions to vacate the stipulated decisions in their cases on two alternative grounds : First, that those decisions were obtained by fraud on the Court becaus e petitioners were bound by the decisions in the test cases, th e fraud committed by the Government attorneys in . the test cases - 27 - necessarily affected and corrupted their cases, and thei r settlement agreements did not address the fraud or foreclose the imposition of sanctions against respondent for the fraud ; second, that' there was misconduct of respondent's management in maki g the posttrial settlement offer, that such misconduct constitite d a new fraud on the Court or continued the fraud on the Court l determined by the Court of Appeals in Dixon V, and that respondent obtained .the stipulated decisions through that misconduct . We emphasize that we did not decide Hartman I on the se an d ground advanced by petitioners . We would not have done so without affording respondent's management a further hearing . decided Hartman I on the first ground on the basis of th e existing record in the Dixon cases supplemented with the drafts' of the posttrial settlement offer without further discovery or a n evidentiary hearing . We held that'the Government attorney s the test case proceedings had committed a fraud on the Court i n every case that was bound by the Kersting project test cases, under the rationale and holding of the Court of Appeals in Dixon V . The only fraud committed on the Court was the fraud committe d by respondent's trial attorneys in the test cases in solicit''ng ; entering into, and concealing the settlement of .the Thompson and Cravens cases . 28 - In . Hartman I we . focused on whether respondent's posttrial disclosure and settlement offer could purge from these cases the fraud committed on the Court by respondent's trial attorneys or otherwise rectify the harm caused by the fraud on the Court . W e n oted that., once a fraud is committed, subsequent voluntary disclosure of the fraud does not purge the fraud . Badaracco v . Commissioner , 464 U .S . 386, 394 (1984) . . The fraud on the Court committed by respondent's attorneys was completed once the tes t cases were tried . We held that, regardless of respondent .' s disclosures to the Court, all .Kersting project cases that were b ound by the test cases during the test case proceedings ; remain cases'of fraud on the Court, and respondent remains subject t o sanction for that fraud . in every such case . In deciding whether the sanction mandated by the Court o f Appeals in Dixon V should be applied in the cases of Kersting project petitioners who accepted respondent's posttrial settlement offer, we considered whether respondent's posttria l actions mitigated the .harm done by the fraud, For that purpose, we identified respondent's obligations to such petitioners an d 11 found (1) that respondent was obligated to inform Kersting project non-te,st-case petitioners of the existence and terms o f the Thompson settlement and that Dixon,,II was being appealed and (2) that respondent intentionally omitted those material facts in the posttrial settlement offer . - 29 - In the motion for reconsideration respondent argues tha t section 6103 prohibited respondent from disclosing the terms of l the Thompson settlement agreement to non-test-case petitione :s . We disagree . Section 6103(,h)(4). permits disclosure of retu r information in judicial and administrative tax proceedings . (The' Thompsons were petitioners (parties) in test cases that i determined their civil tax liabilities, see sec . 6103(h)(4) ( and the treatment of the disallowed Kersting. deductions clai edl on the Thompsons' returns was directly related to the resolu io n of that issue in every case bound-by the outcome of the test' cases . The section 6103(h)(4) exception to nondisclosur e permitted disclosure of the Thompson settlement to petitione'~. s whose cases were bound by the Thompsons' cases . Moreover, decision documents in the Thompsons' cases disclosed the settlement . The decision documents in a Tax Court case ar e public records, open for inspection by the public . Responde had an obligation to fully disclose the agreement to the no n test-case petitioners . In Hartman I we observed that (1) willful concealment omission of . material facts or intentional statements o f half-truths will support a finding of fraud, (2) respondent , having disclosed some of the facts concerning the irregulari i e in the test case procedure, was obliged to disclose all fact that would materially qualify the limited facts that were 30 - disclosed, and (3) the Court has held that a settlement stipulation may be set aside for excusable, damaging reliance upon a~,Ifalse or untrue . representation of the other party . Again, we made those observations in deciding whether respondent' s posttr,ial settlement offer somehow mitigated the harm done by th e fraud committed by respondent's attorneys in the test cas e proceedings . We did not hold .that respondent's failure t o satisfy respondent's obligation to inform or omission of materia l facts was a fraud on the Court . Nor did we hold or conclude tha t r;espondent's omissions in formulating and proffering the . i osttrial settlement offer evidenced a " .scheme of secrecy" to P hide the Thompson settlement ; we limited our use of that term, see. Hartman I, slip op . at 119-120, to the concealment of th e Thompson settlement that constituted the fraud on the Court by respondent's trial attorney and his supervisor . We also found that the stipulated decisions and the ., posttrial settlement agreement did not specifically release respondent from liability for matters arising from the misconduct- . 'In Hartman I we held 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 th e Kersting project test case proceedings began, by extending the benefit of the Thompson settlement to all such petitioners . - 31 - Since we did not find a continuing' fraud on the Court b yod that committed by respondent's trial counsel during the test cas e proceedings, there are no findings to strike from Hartman~I . Respondent's request is moot . III . Modification and Delay of Implementation of Sanction s In Hartman I we recognized that "Enormous amounts of ti e and judicial resources have been wasted" and hoped to relie v other Kersting project non-test-case petitioners who had stipulated decisions entered in . their cases on or after June 10 ; 1985, of the burden of filing motions for leave to file motions! to vacate decisi-ons . It appeared to the Court that respondent could adjust administratively such petitioners' accounts, as had been done in the Kahle cases after those decisions had becom final . We believed that the most expeditious and efficient Lean s of implementing the sanction would be to allow respondent to adjust administratively the accounts of all Kersting project petitioners, other than Mr . Hartman, the Lewises, and the Li s, without requiring further action from the Kersting project petitioners . To facilitate the implementation of the sanction, we proposed to issue an order (the implementation order) directing respondent to send a copy of Hartman I and the implementatio order to all taxpayers who had filed petitions in this Court contesting the adjustments at issue in Dixon II and who had - 32 - stipulated decisions entered in their cases (closed cases) on o r after June 10, 1985 . That notification action by respondent wa s be completed within 60 days after the decisions entered i n .these cases become final, i .e ., after the Court of Appeals for the Ninth Circuit renders its decision, if and when the decision s herein ,should be appealed . Respondent would have-9 months after the date the decisions in these cases become final to adjust administratively the accounts of all Kersting project petitioners who had stipulated decisions entered in their cases on or after June 10, 1985 . Respondent asks the Court to delay entry of decisions in these cases and the implementation of sanctions in the close d cases,until the Court of Appeals for the Ninth Circuit has issued the Hongsermeier mandate and to modify the implementation of sanctions . We first address respondent's request that we delay implementation of the sanctions . A . Delay of Entry of Decisions in the Hartman, Lewis, and Liu Case s Respondent first requests that the Court delay entry of decisions in these cases, the Hartman , Lewis , and Liu cases, until after the Court of Appeals issues the Honcrsermeier ~mandate . We held in Hartman I that the administrative adjustment procedure would not be implemented until the decisions in these cases are final . These cases will not become final until any - 33 - appeal by petitioners or respondent-is complete, presumably fte r or simultaneously when the Court of Appeals issues th e Hongsermeier mandate .- We do not believe'the decisions in th~s e cases should be postponed ; a postponement would unnecessaril delay any appeal in one or'more of these cases . The Court w order decisions in these cases to be submitted under Rule 15 within 30 days after the filing of this supplemental opinio n I f respondent and petitioners in any of these cases agree tha t neither party will file an appeal-in the case and that both parties want to delay entry of deci'sion~until after the Cour Appeals has decided the appeal of any of the other of these consolidated cases and the Honasermeier appeal, the Court w i 1 . extend the date .for filing the Rule 155 computation until t h t time . B . Delay of Implementation of Sanctions in Closed Cases Until. After Court of Appeals Has Decided Cases Currently on Appeal From Dixon VI and Dixon VII I Implementation of the sanctions in other cases was to b gi n by notification from respondent to affected .Kersting project I petitioners . The notification was-to be completed within 60lday s after the decisions entered in these cases had become final ; i .e ., after the Court of Appeals for the .Ninth Circuit rende s its decision, if and when the decis'ions' herein should be appealed . Respondent asks the Court to delay implementation of - 34 - the sanction until after the Court of Appeals has decided the cases currently on appeal from Dixon VI and Dixon VIII . Inlsetting the deadlines for implementing the sancti'on, w e did not expect that the decisions in the cases at hand migh t become :final before the Court of Appeals decided the Hongsermeier appeal,..,> Upon reconsideration, we believe that implementation o f sanctions in closed cases other than these cases should not commence until the later of (1) the last date a decision in any of these cases become final, (2) the date the Court of Appeals . fbr the Ninth Circuit renders its mandate in any of these cases, LF if and when the decisions herein should be appealed, and (3) the date of the Hongsermeier mandate . Modification of . Implementation of Sanction s Respondent asks the Court to modify the Court's method o f implementing the sanction . Respondent, citing section 6512 , argues that the Court "lacks jurisdiction to order overpayment refunds, with respect to closed cases when the final decision s have not been vacated" . In Hartman I we did not. hold that we would order respondent to make the administrative adjustments-- we held that we would issue the implementation order giving respondent the opportunity to adjust administratively the , accounts of the petitioners in closed cases before acting on any i4 motions to vacate decisions in other closed cases or accepting any new motions in closed cases where motions had not as yet been 35 - filed . ' .Respondent asserts that the adjustment to Mr . Kahle' account in the Kahle cases did not result in a refund of ant overpayment of tax and that section 6512(a) prohibits respon en t from making a refund in the closed cases by adjustin g administratively the accounts of the petitioners in closed c ses .6 Respondent argues that the Court has made no determinat on ' of overpayment of tax with respect to the approximately 800 closed cases and section 6512(a) prohibits respondent from issuing refunds administratively . Instlead, in order for respondent to comply, the Court must vacate the decisions an determine the amounts of the overpayments . To facilitate implementation of the sanction, we shall issue the following implementationforder . 1 . Status Reports Identifying Affected Closed Cases a . On or before 90 days after the date this .supplemental opinion is filed, respondent shall file with th Court a status report (the first status report) listing all case s 'If the Commissioner has mailed a notice of deficiency to a taxpayer for a tax year and the taxpayer has filed a timely petition with the Court, sec . 6512(a) prohibits the Commissioner from making a refund or credit for that taxable year except as! to, inter alia, an overpayment determined by a decision of hey Tax Court which has become final . The'Court has jurisdiction to determine the amount of an overpaymentlof tax for a taxable year, and the amount so determined by the Court shall, when the decision of the Court becomes final, be credited or refunded to the taxpayer . See sec . 6512(b)(1) . Sec . 6512(b)(3) limits,the amount of any such credit or refund to, the portion the Court determines was paid after the mailing-of the notice of deficiency . or within the applicable look-back period . 36 - of the ; petitioners who filed petitions in this Court contesting the adjustments at issue in Dixon II who had stipulated decision s entered in their cases on or .after June 10, 1985, that became final before the Court filed Dixon VI and Dixon VIII (the affected closed cases) by caption and docket number and,-if the n known t.o respondent, the cur-rent addresses of the petitioners in the cases and any counsel . of record . In the first status report respondent shall identify those cases in which respondent agrees the sanctions may be applied and those in which respondent contends the sanctions may not be applied with a brief explanation of respondent's basis for excluding each case to be excluded ; b . Respondent shall continue to search for the current addresses for the petitioners in the affected closed cases . In each affected closed case where the petitioners wer e represented by counsel, respondent shall contact the counsel of IE record in an attempt to verify that the representation is current . On or before 30 days after filing the first status report, respondent shall file a second status report, providing the current addresses of those petitioners and the names and addresses of any counsel of record .not provided in the first status report . Respondent shall .submit additional status, report s on respondent's continuing efforts to identify the petitioners' current addresses and counsel of record in the affected closed - 37 - cases every 30 days until all addresses and counsel of recor d have been identified and provided to the Court ; 2 . Sanction Notice to Petitioners in Affected Closed Case s On or before 60 days after the later of (1) the last date a decision in any of these cases becomes final, -(2)-the date th e Court of Appeals for the Ninth Circuit renders its mandate i any of these cases, if and when the decisions herein should be appealed, and (3) the date of the Hongsermeier mandate, respondent shall send a notice to the petitioners in all th e affected closed cases of the imposition of a sanction in cases bound by the Kersting'project test cases (sanction notice) . InI the sanction notice, respondent shall : a . Provide the petitioners with a brief synopsis of the background and opinions imposing the sanction on respondent . b . Rather than providing copies of Hartman I and this supplemental opinion, provide links to the Opinions search file on the Court's Web site . ' c . When possible, respondent shall compute t- e proposed adjustments to tax in the petitioners' case(s) and inform the petitioners of the result (i .e ., the estimated amoun t of overpayment or balance due) . 6For example, the link to Hartman I is http ://www .ustaxcourt .aov/InOpHistoric/Hartm8an .TCM .WPD .pdf . d . Inform the petitioners that the sanction nee d n'ot be applied in their case if it would be detrimental to them . e . Inform the petitioners that, if they wish t o have the sanction applied in their case, respondent will file wlith the Tax Court a motion for leave to file'a motion to vacate the decision(s) in their case(s) and a motion to vacate the decision (s) . f . Request that the petitioners inform respondent within 60 days of their decisions either to have the sanctio n applied in their case or to waive the sanction . g . Include the name of IRS contact personnel who can answer any questions the petitioners may have concerning the imposition of the sanction in their cases . 3 . Status Reports on Responses to Sanction Notic e On or before 90 days after respondent sends the sanction notice to the petitioners in the affected closed cases, respondent will file a status report with the Court reporting on the responses received, listing those case in which sanctions are expected to be applied, those in which the petitioners waived application of the sanctions, and those in which no response was received . Respondent shall attach to the status report for the Court' .s records all responses where the petitioners waived the sanction and requested that it not be applied to their cases . - 39 - D . Motions for Leave To File . Motions To Vacate Decisi ns in Affected Closed Case s In each case in which the petitioners have requested tho t the sanction be applied in their affected closed case, respo dent shall file a motion for leave to file a motion to vacate the decision in the case and a motion to vacate the decision . Respondent shall attach the petitioners' request to the moti n for leave . Upon receipt of the motion, :the .-Court will grant th e motion and order the decision in the case vacated . i The parties shall work expeditiously to prepare and exe ut e new decisions (and overpayment stipulations, as appropriate) reflecting the revised liabilities after application of the Thompson settlement and, within 90 days after the order t o vacate, shall submit the new decision for the Court's review and entry . If the parties are unable to reach agreement with re pect to the new decision documents, the parties will submit thei r respective positions to the Court for resolution within 120 clay s of the order to vacate .' See Rule 155 . In addition to motions filed in these cases, motions for leave to file motions to vacate stipulated decisions have be n filed in 66 other affected closed cases . In Hartman I we he d that we would not act on those motions,1so that respondent c mul d 'Respondent cautions that disputes might arise if the existing records are incomplete, creating uncertainty as to the computation of the revised deficiencies and/or payment hist ry . 40 - have an opportunity to adjust the accounts administratively . B i ecause respondent cannot adjust the accounts administrativel y and the Court must vacate the decisions in the affected closed cases , the Court will grant leave to file the motions to vacat e decisions in cases where motions for leave have been filed and will accept for filing and grant any motions for leave to file motions to vacate the decisions in other affected closed cases . E . Cases That Will Remain Close d I The Court will not take any action in any cases in which the petitioners either did not respond or sent a negativ e response ; those cases will remain closed . IV . Petitioners' Motio n In Hartman I we held that the fraud on the Court committed by respondent's attorneys in the Kersting project test cases violated the rights not only of the test case petitioners but of every petitioner whose case was bound by the outcome of the test cases . The fraud committed by the Government attorneys was a fraud on the Court in every one of the more than 1,800 Kersting project cases filed in this Court . Extending the benefit of th e Thompson settlement to all Kersting project petitioners who were part of the Kersting project test case procedure is the sanction that in Dixon V the Court of Appeals deemed appropriate an d i necessary to restore the confidence of future litigants who may become involved in test case proceedings . In Hartman I we held - 41 - that'the Dixon V sanction should be applied to give the same relief to all Kersting project petitioners whose cases were par of the Kersting project test case proceedings . In petitioners' motion for reconsideration, petitioner s counsel, in essence, ask the Court to extend the sanction to taxpayers who participated in the Kersting tax shelters and had deficiencies arising,from the disallowance of their claime d deductions and who either never filed a petition in this Cou~t o r filed a petition in this Court but settled their cases befor the test case proceedings began . We cannot do so because (1) t h fraud committed on the Court did not extend the time for fil'ng a petition after a notice of deficiency had been issued, and tie Court never acquired jurisdiction over those taxpayers or th irl deficiencies, (2) a taxpayer who did not file a petition in hi s Court did not have a case in this Court to which the fraud oh th e Court committed by the Government attorneys in the test case proceeding could have attached, (3) the Court invoked its inherent power to impose a sanction against respondent for the harm done .to the judicial process, namely the test case proceedings in this Court, which did not involve taxpayers w o were not part of those proceedings, and (5) the Court's inhelrenn t power is limited to'imposing the sanction in those cases in whi ch a fraud on the Court was committed and,does not extend to cases i in which no fraud was committed-- i .e ., ;those cases that settled before the test case proceedings began--or where there was no - 42 - case . Petitioners' motion-for reconsideration will be denied . To give effect to the foregoing , Appropriate orders will be issued, and decisions will be entered under Rule 155 . I it