                       T.C. Memo. 2005-205



                     UNITED STATES TAX COURT



           JESSE M. AND LURA L. LEWIS,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 15673-87, 18551-88,   Filed August 29, 2005.
                 29429-88.



          R determined deficiencies and additions to tax
     against Ps and hundreds of other taxpayers who then
     signed “piggyback agreements” with R, agreeing to be
     bound by the outcome of selected test cases involving
     tax shelter programs promoted by K. Before trial of
     the test cases, R’s trial attorney, with his immediate
     supervisor, entered into a secret settlement (not
     disclosed to R’s management, the attorney for other
     test case petitioners, or the Tax Court) with D,
     attorney for test case petitioners T, arranging refunds
     to the Ts sufficient to pay D’s attorney’s fees as
     consideration for the Ts’ staying in the test case
     array and T’s testifying at trial. After the Court
     upheld R’s determinations and entered decisions in
     favor of R in the test cases, R’s management discovered


     1
      These cases have been consolidated for the sole purpose of
deciding the motions currently before the Court.
                         - 2 -

the settlement and disclosed it to the Court. The
Court entered decisions in favor of the Ts in
accordance with the settlement but allowed the adverse
determinations against other test case petitioners to
stand. The other test case petitioners appealed the
Court’s decisions against them.

     After R’s management had discovered the settlement
and disclosed it to the Court and while the other test
cases were on appeal, R made a blanket settlement offer
to Ps and other non-test-case petitioners that was less
advantageous to taxpayers than the T settlement. Ps
accepted R’s offer, and Ps’ counsel and R signed
stipulated decisions in accordance with the terms of
the offer, which were entered as decisions by the
Court.

     The Court of Appeals ultimately held that the
misconduct of R’s attorneys in arranging and failing to
disclose the settlement with the Ts constituted “fraud
on the court”. It mandated that “terms equivalent to
those provided in the settlement agreement with [the
Ts] and the IRS” be extended to “appellants [test case
petitioners] and all other taxpayers properly before
this Court.” Dixon v. Commissioner, 316 F.3d 1041,
1047 (9th Cir. 2003), revg. and remanding T.C. Memo.
1999-101, supplemented by T.C. Memo. 2000-116. Ps now
seek to have their stipulated decisions vacated so they
can become entitled to the benefit of the T settlement.

     Held, because Ps and their counsel had become
aware of the misconduct of R’s attorneys and of the
pending appeals by test case petitioners when they
entered into their stipulated decisions, Ps are not
entitled to have those decisions vacated.



Declan J. O’Donnell and Robert Alan Jones, for petitioners.

Henry E. O’Neill, for respondent.
                                - 3 -

                         MEMORANDUM OPINION


     BEGHE, Judge:    This matter is before the Court on

petitioners’ motions for leave to file motions to vacate

stipulated decisions entered more than 12 years ago in the above-

numbered dockets.    The motions for leave, which have been filed,

are accompanied by motions to vacate, which have been lodged.

The issue presented by the lodged motions is whether stipulated

decisions previously entered should be vacated because of fraud

on the Court.    We have followed our practice of examining the

merits of the lodged motions in deciding whether to grant leave

to file them.2   We decide that the motions for leave to file

motions to vacate should be denied.

Background

     Petitioners’ motions have been made in the context of the

difficult, protracted, and ongoing litigation commencing with

Dixon v. Commissioner, T.C. Memo. 1999-614 (Dixon II),3 revd. 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. 2000-116 (Dixon IV),

revd. and remanded 316 F.3d 1041, 1047 (9th Cir. 2003) (Dixon V).

For purposes of these motions, we take judicial notice of our



     2
      See infra note 28.
     3
      See infra note 10 regarding Dixon I.
                              - 4 -

findings in Dixon III and IV, as modified by Dixon V.   Otherwise,

the pertinent facts, as set forth in petitioners’ motions and the

oppositions thereto, and as summarized in this “Background”

section of our opinion, are undisputed.4

     Respondent determined deficiencies of $935 in petitioners’

Federal income taxes for their taxable year 1983, $3,523 for

their taxable year 1984, and $2,744 for their taxable year 1986.

For all 3 years, respondent also determined that petitioners were

liable for additions to tax for negligence or intentional

disregard of rules or regulations under section 6653(a)(1) for

1983 and 1984 and under section 6653(a)(1)(A) for 1986, with

increased interest under section 6653(a)(2) for 1983 and 1984 and


     4
      Motions similar to those under consideration herein have
been filed and lodged by other taxpayers, most of whom were
represented by Messrs. O’Donnell and Jones when they settled
their cases and who continue to be represented by them in
connection with their pending motions. In addition, similar
motions by still other taxpayers, some represented by Messrs.
O’Donnell and Jones and some represented by other attorneys, have
not been filed or lodged by the Court for technical reasons and
have been returned to the taxpayers’ attorneys.

     Still other motions have been filed and lodged on behalf of
taxpayers who signed stipulated decisions that were entered
before discovery and revelation of the settlements in the test
cases whose concealment was ultimately held in Dixon V to
constitute fraud on the Court. In two such cases, Kahle v.
Commissioner, docket Nos. 24558-84 and 38976-84, in which the
stipulated decisions were agreed to and entered after publication
of the Court’s opinion in Dixon II and before the discovery and
revelation of the Thompson settlement, respondent has conceded on
the record that the taxpayers are entitled to have their
stipulated decisions vacated so that they can become entitled to
the benefits of the Thompson settlement as mandated by the Court
of Appeals for the Ninth Circuit in Dixon V.
                               - 5 -

under section 6653(a)(1)(B) for 1986.5   For 1984, respondent also

determined an addition to tax of $880.75 under section 6661 for

substantial understatement of tax.

     Petitioners, originally proceeding pro se, filed a petition

in this Court on June 2, 1987, seeking a redetermination of the

deficiency, additions to tax, and additional interest determined

by respondent for the year 1983.   On July 18, 1988, petitioners

filed a similar petition with respect to their 1984 taxable year,

and on November 14, 1988, they filed their petition with respect

to their 1986 taxable year.   When petitioners filed their

petitions, they resided in Westlake Village, California.

     The Kersting Project

     The deficiencies, additions to tax, and interest stemmed

from petitioners’ participation in tax shelter programs promoted

by Henry F.K. Kersting (Mr. Kersting).   Respondent issued the

notices of deficiency to petitioners in furtherance of a project,

called the Kersting project, that respondent had established

regarding those programs.   Respondent also sent notices of

deficiency to other taxpayers who had participated in the

Kersting programs.   Ultimately, more than 1,800 cases arising

from disallowance of deductions claimed by participants in the



     5
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                              - 6 -

Kersting programs were filed in this Court.   Respondent assigned

the role of Kersting project attorney to Kenneth W. McWade (Mr.

McWade), an attorney in the Internal Revenue Service (IRS)

District Counsel’s office in Honolulu, Hawaii.

     The Tax Court cases generated by the Kersting project were

assigned to Judge William A. Goffe (Judge Goffe) for disposition.

     Mr. Kersting took an active role in opposing respondent’s

enforcement activities against his tax shelter programs.    In a

letter dated March 1, 1985, Mr. Kersting informed Kersting

program participants that he had retained attorney Brian Seery

(Mr. Seery) to represent them in the Tax Court at no charge.

After Mr. Seery entered his appearance in many of the Kersting

project cases in this Court, he and Mr. McWade discussed

settlement options for the cases, as well as procedures for

trying them.

     Respondent’s Pretrial Settlement Offer

     During 1982 through 1986, respondent had in effect an

official settlement offer for the Kersting tax shelter programs.

The offer permitted the participants to resolve their cases by

agreeing to pay deficiencies that averaged 7 percent less than

those determined in their deficiency notices.    The 7-percent

reduction of the deficiencies reflected a deduction equal to an

average of the participants’ actual out-of-pocket expenses in

approximately 25 Kersting project cases.   From respondent’s
                               - 7 -

perspective, the 7-percent reduction settlement offer was

equivalent to allowing a theft loss deduction in the year of

payment.6

     In addition to reducing the deficiencies by 7 percent,

respondent’s offer incorporated other concessions and

adjustments:   (1) To concede the negligence addition to tax and

increased interest imposed on tax-motivated transactions pursuant

to section 6621(c); (2) to concede an annual deduction under

section 162 or 212 for certain “leasing” program participants for

expenses that exceeded the out-of-pocket adjustment; (3) to

concede the deficiency in full to participants in one particular

program who could show that funds paid to their children did not

give rise to constructive receipt of income by the parents; and

(4) to make appropriate adjustments if the participant had

reported a capital gain upon the surrender of stock certificates

to Mr. Kersting.   Respondent’s purpose in offering these

concessions and adjustments was to provide similar treatment for

all Kersting program participants who wished to settle their

cases.

     Although District Counsel generally is expected to adhere to

the terms of an official project settlement offer, once a tax


     6
      Respondent’s position represented an additional concession
insofar as the allowance of a theft loss deduction for payments
induced by misrepresentation is postponed until the year of
discovery of the theft. See sec. 165(e); Bellis v. Commissioner,
61 T.C. 354, 357 (1973), affd. 540 F.2d 448 (9th Cir. 1976).
                                - 8 -

shelter project, such as the Kersting project, is assigned to a

particular District Counsel’s office, that office has the

authority to settle any individual case in the project.    District

Counsel has the authority in special circumstances to settle

individual tax shelter project cases on a basis different from

the project settlement offer.

     By September 1986, Messrs. McWade and Seery agreed to modify

the 7-percent reduction settlement offer to incorporate a new

feature they called the “burnout” in cases involving more than 1

taxable year.   Under this feature, the interest on a taxpayer’s

total unpaid deficiencies for the first and second years of tax

liability would not begin to accrue until the due date for the

second year.    The burnout thus postponed for a year the accrual

of interest on the first year’s deficiency and reduced the total

interest that accrued on the deficiencies for both years.   This

was accomplished by zeroing out the taxpayer’s agreed deficiency

for the first year and adding it to the agreed deficiency for the

second year.

     The record does not disclose whether petitioners were aware

of respondent’s pretrial settlement offer; in any event,

petitioners did not enter into a settlement before trial.

     The Test Case Procedure

     It would have been a daunting task to try the cases of the

hundreds of similarly situated Kersting program participants who
                                 - 9 -

did not accept respondent’s pretrial settlement offer.      In June

1986 Messrs. Seery and McWade addressed the problem by deciding

to employ a test case procedure.     Under that procedure, a few

typical cases are selected as test cases, while the petitioners

whose cases are not selected as test cases are encouraged to

execute a piggyback agreement; i.e., a stipulation to be bound by

the outcome of the test cases.

     Petitioners and respondent entered into piggyback agreements

providing that petitioners’ cases would be resolved in accordance

with the outcome of the final decisions in the test cases.        The

pertinent dates are as follows:

  Taxable      Docket       Dates of Execution          Date of
   Year          No.      Petitioners Respondent        Filing

   1983       15673-87    Undated         9/08/87       9/11/87
   1984       18551-88    10/20/88       10/27/88      10/31/88
   1986       29249-88     2/16/89        2/23/89       2/27/89

Petitioners, who were still proceeding pro se, signed their

piggyback agreements.    Mr. McWade signed petitioners’ piggyback

agreements on behalf of respondent.

     Pretrial Proceedings in the Test Cases

     Among those petitioners whose cases Messrs. Seery and McWade

selected to be test cases were Mr. Seery’s clients Jerry and

Patricia A. Dixon (the Dixons), plus six other couples and an

individual.   The experience of the Dixons typified the experience

of the other test case petitioners.      The Dixons’ deficiencies

were for the taxable years 1977 through 1981 and totaled
                              - 10 -

$102,856.   Respondent further determined that the Dixons were

liable for negligence additions for 1977 through 1980 under

section 6653(a) and for 1981 under section 6653(a)(1).   The

deficiencies and negligence additions so determined were

attributable to their participation in Kersting tax shelter

programs.

     The test case petitioners also included John R. and Maydee

Thompson (the Thompsons) and Mr. and Mrs. John R. Cravens (the

Cravenses).7   The Thompsons’ deficiencies were for the taxable

years 1979 through 1981 and totaled $79,293.   Respondent further

determined that the Thompsons were liable for additions to tax

for negligence for 1979 and 1981 and for increased interest for

1981 pursuant to section 6621(d),8 as well as a late filing

addition to tax for 1981 under section 6651(a).   The

deficiencies, negligence additions, and increased interest were

attributable to their participation in Kersting tax shelter

programs.   The Thompsons filed a petition in this Court seeking

review of the deficiencies, increased interest, and additions,

with Mr. Seery as their counsel.


     7
      Mr. Seery particularly wished to include the Cravenses as
test case petitioners because they treated their payments to Mr.
Kersting to participate in the programs as basis reductions that
resulted in their reporting capital gains on terminating their
interests in the programs.
     8
      Sec. 6621(d) was redesignated sec. 6621(c) by the Tax
Reform Act of 1986 (TRA), Pub. L. 99-514, sec. 1511(c)(1)(A)-(C),
100 Stat. 2744. We will hereinafter refer to the provision as
sec. 6621(c).
                              - 11 -

     The Thompsons had previously hired another attorney, Samuel

M. Huestis (Mr. Huestis), to prepare an estate plan for them.    In

a letter dated October 28, 1986, Mr. Huestis expressed concern to

Mr. Seery about Mr. Seery’s apparently close association with Mr.

Kersting.   Mr. Heustis said Mr. Seery could be viewed as having a

conflict of interest between Mr. Kersting and the participants in

the Kersting programs, and that any resulting harm to the

Thompsons could result in an action against Mr. Seery for

“professional negligence”.   On October 31, 1986, Mr. Seery filed

a motion to withdraw as counsel for the Thompsons in their

docketed cases, which the Court granted.

     In ruling on a subsequent motion, Judge Goffe observed that

Mr. Seery might have a conflict of interest if he represented

both petitioners and Mr. Kersting.     Mr. Seery subsequently filed

motions to withdraw as counsel in the Kersting project cases

(both test cases and nontest cases), citing concerns about a

possible conflict of interest.   The Court granted Mr. Seery’s

motions.9


     9
      On Nov. 7, 1986, Mr. Seery had filed a motion to change the
place of trial of the test cases from Maui to Honolulu. Mr.
Seery asserted that a trial in Maui would be inconvenient and a
hardship to Mr. Kersting, who lived and operated a business in
Honolulu. On Nov. 14, 1986, the Court denied that motion, noting
that the motion “implies that * * * [Mr. Seery] represents not
only petitioners but also Henry Kersting, the promoter of the tax
shelters which are the subject of this litigation.” The Court
went on to observe that, if Mr. Seery were representing both Mr.
Kersting and petitioners, the dual representation would
constitute a conflict of interest. The Court attached to the
                                                   (continued...)
                               - 12 -

     Additional Attorneys Engaged by Mr. Kersting

     Mr. Kersting then engaged attorneys Robert J. Chicoine (Mr.

Chicoine) and Darrell D. Hallett (Mr. Hallett) to represent the

test case petitioners.   Messrs. Chicoine and Hallett agreed to do

so with the understanding they would not represent Mr. Kersting.

Early in January 1987, they entered their appearances for the

Dixons and the other test case petitioners and promptly filed

motions to suppress evidence seized in 1981 from Mr. Kersting’s

office.10   Throughout 1987, Messrs. Chicoine and Hallett also

negotiated with Mr. McWade to settle the test cases.   They

ultimately reached an oral agreement with Mr. McWade for a

settlement in which respondent would concede 20 percent of the

proposed deficiencies; in letters dated February 9, 1988, they

disclosed this proposed settlement to the test case petitioners

and to non-test-case petitioners who had inquired about the

possibility of a more advantageous settlement.   The proposed 20-

percent reduction settlement displeased Mr. Kersting; on February

20, 1988, he wrote to Messrs. Chicoine and Hallett that “I hereby

revoke your appointment as counsel for the test cases”.   In April

1988, Messrs. Chicoine and Hallett informed the test case


     9
      (...continued)
order copies of several authorities concerning conflicts of
interest, including Adams v. Commissioner, 85 T.C. 359 (1985).
     10
      In an Opinion dated Feb. 11, 1988, this Court held that it
lacked power to suppress evidence seized from a third party not
before the Court. See Dixon v. Commissioner, 90 T.C. 237 (1988)
(Dixon I).
                               - 13 -

petitioners they would withdraw as counsel because of a

disagreement with Mr. Kersting.    Mr. Kersting then engaged

attorney Joe Alfred Izen, Jr. (Mr. Izen), to represent the test

case petitioners at trial.

     The Thompsons Hire Mr. DeCastro

     The Thompsons and the Cravenses did not engage Messrs.

Chicoine and Hallett.    Instead, Mr. Huestis helped the Thompsons

find attorney Luis C. DeCastro (Mr. DeCastro) as their

replacement for Mr. Seery.    In November 1986, the Thompsons

engaged Mr. DeCastro to represent them before this Court.      The

Cravenses did not hire counsel to represent them in their test

cases.    Thus, most of the test case petitioners, including the

Dixons, continued to be represented by an attorney selected by

Mr. Kersting.    The Thompsons and the Cravenses, however,

continued as test case petitioners who were not represented by

counsel engaged by Mr. Kersting.

     The Thompson Settlement

     In December 1986, Mr. McWade and his supervisor, District

Counsel William A. Sims (Mr. Sims), entered into contingent

settlement agreements with the Cravenses regarding their test

cases and with Mr. DeCastro regarding the Thompsons’ test cases.

For purposes of the present motions, only the details of the

Thompson settlement are relevant, but we must describe it in some

detail.    By December 1986, Mr. McWade had negotiated a settlement
                              - 14 -

with Mr. DeCastro calling for reduction of the Thompsons’ total

deficiencies from the $79,293 originally determined in their

statutory notices to $64,425, a reduction of 18.8 percent.11     The

settlement also eliminated all additions to tax and the increased

interest rate under section 6621(c) for 1981.   The settlement

also incorporated the burnout feature, combining the agreed

deficiencies for the years 1979 and 1980 in the year 1980.

     On December 23, 1986, Mr. McWade sent Mr. DeCastro decision

documents incorporating the above-described settlement.   The

transmittal letter stated:

          As previously indicated, the Decision documents in
     John R. and Maydee Thompson will not be filed with the
     Court until the Decision becomes final in the test
     cases. In the interim, the Thompsons can make an
     advance payment, as discussed at our conference, and
     stop the accrual of any additional liability for
     interest.

Mr. DeCastro executed the decision documents on behalf of the

Thompsons.   Neither Mr. McWade nor Mr. Sims communicated the

terms or existence of the Thompson settlement to their superiors

in the Office of Chief Counsel.

     On December 30, 1986, the Thompsons paid $59,545 as interest

on their then-agreed deficiencies, timed to take advantage of the

full deductibility of that interest for taxable years beginning


     11
      Respondent later indicated that Mr. McWade’s agreement to
reduce the Thompsons’ deficiencies by 18.8 percent reflected
“increased litigation hazards caused by the Motion to Suppress
Evidence” filed by Messrs. Chicoine and Hallett that was
ultimately denied in Dixon I.
                                - 15 -

before January 1, 1987.    See TRA sec. 511(b), 100 Stat. 2246.

The payment was made with two checks, one of which, for $34,000,

was originally dishonored.    The Thompsons replaced the $34,000

check early in 1987.12    On June 15, 1987, pursuant to further

negotiations, the Thompsons paid the total proposed deficiencies

of $63,000, in order to halt further accrual of interest on the

deficiencies.13   By June 1987, their payments to the Internal

Revenue Service with respect to the taxable years 1979 through

1981 totaled $121,770.

     Shortly before trial of the test cases in this Court in

January 1989, Messrs. McWade and DeCastro reached an oral

agreement (the new agreement) in the Thompsons’ cases calling for

reduction of the agreed deficiencies for 1979, 1980, and 1981 to

zero, $15,000, and $15,000, respectively.    The purpose of this

reduction was to generate refunds to the Thompsons from the

$121,770 they had previously paid toward satisfaction of the



     12
      In March 1987, Mr. McWade agreed to reduce the combined
deficiency of the Thompsons for 1979 and 1980 from $34,425 to
$33,000, bringing the reduction in total deficiencies to
approximately 20 percent. The record does not disclose why Mr.
McWade agreed to that reduction, although similar 20-percent
reduction settlements were later offered to the clients of
Messrs. Chicoine and Hallett. Mr. DeCastro communicated this
proposed reduction to his clients, but apparently he did not
execute decision documents confirming the Thompsons’ acceptance
of this lowered amount.
     13
      The Thompsons paid this amount with a check for $63,000;
respondent credited $775 to their taxable year 1988, a year not
then before the Court. The balance of $62,225 was credited to
their liabilities for their taxable year 1979.
                              - 16 -

previously agreed deficiencies and interest.   The refunds,

estimated to exceed $60,000, were to be used to pay Mr.

DeCastro’s fees in connection with the test case trial.

Moreover, if the results of the trial were more favorable to the

Thompsons than the new agreement, they would be entitled to the

results of the trial.   On August 3, 1989, Mr. DeCastro wrote a

letter to Mr. McWade, reducing the new agreement to writing.    Mr.

McWade signed the letter and returned it to Mr. DeCastro.

     When Messrs. McWade and DeCastro reached the new agreement,

respondent’s official settlement policy still provided for a 7-

percent reduction in determined deficiencies, elimination of the

negligence additions, and other minor concessions.   This was

notwithstanding that some petitioners’ attorneys, including Mr.

DeCastro and Messrs. Chicoine and Hallett, had previously

negotiated 20-percent reduction settlements on behalf of some of

their clients.   The new agreement, however, reduced the

Thompsons’ determined deficiencies for the years at issue from

$79,293 to $30,000--a reduction of 62 percent.   The new agreement

was thus a much more substantial deviation from respondent’s

official settlement policy.   Messrs. Sims’s and McWade’s

superiors did not approve the new agreement.   They did not

discover the new agreement until after this Court had tried the

test cases and issued its opinion and initial decisions therein.
                             - 17 -

     Posttrial Proceedings in the Test Cases

     On December 11, 1991, the Court, through Judge Goffe, issued

its opinion in Dixon v. Commissioner, T.C. Memo. 1991-614 (Dixon

II), sustaining almost all respondent’s determinations that the

Kersting programs in issue lacked substance for tax purposes.

     In February 1992, Mr. Kersting sent a lengthy “Dear Friend”

letter to the participants in his programs.    He advised them:

     We came to talk about the escape routes open to
     essentially all of us as a result of the adverse
     decision in US Tax Court. There is first the road to
     San Francisco where we plan to point out to the 9th
     Circuit [Court] of Appeals the items of “reversible
     error” with which the Judges opinion is laced and the
     procedural flaws which had been disregarded by the
     Judge even though he was bound by law to take them into
     consideration. The appeal is being prepared by Joe
     Izen and shall be filed timely in due course.

               *    *    *    *    *    *      *

     To my total exhilaration there was not a single voice
     of disgruntlement or dissent at either the meeting in
     Houston or Los Angeles. On the contrary, there was
     unanimous support for the appeal at the 9th Circuit
     [Court] of Appeals in San Francisco and for continuing
     efforts to right the wrong we have been subjected to in
     US Tax Court. * * *

     Mr. Kersting’s letter also warned the participants in his

programs that “IRS soldiers * * * will begin another harassment

campaign soon in order to break down your willingness to resist.

It would be well within their character.”   Accordingly, he

advised:

     In anticipation of this we have formed a defense team
     of attorneys who have indicated their willingness to
     provide the shield for you if you get singled out for
                             - 18 -

     direct molestation. I have met with the attorneys
     several times over the last 10 days or so and I have
     convinced myself of their skills and competency.
     Moreover, they seem to have the most important trait in
     dealing with the Revenue Service, namely fearlessness.
     It is the distinction which makes the difference. The
     IRS is to us a formidable and threatening adversary.
     We need the presence of someone who can provide the
     balancing force and the element of stabilization. I
     will include with this letter a copy of the business
     card of the attorney I have in mind. * * *

The copy of the business card bore the name “R.A.J. Limited,

Robert Alan Jones, Esq., President”.

     Subsequently, Mr. Jones and attorney Declan J. O’Donnell

announced the “Henry Kersting Tax Defense Group”.   A “Defense

Group” brochure, created in May 1992 and stamped “advertising

material”, describes the legal services Messrs. O’Donnell and

Jones would offer to Kersting program participants.   The brochure

includes a description of the qualifications and practice

backgrounds of Messrs. O’Donnell and Jones, along with retainer

agreements and copies of relevant memoranda and correspondence.

One such memorandum, entitled “Status of the Kersting Cases”, was

signed by Mr. O’Donnell and dated May 12, 1992.   It advised that

most of the Kersting program participants had executed piggyback

agreements to be bound by the results in the test cases.    It

stated:

          The Dixon case was decided for the Government and
     against the six Petitioners. The opinion of Judge
     Goffe was filed on December 11, 1991, and the Appeal
     deadline date is June 11, 1992. Mr. Joe Izen of
     Houston, Texas, represents the lead case Petitioners
     and will handle the Appeal. * * *
                              - 19 -

     The memorandum further advised that Messrs. O’Donnell and

Jones had “a Program to abate I.R.S. activity against its’ [sic]

clients until the dispute is finally resolved by Appeal.

Enclosed herewith is a letter from Mr. Alan Jones to Mr. Kenneth

McWade, IRS District Counsel, which establishes this treaty.”

     Another memorandum, dated May 18, 1992, entitled

“Relationship to Henry Kersting”, discussed Messrs. O’Donnell’s

and Jones’s request to assist in preparing the taxpayers’

appellate brief in the appeal of the test cases.   It quoted a

communication from Mr. Kersting to Mr. Izen as follows:

     Joe Izen - Joe - You probably know by the messages left
     at your office that Alan Jones and Declan O’Donnell
     have been trying to reach you for several days. They
     need to talk to you for all sorts of reasons as they
     are representing now a number of our mutual clients.
     Moreover, they have developed certain contributions to
     the Appeal to be filed at the Ninth Circuit Court of
     Appeals in San Francisco of which you should know as
     you are formulating the Briefs. I wish you would take
     the time and return their calls. Henry. 05/11/92.

     In the meantime, in March 1992, this Court had entered

decisions in the test cases in accordance with its opinion in

favor of respondent.   The test case petitioners (with the

exception of the Thompsons and the Cravenses) appealed the

decisions in their cases to the U.S. Court of Appeals for the

Ninth Circuit.

     After entry of the decisions in the test cases, Mr. McWade

attempted to have respondent’s Collection Division assess

deficiencies in the Thompson and Cravens cases in accordance with
                              - 20 -

the previously undisclosed settlement agreements rather than in

accordance with the decisions entered by the Court.   Mr. McWade’s

attempts alerted senior officials in the IRS Regional Counsel’s

Office to the new agreement reached by Messrs. Sims, McWade, and

DeCastro before trial.   These senior officials determined that

the new agreement was unauthorized.    At their behest, on June 9,

1992, respondent filed motions for leave to file motions to

vacate the decisions entered in the Thompson and the Cravens

cases and one other test case.14   Respondent requested the Court

to conduct an evidentiary hearing to determine whether the

agreements with the Cravenses and the Thompsons had affected the

trial of the test cases or the ensuing decisions of the Court.

On or about June 11, 1992, the IRS Regional Counsel decided that

Messrs. Sims and McWade should be removed from the Kersting

project cases, and that responsibility for the project should be

reassigned to other District Counsel attorneys.   The Deputy

Regional Counsel reassigned all 15 test case dockets to Thomas A.

Dombrowski (Mr. Dombrowski) and all the nontest cases in the

project to Henry E. O’Neill (Mr. O’Neill).

     On June 22, 1992, this Court granted respondent’s motions to

vacate decisions in the Thompson and Cravens cases.   The Court

ordered the parties to file agreed decisions with the Court, or


     14
      In addition to the cases of the Thompsons and the
Cravenses, respondent also sought to vacate the decision entered
against test case petitioner Ralph J. Rina.
                              - 21 -

otherwise move as appropriate.    The Court denied respondent’s

request for an evidentiary hearing.    In a separate order filed

the same date, the Court denied respondent’s motion to vacate the

decision filed in the case of Ralph J. Rina, the test case

petitioner in docket No. 17640-83, stating:

     The Court has reviewed the testimony of Cravens, the
     testimony of Thompson, the stipulated facts and
     stipulated exhibits relating to the Cravenses and the
     Thompsons, and the exhibits offered through Thompson as
     a witness. The Court finds that these reviewed items
     had no material effect on the opinion which the Court
     filed on December 11, 1991, as that opinion relates to
     petitioner Rina. If the reviewed items were stricken
     from the record, the Court would file an opinion in all
     material respects like the opinion it filed on December
     11, 1991 (with the exception of certain portions
     relating specifically and expressly to the Cravenses or
     the Thompsons), and the Court’s findings, analyses, and
     conclusions relating to petitioner Rina would remain
     the same. * * *

      Two days after the Court’s order and decision denying the

motion to vacate the decision in Mr. Rina’s case, Messrs.

O’Donnell and Jones wrote Mr. Dombrowski a joint letter, dated

June 24, 1992, concerning further proceedings in the Kersting

project cases.   In that letter, Messrs. O’Donnell and Jones

informed Mr. Dombrowski that they represented “about one-hundred

Petitioners” and that they understood Mr. Dombrowski had replaced

Mr. McWade as respondent’s counsel “because of an ethical concern

regarding the impropriety of two settlement offers * * * secretly

extended to Mr. Cravans [sic] and Mr. Thompson who testified for

the I.R.S. at the Dixon Trial.”
                               - 22 -

     The letter further reported on the status of the cases as

follows:

          The Motions for Leave to File Motions to Vacate
     were granted as to cases not on Appeal and a similar
     Motion (to remand rather than vacate judgment) is
     pending in the Ninth Circuit Court of Appeals as to the
     cases on Appeal.

          More   recently, J. Goeffe [sic] has denied the
     Motion to   vacate. He has decided that the newly
     disclosed   “Contingent Settlements” would not change his
     ruling in   any material way.

     On July 6, 1992, Messrs. O’Donnell and Jones entered their

appearances on behalf of petitioners in the present cases.

     In a letter dated July 31, 1992, Mr. Kersting updated the

situation for Kersting program participants.    He advised that Mr.

Izen and another attorney, Robert Patrick Sticht (Mr. Sticht),

were “exposing the government’s fraud and perfidy in a secret

deal between Cravens and Thompson on the one hand, and IRS

attorney McWade (and other government officials) on the other

hand.”   Mr. Kersting explained his version of the misconduct of

the Government’s attorneys as follows:

     As many of you already know, the growing scandal in the
     “piggyback” cases involves a settlement in favor of
     Cravens/Thompson in exchange for their damaging
     testimony and exhibits that were all put together as
     part of a prearranged plan to influence and persuade
     Judge Goffe to rule against us. * * *

     Also in July 1992, Mr. DeCastro filed a motion for entry of

decision in the Thompson case reflecting the terms of the new

agreement he had reached with Mr. McWade shortly before trial,
                             - 23 -

providing for deficiencies of zero, $15,000, and $15,000 for the

taxable years 1979, 1980, and 1981, respectively.   On August 20,

1992, respondent filed objections to Mr. DeCastro’s motion for

entry of decision, together with respondent’s own motions for

entry of decision and an accompanying memorandum.   Respondent’s

motion papers set forth the facts regarding the Thompson

settlement that had been discovered by IRS senior officials.

Respondent informed the Court that, before the test case trial,

Messrs. Sims and McWade had agreed to settle the Thompson cases

by reducing the Thompsons’ deficiencies in amounts sufficient to

compensate them for their projected attorney’s fees.   As

respondent explained to the Court, Messrs. Sims and McWade had

agreed with Mr. DeCastro that:

     All settlement refunds in excess of the amounts
     provided by the December 1986 agreement would go
     ultimately to the benefit of Mr. DeCastro for payment
     of his legal fees and costs. Mr. DeCastro would be
     paid solely from amounts refunded by the Service to
     Thompson. * * * This “New Agreement”, in sum and
     substance, if not explicitly, was designed, and
     constituted an agreement by Messrs. Sims and McWade to
     pay Mr. DeCastro’s legal fees and expenses.

     Respondent’s motion papers maintained that the new agreement

pursuant to which respondent would pay Mr. DeCastro’s fees was

unauthorized and had no legal basis.   Respondent conceded,

however, that the original 18.8-percent reduction settlement

between Messrs. McWade and DeCastro on behalf of the Thompsons

was valid and within the scope of District Counsel’s settlement
                              - 24 -

authority.   Consequently, respondent asked the Court to apply the

18.8-percent reduction settlement to the Thompsons.15   The result

for the Thompsons would have been deficiencies of zero for

taxable year 1979, $34,425 for 1980, and $30,000 for 1981.16

     Respondent’s motion papers compared the amounts of the

Thompsons’ deficiencies originally determined for the 3 years at

issue, totaling $79,293.52, with the unauthorized new agreement

reducing the deficiencies to zero, $15,000, and $15,000, or

total deficiencies of only $30,000, thus generating the refunds

used to pay Mr. DeCastro’s legal fees.   These figures, without

more, indicate that the new agreement represented a 62-percent


     15
      Respondent’s motion papers explained that the December
1986 agreement between Mr. DeCastro and Messrs. Sims and McWade
to reduce the Thompsons’ deficiencies by 18.8 percent exceeded
the terms of the standard 7-percent reduction settlement offer.
Nevertheless, respondent conceded, “Respondent’s counsel
possessed the authority to make such an offer, and such offer was
accepted by petitioners herein as well as others.” Respondent
also noted an “approximately 20 percent” reduction settlement
offer previously made to other participants. Respondent did not
revive the 20-percent reduction offer after trial. See supra
note 11.
     16
      As things worked out, the final settlement of the
Cravenses, who were not represented by counsel, was less
favorable to them than respondent’s modified 7-percent reduction
settlement offer. In particular, the Cravenses’ correct tax
liabilities for 1979 and 1980 were $4,508 and $5,893.45,
respectively, for a total of $10,401.45. The Cravenses’
settlement, which was for $9,782.16, represents a reduction of 6
percent of the deficiencies respondent originally determined.
In addition, the Cravenses’ settlement did not include the
burnout feature. On Aug. 25, 1992, this Court entered a decision
for the stipulated total amount of the deficiencies, but the
decision included the stipulation that certain advance payments
made by the Cravenses had not yet been taken into account.
                               - 25 -

reduction of the deficiencies originally determined by

respondent.

     On August 26, 1992, the Court denied respondent’s motion and

held respondent to the pretrial concessions granted by Messrs.

Sims and McWade in the new agreement as set forth in the August

3, 1989, letter agreement between Messrs. McWade and DeCastro.

The Court granted Mr. DeCastro’s motions for entry of decision in

the Thompson cases as follows:

          Year      Deficiency      Additions to Tax

          1979         ---                ---
          1980       $15,000              ---
          1981        15,000              ---

     Respondent did not appeal this Court’s decisions in the

Thompson and the Cravens cases.17   As a result, the Cravenses and

Mr. DeCastro’s clients, the Thompsons, had their cases closed,

while the other test case petitioners, who had appealed the

decisions entered in their cases, added the newly revealed facts

about the misconduct of respondent’s attorneys to the grounds for

their appeals.

     On September 14, 1992, Mr. Kersting wrote another “Dear

Friend” letter to the participants in his tax shelter programs,


     17
      As noted above, this Court had also denied the motion to
vacate with respect to petitioner Ralph J. Rina, and he appealed.
Unlike the Thompsons and the Cravenses, Mr. Rina had no
settlement agreement with Messrs. Sims and McWade. On June 13,
1995, however, Mr. Rina agreed to entry of a stipulated decision
in the amounts originally determined by respondent in his
deficiency notice.
                                - 26 -

informing them of developments in the ongoing litigation.     He

said:     “I had reason to believe that the Appeal of Judge Goffe’s

decision at the 9th Circuit [Court] of Appeals in San Francisco

was just around the corner.     It did not come about that quickly,

as you know.”     Mr. Kersting noted the misconduct of Messrs. Sims,

McWade, and DeCastro in entering into and not disclosing the

Thompson settlement and added:     “It threw the appeals schedule

into turmoil and motions had to be filed to ask for an extension

of time for filing the Appeal.”     Mr. Kersting advised:

     You had stipulated to go along with the outcome of the
     test cases including Thompson and Cravens which
     entitles you to ask for the same concessions arranged
     by the Revenue Service to Thompson and Cravens. An
     arrangement whereby $100,000.00 of taxes allegedly owed
     were reduced to a mere $15,000.00.

        This “Dear Friend” letter concluded by disclosing that

relations had soured between Mr. Kersting and the “Henry Kersting

Tax Defense Group” of Messrs. O’Donnell and Jones.     Mr. Kersting

explained:

        I anticipate that tension will build now between
        O’Donnell and our attorneys and me. We are on a
        collision course which might lead to litigation. There
        will be attempts by either Mr. O’Donnell or Mr. Alan
        Jones to alienate you from us. Frequent efforts have
        been made already verbally. Remind yourself that you
        are lined up at present with a proven legal team of Joe
        Izen and Butch Bradt. They have kept the squeezers at
        the Revenue Service away from us for many years. They
        will continue to protect us and lead us out of the
        quagmire eventually. They will do it at a cost much,
        much less than projected by Mr. O’Donnell.
                                - 27 -

     Shortly thereafter, Messrs. Izen and Sticht each filed a

separate motion with the Court to intervene in the Thompson and

Cravens cases.     Mr. Sticht filed his motion in the Thompson cases

on September 29, 1992, and in the Cravens cases on October 2,

1992.     Mr. Izen filed his motions in both cases on October 27,

1992.     Messrs. Sticht and Izen maintained they should be allowed

to intervene in these cases in order to assert that Mr. McWade

had committed fraud on the Court by arranging the Thompson

settlement and failing to inform the Court or the parties.

     In a subsequent “Notice to Apprise the Court of Petitioner-

intervenors” served on November 5, 1992, Mr. Sticht identified

Norman and Irene Cerasoli as petitioner-intervenors.     At that

time, Norman and Irene Cerasoli were being represented by Messrs.

O’Donnell and Jones.18    The Court denied the motions to intervene

on November 6, 1992.     Messrs. Izen and Sticht filed notices of

appeal of the denials of their motions to intervene, again

alleging fraud on the Court.


     18
      In a colloquy before this Court during a hearing following
the remand by the Court of Appeals for the Ninth Circuit in Dixon
V, Mr. Jones remarked that he had argued the existence of fraud
on the Court earlier in these proceedings. Although he did not
specify the occasion, we note that Mr. Jones represented the
Cerasolis when Mr. Sticht had included their names as petitioner-
intervenors in November 1992 and made his allegations of fraud on
the Court. On Jan. 12, 1993, Mr. Sticht entered his appearance
in the Cerasoli cases, adding his name to those of Messrs.
O’Donnell and Jones. We also note that Mr. Jones argued fraud on
the Court as a ground for vacating stipulated decisions in
Richards v. Commissioner, T.C. Memo. 1997-149, supplemented by
T.C. Memo. 1997-299, affd. without published opinion 165 F.3d 917
(9th Cir. 1998).
                              - 28 -

     Respondent’s Posttrial Settlement Offer

     Early in January 1993, respondent made mass mailings

extending a “global settlement” proposal to all known Kersting

non-test-case petitioners, including those who had signed

piggyback agreements.   Respondent’s letters to the Kersting

program participants explained that, after the trial of the test

cases:

          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 global settlement proposal contained in the

January letters represented a revival of the official settlement

that respondent had offered during 1982 through 1986.   It

permitted petitioners to resolve their cases by agreeing to pay

deficiencies that were 7 percent less than those determined in

their deficiency notices.   Additionally, respondent would impose

no penalties or additions to tax, and petitioners would pay

interest only at the generally applicable (i.e., non-tax-
                                - 29 -

motivated) rate under section 6621(a).       The settlement offered by

respondent in January 1993 did not include the burnout feature

canceling the accrual of interest for the first year for which

multiyear deficiencies had been determined.

     Respondent’s letters further stated:      “Acceptance of this

settlement offer will preclude any further challenge or appeal

with respect to the Kersting programs or the merits of the Dixon

opinion.”   The letter contained a “Sample Analysis” illustrating

a hypothetical taxpayer who owed $20,000 in Kersting-related

deficiencies for the taxable year 1985.       The analysis indicated

that, if the taxpayer accepted the new 7-percent reduction

settlement offer, he or she would owe a total of $36,388 in tax

and interest.   However, if the taxpayer did not accept the

settlement, the taxpayer would owe $67,901 under the piggyback

arrangement as given effect in accordance with this Court’s 1991

opinion.

     Petitioners’ Settlements

     Respondent made the initial mass mailing on January 8, 1993,

and sent copies to petitioners in the present cases.       Because

counsel for various petitioners complained they had not received

the settlement proposal letters, respondent remailed them to

those counsel on January 29, 1993.       Respondent sent Mr.

O’Donnell, as first counsel of record for petitioners in the

present cases, copies of identical letters dated January 8 and
                                - 30 -

January 29, 1993.    Petitioners were given 60 days within which to

accept or reject the settlement.    In a letter dated March 11,

1993, Mr. O’Donnell informed respondent’s counsel, Mr. O’Neill,

that petitioners herein had decided to accept the settlement

proposal.     Thereafter, respondent forwarded a stipulated decision

document to petitioners’ counsel reflecting a disposition of

these cases on the settlement terms set forth in the mass

mailings.19    On May 17, 1993, Mr. O’Donnell signed the decision

documents in docket Nos. 15673-87 and 18551-88; on May 18, 1993,

Mr. Jones signed the decision document in docket No. 29429-88.

On June 16, 1993, Mr. O’Neill signed petitioners’ decision

documents on behalf of respondent.

     The decisions entered in petitioners’ cases reflected a

reduction of the proposed deficiencies by 7 percent to $3,276 for

1984 and $2,552 for 1986; the stipulated deficiency for 1983 was

reduced from $935 to $314, some $556 less than the $870 figure

that would have resulted from a reduction of the original

deficiency by 7 percent.20    The decisions provided there would be

no additions to tax and that no part of the deficiencies


     19
      Respondent extended the settlement proposal to all known
Kersting non-test-case petitioners in mass mailings in January
1993. Respondent reports that taxpayers accepted the proposal in
approximately 400 cases. Overall, between 1991 and the present,
stipulated decisions were filed in approximately 750 Kersting
project cases.
     20
      The record does not explain this discrepancy, nor is it
relevant for purposes of the pending motions.
                                 - 31 -

constituted a substantial underpayment for which additional

interest would be charged pursuant to section 6621(c).     On June

23, 1993, the Court entered the decisions in petitioners’ three

dockets.   On September 22, 1993, the decisions became final under

section 7481.   Petitioners subsequently paid in full the

liabilities assessed in accordance with those decisions.

     Initial Appellate Proceedings

     In the meantime, the appeals by test case petitioners

represented by Mr. Izen were going forward.     On June 14, 1994,

the Court of Appeals for the Ninth Circuit vacated the decisions

in the remaining test cases on the ground that the misconduct of

Messrs. Sims and McWade required further inquiry.     In a per

curiam opinion, it observed:     “We cannot determine from the

record whether the extent of misconduct rises to the level of a

structural defect voiding the judgment as fundamentally unfair,

or whether, despite the government’s misconduct, the judgment can

be upheld as harmless error.”     DuFresne v. Commissioner, 26 F.3d

105, 107 (9th Cir. 1994) (hereafter DuFresne).     Accordingly, the

Court of Appeals remanded the remaining test cases to this Court

with directions “to conduct an evidentiary hearing to determine

the full extent of the admitted wrong done by the government

trial lawyers.”   Id.   It further directed this Court to “consider

on the merits all motions of intervention filed by parties

affected by this case.”    Id.
                               - 32 -

     Notwithstanding the later opinion of the Court of Appeals

for the Ninth Circuit in Dixon V,21 vacating the decisions in the

other test cases for “fraud on the court”, the panel that issued

the opinion in DuFresne entered separate orders on the same day

dismissing Messrs. Izen’s and Sticht’s appeals of this Court’s

denials of their motions to intervene in the Thompson and Cravens

cases.    These orders explained:

          The Tax Court’s August 25 and 26, 1992 decisions
     entering settlement in the Cravens and Thompson cases,
     respectively, are final. 26 U.S.C. § 7481(a)(1); Fed.
     R. App. P. 13. The Tax Court lacks jurisdiction to
     vacate those decisions. Billingsley v. CIR, 868 F.2d
     1081, 1084 (9th Cir. 1989). Because there is no case
     remaining in which the taxpayers can intervene, this
     appeal is moot. [Adair v. Commissioner, 26 F.3d 129
     (9th Cir. 1994) (No. 92-70812).]

     Evidentiary Hearing After Remand of DuFresne

     On September 30, 1992, Judge Goffe, who had presided over

the trial of the test cases, terminated his recall status as a

Senior Judge of this Court and retired from the bench.   The Chief

Judge of this Court reassigned the Kersting project cases to

Judge Renato Beghe.   Thereafter, to give effect to the direction

of the Court of Appeals in DuFresne regarding intervention,22

     21
      For a description of Dixon v. Commissioner, 316 F.3d 1041
(9th Cir. 2003) (Dixon V), and the events leading up to it, see
infra under heading “The Second Appeal”.
     22
      In an order dated June 16, 1995, calendaring a preliminary
hearing in the remaining test cases, this Court had caused a copy
of respondent’s motion for an evidentiary hearing pursuant to the
mandate of the Court of Appeals in DuFresne v. Commissioner, 26
                                                   (continued...)
                                - 33 -

this Court ordered that the cases of 10 non-test-case

petitioners, one docket represented by Mr. Izen, some represented

by Mr. Sticht, and others by Messrs. O’Donnell and Jones, be

consolidated with the remaining test cases for purposes of the

evidentiary hearing mandated by the Court of Appeals in its

DuFresne opinion.23

     This Court conducted this evidentiary hearing at special

trial sessions held in Los Angeles May 13 through 30 and June 10

through 26, 1996, and August 18, 1997.    On the basis of the

record developed at the evidentiary hearing, this Court, on March

30, 1999, issued its Supplemental Memorandum Findings of Fact and

Opinion in Dixon III and entered decisions in the test cases.    We

held that the misconduct of the Government attorneys in the trial

of the test cases did not, in the words of DuFresne, constitute a

“structural defect” in the trial, but rather resulted in

“harmless error”.     However, with a view to promoting basic

fairness and justice in the Kersting project cases, and to

discourage future Government misconduct, the Court exercised its

     22
      (...continued)
F.3d 105 (9th Cir. 1994), to be served on all attorneys who had
entered appearances in the nontest cases.
     23
      The group of cases that were consolidated for purposes of
the evidentiary hearing initially included the case of William D.
and Karyn S. Booth, docket No. 28950-88, in which Mr. O’Donnell
had entered his appearance. However, at the start of the
evidentiary hearing, the Court granted Mr. O’Donnell’s motion to
sever the Booth case from the cases consolidated for the
evidentiary hearing.
                               - 34 -

inherent power and imposed sanctions against respondent.   In

particular, the Court held that Kersting program participants who

had not had decisions entered in their cases, or whose decisions

were not final, were relieved of liability for (1) the interest

component of the addition to tax for negligence under sections

6653(a)(2) and 6653(a)(1)(B), and (2) interest computed at the

increased rate prescribed in section 6621(c).

     On June 24, 1999, the Court vacated its decisions in the

test cases to consider the applications of attorneys Izen and

Jones for fees and sanctions against respondent.   After the test

case and non-test-case petitioners who had participated in the

evidentiary hearing, including those represented by Mr. Sticht,

had filed numerous additional papers, the Court, on March 31,

2000, filed a Supplemental Memorandum Opinion as Dixon IV.   The

Court awarded in part the fees sought and denied the motions for

additional sanctions.    On the same date, the Court again entered

decisions in the test cases.   The test case petitioners filed

timely notices of appeal from these decisions, again seeking

review by the U.S. Court of Appeals for the Ninth Circuit.

     The Second Appeal

     On January 17, 2003, the Court of Appeals issued a second

opinion in the test cases, Dixon v. Commissioner, 316 F.3d 1041

(9th Cir. 2003) (Dixon V), as amended on March 18, 2003, vacating

and remanding this Court’s decisions in the test cases other than
                               - 35 -

the Thompson, Cravens, and Rina cases.24    Citing Hazel Atlas Glass

Co. v. Hartford-Empire Co., 322 U.S. 238, 247 (1944), overruled

on other grounds Standard Oil v. United States, 429 U.S. 17, 18

(1976), the Court of Appeals held that “There can be no question

but that the actions of McWade and Sims amounted to a fraud on

both the taxpayers and the Tax Court.”     Id. at 1046.   The Court

of Appeals held that “fraud on the court” occurs regardless of

whether the opposing party is prejudiced.     Id.25   Rather than

ordering a new trial or entering decisions eliminating all tax

liabilities of the taxpayers, the Court of Appeals directed that

“terms equivalent to those provided in the settlement agreement

with Thompson and the IRS” be extended to “appellants and all

other taxpayers properly before this Court.”     Id. at 1047.26     The

Court of Appeals left to the Tax Court’s discretion “the

fashioning of such judgments which, to the extent possible and

practicable, should put these taxpayers in the same position as

     24
          See supra note 16.
     25
      In Dixon v. Commissioner, 316 F.3d at 1046 n.9, the Court
of Appeals expressed disagreement with the contrary decision by
the Court of Appeals for the Seventh Circuit in Drobny v.
Commissioner, 113 F.3d 670, 678-679 (7th Cir. 1997), affg. T.C.
Memo. 1995-209. In Drobny, the Court of Appeals for the Seventh
Circuit held that proof of fraud on the court requires a showing
that the alleged misconduct actually affected the outcome of the
case to the taxpayer’s detriment.
     26
      In setting forth the factual background and procedural
history of the Kersting project, the Court of Appeals noted
without comment that several hundred taxpayers had settled their
cases. Dixon v. Commissioner, 316 F.3d at 1043.
                              - 36 -

provided for in the Thompson settlement.”   Id. n.11.   On April

18, 2003, in accordance with its opinion in Dixon V, the Court of

Appeals for the Ninth Circuit issued its mandate reversing and

remanding the Tax Court’s decisions in the test cases.27

     On February 20, 2004, petitioners Jesse M. and Lura L. Lewis

filed and lodged the motions before us, seeking to have their

stipulated decisions of 1993 vacated, and to have their cases

reopened to enable them to obtain the benefits of the Thompson

settlement, as mandated by the Court of Appeals, with respect to

“appellants and all other taxpayers properly before this Court”.

They maintain they “were legally bound by the Dixon lead cases by

virtue of a ‘Piggy Back agreement’ that requires consistent

treatment and identifies them as group members”.   They urge that

the Court of Appeals’ holding of fraud on the Court in Dixon V

justifies granting them leave to file their motions to vacate.

     On July 9, 2004, respondent filed objections to petitioners’

motion to vacate.   Respondent argued that petitioners, by

     27
       On July 11, 2000, shortly after the test case petitioners
had filed their notices of appeal, this Court had certified
certain dispositive orders in the nontest cases for interlocutory
appeal, and appeals were taken in these cases. In an order dated
Mar. 14, 2003, another panel of the Court of Appeals for the
Ninth Circuit remanded the cases of various non-test-case
petitioners represented by Messrs. Izen, Sticht, Jones, and
O’Donnell for further proceedings consistent with the opinion in
Dixon V. These nontest cases have been consolidated with the
remaining test cases for the purpose of applying the outstanding
mandates of the Court of Appeals for the Ninth Circuit regarding
the terms, interpretation, and application of the Thompson
settlement.
                               - 37 -

agreeing to stipulated decisions when they or their counsel were

aware of the Government’s misconduct, had rescinded their earlier

piggyback agreement.    Respondent urged that because petitioners

made a “fully formed decision to opt out” of the Dixon

litigation, they could not show that their decision to settle was

caused by the previously disclosed fraud on the Court.

     This Court directed petitioners to submit replies to

respondent’s objections, and petitioners did so on August 20,

2004.   Therein, petitioners maintain that permitting them to

reopen their cases and participate in the Thompson settlement

would be “the only meaningful part of the sanction” mandated by

the Court of Appeals.   They also asked for a hearing on their

motions in order to highlight alleged intimidation of Kersting

project petitioners by respondent’s agents.

     On February 14, 2005, petitioners filed a supplement to

their motions for leave.   In the supplement, Messrs. O’Donnell

and Jones address respondent’s litigating position following the

remand in Dixon V.   They ask that respondent’s litigating

position be characterized as a proposed settlement that includes

both a forgiveness of interest for the 12 years preceding 1992

and a reduction of 62 percent in the deficiencies determined by

respondent.   They then ask the Court to impose this proposed

settlement summarily.   Although we gave respondent leave to reply
                               - 38 -

to petitioners’ supplement, respondent, on March 14, 2005, filed

notices that he chose not to do so.

Discussion

     The Court of Appeals for the Ninth Circuit has decided that

Messrs. Sims and McWade committed fraud on the Court when they

failed to inform this Court, their superiors, and the other test

case petitioners and their counsel, of their settlement agreement

with Mr. DeCastro on behalf of the Thompsons.     Mr. McWade

compounded that misconduct at the original trial before Judge

Goffe by creating a diversion that prevented Mr. Thompson from

revealing the settlement during his testimony.     The Court of

Appeals held that “the actions of McWade and Sims amounted to a

fraud on both the taxpayers and the Tax Court” that “corrupts the

adversarial nature of the proceeding, the integrity of witnesses,

and the ability of the trial court to judge impartially.”      Dixon

v. Commissioner, 316 F.3d at 1047.      The Court of Appeals has

vacated this Court’s decisions in the cases of the test case

appellants and directed that they “and all other taxpayers

properly before this Court” receive the equivalent of the

Thompson settlement.    In so doing, the Court of Appeals noted

without comment that several hundred taxpayers had settled their

cases.   Id. at 1043.

     The opinion of the Court of Appeals constitutes the law of

the case; under the law of the case doctrine, the decision of an
                               - 39 -

appellate court on a legal issue must be followed in all

subsequent proceedings in the same case.   United States v. Hughes

Aircraft Co., 243 F.3d 1181, 1186-1187 (9th Cir. 2001); Caldwell

v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d

278, 281 (9th Cir. 1996).   In accordance with the law of the case

doctrine and the mandate of the Court of Appeals, there have been

subsequent proceedings in this Court, including discovery,

multiple sessions of an additional evidentiary hearing, and

briefing by the parties, with the goal of “the fashioning of such

judgments which, to the extent possible and practicable, should

put these taxpayers in the same position as provided for in the

Thompson settlement.”   Dixon v. Commissioner, 316 F.3d at 1047

n.11.   For purposes of the motions now before us, it is obviously

appropriate to assume that any “judgments” we may fashion

pursuant to the Court of Appeals’ mandate will be substantially

more favorable to the affected taxpayers than if they had

accepted and become bound by the 7-percent reduction settlement

offered by respondent in January 1993.

     In the present cases, petitioners ask us to vacate their

stipulated decisions so that they can participate in the benefits

to be generated by the subsequent proceedings mandated by the

Court of Appeals in Dixon V.   We shall not grant their request.
                              - 40 -

The undisputed facts relevant to petitioners’ motions show they

are not entitled to the benefits of the Thompson settlement.28

     Absent certain narrow exceptions, discussed below, a

decision of this Court based upon the parties’ agreement to

settle a case is final.   The U.S. Supreme Court has stated the

applicable principle:   “There must be an end to litigation

someday, and free, calculated, deliberate choices are not to be

relieved from.”   Ackermann v. United States, 340 U.S. 193, 198

(1950) (ruling that strategic decisions not to appeal, made

during the course of litigation, which in retrospect appear to be

disadvantageous, do not provide a basis for posttrial relief).

     In these cases, absent stipulation to the contrary, the

venue for an appeal is the U.S. Court of Appeals for the Ninth

Circuit; its holdings culminating in Dixon V constitute

dispositive authority governing the cases of these petitioners.

That court has expounded upon the finality of judgments and

decisions not to appeal in Plotkin v. Pac. Tel. & Tel. Co., 688

F.2d 1291, 1293 (9th Cir. 1982):



     28
      In deciding whether to grant a motion for leave to file
motion to vacate a final decision, the Court’s usual practice is
to consider the merits of the underlying (lodged) motion to
vacate decision to determine whether the moving party has alleged
sufficient facts to call into question the validity of the
decision. See Brannon’s of Shawnee, Inc. v. Commissioner, 69
T.C. 999, 1002 (1978); see also Toscano v. Commissioner, 52 T.C.
295, 296 (1969), vacated on another issue 441 F.2d 930 (9th Cir.
1971); Campbell v. Commissioner, T.C. Memo. 1988-105.
                              - 41 -

          Allowing motions to vacate * * * after a
     deliberate choice has been made not to appeal, would
     allow litigants to circumvent the appeals process and
     would undermine greatly the policies supporting
     finality of judgments. Litigants unsuccessful at trial
     could forego available appeals and, should subsequent
     decisions in other cases render their positions viable,
     they could move to have adverse judgments vacated. The
     uncertainty resulting from such a rule would be
     unacceptable.

     Although Ackermann and Plotkin involved litigants’ decisions

not to appeal, their holdings also apply to motions to vacate.

The U.S. Court of Appeals for the Fourth Circuit has explained:

     We find no meaningful distinction between a motion
     asking for relief from a decision not to appeal, as in
     Ackermann, and one that asks for relief from a decision
     to settle, as in this case. The decision to settle a
     case is made in the same manner as any other decision
     with respect to the course of litigation, including a
     decision not to appeal. A litigant weighs the chance
     of success against the probable cost of achieving that
     success through further litigation, all based on
     whatever limited information is available at the time.
     * * * [Schwartz v. United States, 976 F.2d 213, 218-219
     (4th Cir. 1992).]

     Thus, a party making “a conscious and informed choice of

litigation strategy * * * cannot in hindsight seek extraordinary

relief” from the consequences of that choice.    United States v.

Bank of N.Y., 14 F.3d 756, 759 (2d Cir. 1994).   “To hold

otherwise would undermine the finality of judgments in the

litigation process.”   Id. (citing Ackermann v. United States,

supra, and denying a motion for relief from a consent decree

entered pursuant to a settlement agreement).
                               - 42 -

     The above authorities compel the conclusion that, in 1993,

when petitioners settled their cases by agreeing to entry of

final decisions of this Court, they abandoned any opportunity to

benefit from the Court of Appeals’ mandates in Dixon V, issued 10

years later.   Petitioners settled knowingly, with the advice of

counsel who were intimately familiar with the events of the

Kersting project litigation.   More to the point, they did so with

the understanding, set forth explicitly in respondent’s January

1993 letter, that accepting the settlement would “preclude any

further challenge or appeal with respect to the Kersting programs

or the merits of the Dixon opinion.”

     Under the applicable statutory provisions and rules, the

time has long since expired within which petitioners might have

sought relief from their choice to settle.   Section 7481(a)(1)

provides the general rule that a decision of the Tax Court

becomes final upon expiration of the time to file a notice of

appeal.   Section 7483 provides that a notice of appeal generally

must be filed within 90 days after a decision is entered.    The

90-day appeal period may be extended, however, if the taxpayer

files a timely motion to vacate or revise the decision.   Fed. R.

App. P. 13(a).   Pursuant to Rule 162, a motion to vacate or

revise a decision must be filed within 30 days after the decision

is entered, unless the Court allows otherwise.   A timely motion

to vacate or revise the decision will cause the 90-day period to
                               - 43 -

run from the entry of the order disposing of the motion or from

the entry of a new decision, whichever is later.    Fed. R. App. P.

13(a)(2).    Thereafter, as a general rule, the Tax Court lacks

jurisdiction to vacate a decision that has become final.

Billingsley v. Commissioner, 868 F.2d 1081, 1084-1085 (9th Cir.

1989); Abatti v. Commissioner, 859 F.2d 115, 117 (9th Cir. 1988),

affg. 86 T.C. 1319 (1986).

     The strictness of the finality rules is intentional.     “The

legislative history shows that Congress was conscious of the need

that ‘finality’ be clearly defined, so that the process of

collection can proceed unimpeded.    Court decisions, supporting

this objective, have been strict in applying the statute.”

Toscano v. Commissioner, 441 F.2d 930, 932 (9th Cir. 1971),

vacating and remanding 52 T.C. 295 (1969).    The statutory

framework finds support in the strong policy of finality in our

decisions.    See Estate of Smith v. Commissioner, 123 T.C. 15, 28

(2004); Cinema ‘84 v. Commissioner, 122 T.C. 264 (2004), affd.

412 F.3d 366 (2d Cir. 2005); Taub v. Commissioner, 64 T.C. 741,

751 (1975), affd. without published opinion 538 F.2d 314 (2d Cir.

1976); see also Calderone v. Commissioner, T.C. Memo. 2005-151.

As the Court of Appeals for the Ninth Circuit explained, in

affirming one of our decisions in Abatti v. Commissioner, supra

at 119:   “Exceptions which would allow final decisions to be

reconsidered must be construed narrowly in order to preserve the
                               - 44 -

finality of judgments.”    Accordingly, the authority of the Tax

Court to act on a motion to vacate a decision that has become

final is extremely limited.    Cinema ‘84 v. Commissioner, supra at

270.

       We have recently reviewed the limited exceptions to finality

in Estate of Smith v. Commissioner, supra at 27-28.      There, we

observed the general principle that the finality of a decision is

absolute.    See Abatti v. Commissioner, 86 T.C. at 1323.   We

noted, however, that we have jurisdiction to set aside a decision

where there is a fraud on the Court.    See Toscano v.

Commissioner, supra; Kenner v. Commissioner, 387 F.2d 689 (7th

Cir. 1968); Taub v. Commissioner, supra at 751; see also Senate

Realty Corp. v. Commissioner, 511 F.2d 929 (2d Cir. 1975).29     In

Toscano, the Court of Appeals for the Ninth Circuit explained the

exception to finality for fraud on the Court by saying:     “a

decision obtained by fraud on the Tax Court can be set aside by

it at any time because it is not a decision at all--a view

       29
      In addition to fraud on the court, there are some other
narrow exceptions to finality. Thus, this Court and some Courts
of Appeals have ruled that this Court may vacate a final decision
if that decision is shown to be void, or a legal nullity, for
lack of jurisdiction over either the subject matter or the party.
See Billingsley v. Commissioner, 868 F.2d 1081, 1084-1085 (9th
Cir. 1989); Abeles v. Commissioner, 90 T.C. 103, 105-106 (1988);
Brannon’s of Shawnee, Inc. v. Commissioner, 69 T.C. 999 (1978).
We have also vacated a final decision where a clerical error was
discovered after the decision had become final. Michaels v.
Commissioner, 144 F.3d 495 (7th Cir. 1998), affg. T.C. Memo.
1995-294. There has been no suggestion that any of these other
exceptions to finality applies in the cases at hand.
                               - 45 -

strongly supported * * * by the Supreme Court in Hazel-Atlas

Glass Co. v. Hartford Empire Co., 322 U.S. 238”.     Toscano v.

Commissioner, supra at 933 (citing Kenner v. Commissioner,

supra).

     Petitioners’ principal claim in these cases is that they

were victimized by the fraud on the Court whose predicate facts

were disclosed before they agreed to settle.    They maintain that

they were legally bound by the outcome of the test cases by

virtue of their piggyback agreements and are therefore entitled

to “consistent treatment”.    That consistent treatment, they

maintain, is the “target or model settlement to be followed,

i.e., the Thompson settlement”.    They conclude that “they should

have leave of this Court to file appropriate papers that would

include them in the remand group of Dixon III” (i.e., Dixon V).

     Petitioners’ claim ignores the legal consequences of their

superseding agreements to settle.    The compromise and settlement

of tax cases is governed by general principles of contract law.

See Dorchester Indus., Inc. v. Commissioner, 108 T.C. 320, 330

(1997), affd. without published opinion 208 F.3d 205 (3d Cir.

2000).    A settlement stipulation is a contract.   Each party

agrees to concede some rights that he or she may assert against

his or her adversary as consideration for other rights secured in

the settlement agreement.    See Saigh v. Commissioner, 26 T.C.

171, 177 (1956).    Petitioners’ agreement with respondent acted
                                - 46 -

“both as a rescission and a discharge by substitution” of their

earlier piggyback agreements.    13 Corbin on Contracts, sec.

67.8(6), at 68 (Rev. ed. 2003).    At the time of their settlement,

the parties had a genuine dispute, which they resolved under

conventional contract principles:    respondent maintained that

petitioners owed deficiencies totaling $7,202, plus additions and

interest, and petitioners maintained they owed nothing.       When

petitioners settled, respondent’s consideration to petitioners

took the form of respondent’s promises to accept 7 percent less

than the deficiencies originally determined and to forgo the

additions.   Petitioners’ consideration in return was their

promise to pay the reduced deficiencies, plus their agreement,

set forth explicitly in respondent’s offering letter, that the

settlement would “preclude any further challenge or appeal with

respect to the Kersting programs or the merits of the Dixon

opinion”.    The legal effect of their dealings “in substance, was

a mutual surrender, by the parties, of their antithetical

positions, in exchange for a new, formally executed, complete and

binding contract.”    Richards Constr. Co. v. Air Conditioning Co.,

318 F.2d 410, 414 (9th Cir. 1963).       As the Court of Appeals for

the Ninth Circuit added in Richards:       “Generally speaking, a

contract to settle a genuine dispute is binding; the law favors

such contracts; this was such a contract.”       Id.   For the reasons
                              - 47 -

stated above, petitioners are not entitled to relief from the

contracts by which they settled their cases.

     Petitioners are no more successful with their related

argument that, “Under this sanction [i.e., the Court of Appeals’

mandate that the Thompson settlement be extended to all parties

properly before that court] it would be unfair, inequitable, and

more of a ‘reward’ than a ‘sanction’ to exclude settled

petitioners.”   They urge that they “have paid in substantial

monies and suffered damages to their legal rights equivalent to

those who have withheld monies.   Clearly, the Ninth Circuit would

have decreed exclusion of settled cases in the event it

considered their remedies not cognizable by this Trial Court.”

We disagree.

     The Court of Appeals’ direction that the equivalent of the

Thompson settlement be extended to “appellants and all other

taxpayers properly before this Court” by its terms excludes those

who knowingly settled their cases after the predicate facts of

the fraud on the Court were disclosed.   The language of the Court

of Appeals confirms our view that petitioners’ legal predicament

differs fundamentally from the posture of those who did not

settle.   Petitioners’ cases are closed; in contrast, the cases of

those who did not settle are still open.   Under the doctrine of

finality discussed above, we find no significance in the fact

that the Court of Appeals did not specifically exclude already-
                               - 48 -

closed cases from its mandate.    To the contrary, we think that if

the Court of Appeals had intended to extend the Thompson

settlement to previously closed cases, it would have explicitly

said so.

     Before petitioners settled their cases, their legal

situation was the same as those petitioners who did not settle;

the cases of all such petitioners were open.    That prior

similarity, however, does not entitle petitioners to the rights

preserved by those Kersting project petitioners who did not

settle.    The Court of Appeals for the Ninth Circuit rejected a

similar contention in Abatti v. Commissioner, 859 F.2d at 117,

where it held that some taxpayers in a tax shelter group who had

signed piggyback agreements and failed to appeal adverse

decisions in the test cases were not entitled to the relief

gained by other piggybackers who did appeal the adverse

decisions.    The Court of Appeals observed that there is “‘no

general equitable doctrine which countenances an exception to the

finality of a party’s failure to appeal merely because his rights

are “closely interwoven” with those of another party.’”      Id. at

120 (quoting Federated Dept. Stores v. Moitie, 452 U.S. 394, 400

(1981)).

     In addition to arguing that they retain the status of other

non-test-case petitioners who rejected or did not respond to

respondent’s 1993 settlement offer, petitioners argue that the
                               - 49 -

circumstances of their agreements to settle justify relief from

the finality of the resulting decisions.   They argue that they

settled on the premise that “no fraud on the Court existed” and

“that the Thompson scenario was harmless”.   These arguments do

not withstand scrutiny.

     It is axiomatic that knowledge of the facts precludes a

claim of fraud.   Soliman v. Phillip Morris, Inc., 311 F.3d 966,

975 (9th Cir. 2002); see Melanson v. United Air Lines, Inc., 931

F.2d 558, 563 (9th Cir. 1991) (fraudulent failure to disclose

requires a plaintiff unaware of the concealed fact who would not

have acted had he known of the fact); 37 C.J.S., Fraud, sec. 37

(1997) (“one can secure no redress for a representation which he

knew to be false or for failure to disclose facts which he knew

to exist”).

     Petitioners do not deny that, when they agreed to settle

their cases, they had learned of the previously secret deal--

namely, that respondent’s attorneys McWade and Sims had

engineered a settlement with a party-witness in the test cases

who thereby became entitled to the better of his settlement or

the resulting decision of the Court.

     There is ample evidence in the record that petitioners had

become aware of those facts.   In July 1992, Mr. Kersting informed

the Kersting project participants of the recently disclosed,

previously secret McWade/DeCastro agreement.   Mr. Kersting
                               - 50 -

characterized that agreement as “the government’s fraud and

perfidy in a secret deal between Cravens and Thompson on the one

hand and IRS attorney McWade (and other government officials) on

the other hand.”    The misconduct, as Mr. Kersting described it,

“involves a settlement in favor of Cravens/Thompson in exchange

for the damaging testimony and exhibits that were all put

together as part of a prearranged plan.”     In September 1992, Mr.

Kersting advised the Kersting project petitioners who had signed

piggyback agreements that they should demand “the same

concessions arranged by the Revenue Service for Thompson and

Cravens.   An arrangement whereby $100,000.00 of taxes allegedly

owed were reduced to a mere $15,000.00”.     He also informed the

Kersting project participants of the progress of the appeals in

the test cases:    “I had reason to believe that the Appeal of

Judge Goffe’s decision at the 9th Circuit [Court] of Appeals in

San Francisco was just around the corner.     It did not come about

that quickly, as you know.”    Mr. Kersting noted the misconduct of

the Government’s lawyers and added:     “It threw the Appeals

schedule into turmoil and motions had to be filed to ask for an

extension of time for filing the Appeal.”

     In addition, all relevant information Messrs. O’Donnell and

Jones had about the litigation of the test cases is attributable

to their clients, petitioners herein.     See Commissioner v. Banks,

543 U.S.     ,     , 125 S. Ct. 826, 832 (2005); Veal v. Geraci, 23
                              - 51 -

F.3d 722, 725 (2d Cir. 1994) (relationship between attorney and

client attorney represents is one of agent and principal); Morrow

Crane Co. v. Affiliated FM Ins. Co., 885 F.2d 612 (9th Cir. 1989)

(principal is deemed to know what agent knows concerning those

matters in which agent has power to bind principal); 1

Restatement, Lawyers 3d, sec. 28 (1998) (information imparted to

a lawyer during and relating to the representation of a client is

attributed to the client for the purpose of determining the

client’s rights and liabilities in matters in which the lawyer

represents the client).   Attorneys having such information are

duty bound to communicate it to their clients.   See Phillips v.

Woodford, 267 F.3d 966, 984 n.11 (9th Cir. 2001) (attorney must

explain the matter in a manner reasonably necessary to permit the

client to “make informed decisions” regarding the

representation); Model Rules of Profl. Conduct, R. 1.4(a), cmt. 5

(2004) (“For example, when there is time to explain a proposal

made in a negotiation, the lawyer should review all important

provisions with the client before proceeding to an agreement”); 1

Restatement, supra, sec. 20 (a lawyer must keep a client

reasonably informed about the matter and must consult with a

client to a reasonable extent concerning decisions to be made by

the lawyer).

     On the documents before us, Messrs. O’Donnell’s and Jones’s

awareness of the Sims/McWade/DeCastro misconduct can be traced to
                               - 52 -

June 24, 1992, when, on behalf of “about one-hundred

Petitioners”, Messrs. O’Donnell and Jones wrote to respondent,

noting “an ethical concern regarding the impropriety of two

settlement offers * * * secretly extended to Mr. Cravans [sic]

and Mr. Thompson who testified for the I.R.S. at the Dixon

Trial.”    The letter further advised of a motion to remand

“pending in the Ninth Circuit Court of Appeals as to the cases on

Appeal”.

     In August 1992, respondent presented a full report of the

misconduct to this Court as it had been disclosed and developed

at that time.    Although this report was not served upon Messrs.

O’Donnell and Jones directly, it came to the attention of Mr.

Sticht, who joined them in representing the Cerasolis and who was

aware of that report in September 1992.    On September 29, 1992,

Mr. Sticht’s motion of petitioner-intervenors for leave to

intervene stated:

          On or about August 20, 1992, the respondent filed
     its (a) Notice of Objection To Petitioner’s Motion, (b)
     Motion For Entry Of Decision, and (c) Memorandum Of
     Points And Authorities * * * . Respondent’s motion
     described the circumstances surrounding the previously
     disclosed “ostensible contingent settlement” * * * .

     In January 1993, respondent sent two separate copies of the

renewed 7-percent reduction settlement offer letter to

petitioners, in care of their attorneys.    In that letter,

respondent informed petitioners that two test case petitioners

had entered into settlement agreements with the Service before
                              - 53 -

the trial, and that their agreements had not been disclosed to

the Tax Court or the other test case petitioners.   Respondent

further explained that the settlement agreements with those two

test case petitioners provided that they could proceed to trial

but would receive the benefit of the better of their pretrial

settlement agreement or the results of the trial.

     All the foregoing demonstrates that, when petitioners

through their attorneys agreed to settle in March 1993,

petitioners and their attorneys knew of the predicate facts that

later gave rise to the holding of fraud on the Court by the Court

of Appeals for the Ninth Circuit.   This knowledge of petitioners

and their attorneys precludes a claim of fraud that would vitiate

the settlement stipulation from which petitioners, through those

same attorneys, now ask to be relieved.

     In view of the overwhelming evidence of actual knowledge, we

are puzzled by petitioners’ assertion that, at the time they

settled, they thought no fraud on the Court existed.   Perhaps

their claimed unawareness means that they, or their attorneys,

were unaware of the legal consequences of fraud on the Court.    We

would not be persuaded by an assertion to that effect.    Rule

60(b) of the Federal Rules of Civil Procedure explicitly

discusses “An action * * * to set aside a judgment for fraud upon

the court.”   Moreover, Messrs. Izen and Sticht, counsel for other

Kersting petitioners, explicitly alleged “fraud on the court” in
                               - 54 -

motions to intervene filed in September and October 1992, several

months before petitioners’ counsel executed their settlement

documents, including a case in which Mr. Sticht and Mr. Jones

were co-counsel.    In view of this history, any assertion that,

when petitioners agreed to settle their cases, they thought “that

no fraud on the Court existed” is unpersuasive.    When petitioners

settled, they and their attorneys clearly had received enough

information about the misconduct of the Government’s attorneys to

make an informed decision.

     Petitioners have listed other circumstances surrounding

their decision to settle, but none of these circumstances was the

result of fraud on the Court or any other exceptional situation

that would permit relief from their settlement.    Thus,

petitioners argue that when they settled, they thought the

Thompson settlement was harmless.    This appears to be an argument

that when they settled, petitioners assumed or believed, despite

the recently revealed misconduct of the Government’s attorneys,

that this Court’s rulings of harmless error in favor of

respondent would be upheld on appeal.    That assumption or belief

turned out to be erroneous; in Dixon V, the Court of Appeals for

the Ninth Circuit reversed this Court’s rulings of harmless error

on the ground that “fraud on the court” occurs regardless of

whether the opposing party is prejudiced.    Dixon v. Commissioner,

316 F.3d at 1046.    In any event, petitioners’ mistaken assumption
                                - 55 -

or belief about the harmlessness of the Thompson settlement does

not provide a basis for vacating their stipulated decisions.

When parties make a deliberate, strategic choice to settle, they

cannot be relieved of that choice merely because their assessment

of the consequences turns out to be incorrect.     United States v.

Bank of N.Y., 14 F.3d at 759.

     Petitioners also argue they settled because they feared

worse results if they did not settle.     Any worries they may have

had about subsequent results, however, do not provide a basis for

vacating the decisions in their cases.     Concern about the outcome

of litigation is not an extraordinary circumstance; it is a

factor affecting one’s evaluation of any settlement.    The fact

that the ultimate outcome would have been more favorable to

petitioners than what they settled for is no reason to relieve

them of their settlement agreement.      See id.

     Petitioners also contend no settlement other than the

renewed 7-percent reduction settlement offer was available.    That

situation, however, was not created by any fraud of respondent;

to the contrary, as far as the record shows, that contention is

correct.   Respondent’s offer, made a few months after discovery

of Messrs. McWade’s and Sims’s misconduct, was the only one on

the table when petitioners accepted it in March 1993.    That fact,

however, does not entitle them to relief from their agreement to

accept respondent’s offer.   As explained above, when petitioners,
                                - 56 -

with the advice of counsel, decided to settle their cases, they

knowingly assumed the risk that the ultimate outcome of the

nonsettling test cases on appeal would be more favorable than the

current settlement offer they were about to accept.

     Petitioners have cited seven Courts of Appeals opinions as

“Precedent for the remedy of vacating a prior decision on the

grounds cited.”    All those cases note that fraud on the court may

form a basis for vacating decisions of the Tax Court, or of a

U.S. District Court.    The proposition is unassailable.   None of

the cited cases, however, supports the proposition that a party

to a case who knows, or has reason to know, of circumstances in

the case that may be deemed to give rise to fraud on the court,

and who nevertheless agrees to a stipulated decision in that

case, may later obtain relief from that decision on the ground of

fraud.    These authorities do not help petitioners.30

     Petitioners, after respondent’s objection to their motions

for leave and motions to vacate, filed a reply to that objection.

In their reply, petitioners ask for a hearing on their motions,

noting that, in a pleading filed in 1992, respondent had conceded

that, in a hearing on the misconduct of the Government’s



     30
      Of the seven cases cited, only one supports a sanction of
any sort, on the basis of fraud. See Aoude v. Mobile Oil Corp.,
892 F.2d 1115 (1st Cir. 1989) (case dismissed in view of
plaintiff’s use of fraudulent documents and testimony). This
suggests that the relief petitioners seek is even more
extraordinary than they would be willing to acknowledge.
                                - 57 -

attorneys, the Court may determine facts based upon “expected

contradictory testimony.”   Respondent’s concession of the need

for a hearing, however, occurred before the evidentiary hearings

in 1996 and 1997 on remand from DuFresne.    Those hearings

required more than 5 weeks of trial and produced hundreds of

exhibits and thousands of pages of testimony regarding the

misconduct of the Government’s attorneys.   The Court agrees with

respondent that no further testimony is needed to enable the

Court to decide petitioners’ motions for leave.

     Petitioners also ask for a hearing so that they might

expose:   “the scheme whereby CID alleged agents would call on

investors to frighten them about a possible indictment against

them, personally.   Then a project attorney from Hawaii would call

to offer not only the 7% settlement, but, also, certain freedom

from the CID.”   This bare assertion is irrelevant to the present

proceeding.   The relief that petitioners seek in this case was

mandated by the Court of Appeals as a result of Messrs. Sims’s

and McWade’s failure to disclose the Thompson settlement, not as

a result of alleged objectionable telephone calls by agents of

the Internal Revenue Service.    See Harbold v. Commissioner, 51

F.3d 618 (6th Cir. 1995).

     Finally, petitioners’ supplement to their motion for leave

fails to supply any reason to grant the relief petitioners seek.

In the supplement, Messrs. O’Donnell and Jones address
                              - 58 -

respondent’s litigating position in response to the mandate of

the Court of Appeals in Dixon V--in general, that the mandate

requires a 20-percent reduction in deficiencies plus payment of

actual attorney’s fees--as a settlement offer.   They then

elaborate on the terms of that putative offer to their benefit,

by assuming it contains both a forgiveness of interest for the 12

years preceding 1992 and a reduction of proposed deficiencies by

62 percent.   They conclude by asking the Court to impose this

settlement upon respondent.   As we decided in an order in these

cases dated February 24, 2005, we decline to be put into the

anomalous position of compelling a settlement, especially when

the “settlement” as set forth by Messrs. O’Donnell and Jones

might most generously be construed to be no more than a

counteroffer to a position articulated by respondent.

     Following the remand in Dixon V, the remaining test case

petitioners and a representative group of non-test-case

petitioners who did not accept respondent’s January 1993

settlement offer (including non-test-case petitioners represented

by Messrs. O’Donnell and Jones) have made prodigious efforts to

discover and introduce evidence that the Thompson settlement was

actually more generous to the Thompsons than is apparent from its

formal terms.   Whether those efforts have been successful is

irrelevant to our disposition of the pending motions for leave.

The Thompson settlement as it had become known in 1993 has been
                              - 59 -

held by the Court of Appeals for the Ninth Circuit to constitute

fraud on the Court and, hence, to justify entitlement by the

litigants remaining before the Court to the benefits of the

Thompson settlement as we finally determine and apply them.    Here

petitioners, although aware of the predicate facts, deliberately

gave up any right to participate in the benefits of that

settlement.   Because of their decision to settle, petitioners’

legal situation decisively differs from that of the other

Kersting project petitioners who rejected or failed to respond to

respondent’s posttrial settlement offer.   By settling as they

did, petitioners reduced their proposed deficiencies, eliminated

all additions, stopped the further accrual of interest against

them by paying the reduced deficiencies, and put an end to their

participation in litigation that, to date, has lasted more than

12 years beyond the date they chose to settle.   When they did so,

they also assumed the risk that, as a result of the appeals

pending when they chose to settle, other Kersting project

petitioners might become entitled to a more favorable outcome.

      We conclude that petitioners’ stipulated decisions are

final, inasmuch as petitioners agreed to those decisions with the

advice of experienced counsel.   At the time of the settlements,

their counsel, who signed the decision documents, were aware of

the misconduct that ultimately led the Court of Appeals to decide

that such misconduct constituted fraud on the court.   Their
                             - 60 -

counsel were also aware that test case petitioners represented by

Mr. Izen had appealed the Tax Court’s decisions, which had

sustained respondent’s determinations despite the revelation of

the misconduct of Messrs. Sims and Mcwade.    The finality of the

stipulated decisions in petitioners’ cases precludes them from

participating in the relief mandated by the Court of Appeals in

Dixon V to other Kersting project petitioners who did not accept

respondent’s January 1993 settlement offer.

     In view of the foregoing,


                                      Orders will be issued denying

                                 petitioners’ motions for leave to

                                 file motions to vacate decisions,

                                 as supplemented.
