                              T.C. Memo. 2016-193



                        UNITED STATES TAX COURT



        MICHAEL SHAMROCK AND VICTORIA BIGG, Petitioners v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 28725-11.                        Filed October 20, 2016.



      Sheldon Drobny, for petitioners.

      Michael T. Shelton, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      CHIECHI, Judge: This case is before the Court on remand from the U.S.

Court of Appeals for the Seventh Circuit (Court of Appeals). On November 17,

2014, the Court of Appeals issued a mandate in accordance with its order filed on

September 22, 2014, and its judgment filed on September 23, 2014. In its order
                                         -2-

[*2] and its judgment, the Court of Appeals vacated the Court’s Order and Deci-

sion entered on January 27, 2014,1 and remanded this case for further proceedings

in accordance with that order and that judgment.

      In its Order dated January 15, 2015 (January 15, 2015 Order), the Court set

this case for an evidentiary hearing at a special session that was to, and did, take

place on March 30, 2015 (March 30, 2015 evidentiary hearing), in Chicago,

Illinois (Chicago). In its Order dated January 20, 2015, the Court established a

schedule for certain prehearing activity. Thereafter, there was extensive

prehearing motion activity principally because of the questionable tactics that

Sheldon Drobny (Mr. Drobny),2 petitioners’ representative in this case, decided to

pursue.


      1
        In its Order and Decision entered on January 27, 2014, the Court granted
respondent’s motion for entry of decision and entered a decision that reflected the
stipulation of settled issues and the supplemental stipulation of settled issues
which the parties had signed and which they had filed with the Court on February
28 and October 28, 2013, respectively (collectively sometimes, stipulations of
settled issues).
      2
        Mr. Drobny first entered an appearance in this case on December 17, 2013,
the date on which respondent filed a motion for entry of decision reflecting the
parties’ stipulations of settled issues. See supra note 1. Mr. Drobny is not an
attorney. He was admitted to practice before the Court on March 26, 1993,
pursuant to the Court’s Rules of Practice and Procedure then, but no longer, in
effect that governed the admission of nonattorneys to practice before the Court.
See sec. 7452 (“No qualified person shall be denied admission to practice before
the Tax Court because of his failure to be a member of any profession or calling.”)
                                         -3-

[*3] As stated in the Court’s January 15, 2015 Order, the March 30, 2015

evidentiary hearing was set for the purpose of giving the parties the opportunity to

present evidence as to whether the parties’ stipulations of settled issues should be

set aside. On March 13, 2015, petitioners filed a second supplement to the

prehearing memorandum that they had filed on January 21, 2015. In that second

supplement, petitioners narrowed the scope of the hearing to whether only para-

graph 22 of the parties’ supplemental stipulation of settled issues should be set

aside.3

      The issues for decision are:

      (1) Will the Court set aside paragraph 22 of the parties’ supplemental

stipulation of settled issues? The Court holds that it will not.

      (2) Will the Court grant respondent’s motion to impose sanctions under

section 6673(a)(2)4 on Mr. Drobny? The Court holds that it will not.




      3
        Paragraph 22 of the parties’ supplemental stipulation of settled issues
pertains to a certain loss that petitioners claimed in this case as an affirmative
issue for the taxable year 2009.
      4
       All section references are to the Internal Revenue Code in effect at all
relevant times. Unless otherwise indicated, all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                          -4-

[*4]                             FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.

       Petitioners resided in Illinois at the time they filed the petition.

       Petitioner Michael Shamrock (Mr. Shamrock) filed a Federal individual

income tax (tax) return (return) for his taxable year 2007 (2007 return), in which

he claimed a filing status of married filing separately. Mr. Shamrock and peti-

tioner Victoria Bigg (Ms. Bigg) jointly filed a tax return for each of their taxable

years 2008 (2008 return) and 2009 (2009 return). (The Court will sometimes refer

collectively to the 2007 return, the 2008 return, and the 2009 return as the returns

in question.) John A. Hauter (Mr. Hauter), a certified public accountant (C.P.A.)

and an attorney, had prepared each of the returns in question.

       Early in 2011, the Internal Revenue Service (IRS) began an examination

(IRS examination) of Mr. Shamrock’s taxable year 2007 and Mr. Shamrock’s and

Ms. Bigg’s taxable years 2008 and 2009. They authorized Mr. Hauter to represent

them with respect to that examination. (The Court will sometimes refer to Mr.

Hauter as petitioners’ prior representative.) During the course of the IRS exami-

nation, Mr. Hauter provided the revenue agent that the IRS had assigned to

conduct that examination (revenue agent) an amended return for Mr. Shamrock’s

and Ms. Bigg’s taxable year 2009 (first amended 2009 return). Thereafter, Mr.
                                           -5-

[*5] Hauter provided the IRS with a second amended return for that taxable year

(second amended 2009 return).

      In the second amended 2009 return, Mr. Shamrock and Ms. Bigg claimed

for the first time in Form 4797, Sales of Business Property, a loss of $435,751

(claimed Elm Court loss) from the sale of certain real property at 1249 Elm Court

(Elm Court), Glenview, Illinois (Elm Court property).5 Included as part of the

second amended 2009 return was a worksheet that explained, inter alia, that

“developer expenses” of $162,898 had been “TRANSFERRED TO FROM [sic]

4797”. Mr. Shamrock and Ms. Bigg had originally claimed “developer expenses”

of $162,898 in Schedule C, Profit or Loss From Business (Schedule C), that they

had included as part of their 2009 return and that related to what was described in

that schedule as Ms. Bigg’s “DENTAL PRACTICE & DEVELOPER”.

      Around early June 2011, Mr. Shamrock and Ms. Bigg wanted to terminate

their relationship with Mr. Hauter because they were dissatisfied with the services

that he had been providing them with respect to the IRS examination of taxable

years 2007, 2008, and 2009. One of Ms. Bigg’s patients6 recommended to Ms.



      5
      Paragraph 22 of the supplemental stipulation of settled issues sets forth the
agreement of the parties with respect to the claimed Elm Court loss.
      6
          At all relevant times, Ms. Bigg was a dentist.
                                         -6-

[*6] Bigg that she consider retaining her son, Grant Niehus (Mr. Niehus), who

specialized in tax matters.

      Mr. Niehus had been admitted to the bar of the Supreme Court of Illinois

(Illinois State bar) on May 1, 1980, and was thereby authorized to practice law in

that State. From the time he was admitted to the Illinois State bar to the time of

the March 30, 2015 evidentiary hearing in this case, Mr. Niehus had never been

disciplined or disbarred.7 The Illinois State bar requires that its members periodi-

cally register with it, pay dues to it, and satisfy certain continuing legal education

(CLE) requirements. (The Court will sometimes refer collectively to the require-

ments of the Illinois State bar that its members periodically register with it, pay

dues to it, and satisfy certain CLE requirements as the Illinois State bar attorney

status requirements.) In the event that a member of the Illinois State bar fails to




      7
        The Attorney Registration and Disciplinary Commission of the Supreme
Court of Illinois showed in its Web site as of February 9, 2015, which was
approximately a month and a half before the March 30, 2015 evidentiary hearing
took place, that Mr. Niehus had no record of discipline by, or disciplinary
proceedings pending before, that court. However, as discussed below, that Web
site also showed that Mr. Niehus was not authorized to practice law in Illinois
because after 2009 he had not registered annually and paid annual dues to the
Illinois State bar; nor had he satisfied the Illinois State bar CLE requirements. See
discussion infra of Ill. Sup. Ct. Rules 756 and 796 addressing the Illinois State bar
attorney status requirements.
                                        -7-

[*7] comply with any of the Illinois State bar attorney status requirements, that

member will no longer be authorized to practice law in Illinois.

      Ms. Bigg contacted Mr. Niehus after her patient had recommended him and

arranged a meeting with him (first meeting or initial meeting) that took place in

early June 2011. Mr. Shamrock and Ms. Bigg met with Mr. Niehus for about two

hours during that first meeting. They explained to him that the IRS was examining

taxable years 2007, 2008, and 2009 and that there were approximately 50 issues

that the IRS had raised during that examination (IRS examination issues) and one

affirmative issue (namely, the claimed Elm Court loss) that they had raised during

that examination in their second amended 2009 return. (The Court will sometimes

refer collectively to the IRS examination issues and the affirmative issue relating

to the claimed Elm Court loss that Mr. Shamrock and Ms. Bigg raised in the

second 2009 amended return as the examination issues.) Mr. Shamrock and Ms.

Bigg also explained to Mr. Niehus during their initial meeting with him that they

were dissatisfied with the individual who had been representing them before the

IRS with respect to that examination. Mr. Shamrock and Ms. Bigg knew when

they had their first meeting with Mr. Niehus that Mr. Niehus would be starting at a

disadvantage if they were to retain him to represent them with respect to the IRS

examination. In fact, during their initial meeting with Mr. Niehus, Mr. Shamrock
                                         -8-

[*8] and Ms. Bigg characterized the then-current situation with respect to the IRS

examination of the taxable years 2007, 2008, and 2009 as a “mess”, an assessment

with which Mr. Niehus agreed after he learned more about the IRS examination,

the events that occurred during that examination, and how it had been handled by

petitioners’ prior representative.

      Mr. Shamrock and Ms. Bigg knew before their initial meeting with Mr.

Niehus that a resolution of the claimed Elm Court loss that was favorable to them

depended in large part on how Mr. Shamrock intended to, and did, use the Elm

Court property and on their tax basis in that property. Mr. Shamrock and Ms.

Bigg also knew that establishing those factual matters in turn depended on the

willingness of the IRS to accept what they contended were the salient facts about

those matters. Mr. Shamrock and Ms. Bigg understood before they had their first

meeting with Mr. Niehus that convincing the IRS to accept what they contended

were the salient facts with respect to the claimed Elm Court loss would be difficult

for them and for anyone, such as Mr. Niehus, whom they decided to retain to

represent them. That was because Mr. Shamrock and Ms. Bigg knew before that

initial meeting took place that, as a result of certain events that had occurred

during the IRS examination, certain representatives of the IRS who were involved

in that examination already had grown suspicious of, and had trust and credibility
                                        -9-

[*9] issues with, them and their claims regarding at least some of the examination

issues. As a result, Mr. Shamrock and Ms. Bigg understood fully when they

retained Mr. Niehus at their first meeting with him in early June 2011 that Mr.

Niehus was being placed in the difficult situation of persuading the IRS to trust

and accept what Mr. Shamrock and Ms. Bigg maintained were the salient facts

regarding the claimed Elm Court loss, in the face of and despite the trust and

credibility issues that certain IRS representatives already had with them as of the

time of that meeting.

      Mr. Niehus asked Mr. Shamrock and Ms. Bigg a lot of questions during

their initial meeting about the examination issues. Mr. Niehus’ numerous ques-

tions regarding those issues during their first meeting caused Ms. Bigg to com-

ment to Mr. Niehus that Mr. Shamrock and she had not previously been asked any

questions about the examination issues.

      Toward the conclusion of the initial meeting with Mr. Shamrock and Ms.

Bigg, Mr. Niehus advised them that they and he, as their representative, needed to

address with the IRS the examination issues with a goal of resolving all of them

and avoiding litigating any of them. Mr. Niehus made it clear to Mr. Shamrock

and Ms. Bigg that although he was willing to represent them in attempting to

resolve with the IRS all of the examination issues for taxable years 2007, 2008,
                                       - 10 -

[*10] and 2009, he was unwilling to represent them in the event that they and the

IRS were unable to reach a mutually satisfactory resolution of all of those exami-

nation issues and they wanted to litigate the unresolved issues. That was because,

as he told Mr. Shamrock and Ms. Bigg at their first meeting, he was not a trial

lawyer. However, Mr. Niehus indicated to them that in the event that they wanted

a trial with respect to any unresolved examination issues, he would recommend a

trial lawyer to represent them.

      Mr. Shamrock and Ms. Bigg retained Mr. Niehus at their initial meeting to

represent them before the IRS with respect to taxable years 2007, 2008, and 2009.

During his representation of Mr. Shamrock and Ms. Bigg from early June 2011

until December 2013, Mr. Niehus provided to them competent, valuable, diligent,

and effective assistance in (1) advancing arguments to certain IRS representatives

explaining how and why the documents that Mr. Shamrock and Ms. Bigg provided

to the IRS and the applicable tax law supported each of their positions with respect

to each of the examination issues for each of the taxable years 2007, 2008, and

2009, including the claimed Elm Court loss that they had raised in their second

amended 2009 return, and (2) advocating acceptance by those IRS representatives

of each of those positions. During that representation which ended in December

2013, petitioners never asked Mr. Niehus to recommend a trial lawyer to them.
                                        - 11 -

[*11] In order to authorize the IRS to deal with Mr. Niehus and to stop dealing

with petitioners’ prior representative with respect to the examination issues for

taxable years 2007, 2008, and 2009, on June 17, 2011, Mr. Shamrock and Ms.

Bigg submitted to the IRS Form 2848, Power of Attorney and Declaration of

Representative (Form 2848). In Part I, Power of Attorney, of Form 2848, which

Mr. Shamrock and Ms. Bigg signed on June 1, 2011, they authorized Mr. Niehus

to represent them before the IRS with respect to tax matters for taxable years 2007,

2008, and 2009. In Part II, Declaration of Representative, of Form 2848, which

Mr. Niehus signed on the same date, he represented that he was a member in good

standing of the Illinois State bar.8 Although Mr. Niehus did not intend to misstate

his status with the Illinois State bar or to deceive the IRS or petitioners when he

signed part II of Form 2848, his representation in that part that he was a member in

good standing of the Illinois State bar was not accurate. Mr. Niehus simply did

not have in mind, and may not even have been aware, when he signed part II of

Form 2848 that after 2009 he no longer was authorized to practice law in the State

of Illinois on account of his failure to comply with certain Illinois State bar

attorney status requirements. That was because Mr. Niehus had been under

      8
        Mr. Niehus did not represent in part II of Form 2848 or at any other time
that he was a certified public accountant, an enrolled agent, or any other category
of representative authorized to practice before the IRS that was listed in that part.
                                        - 12 -

[*12] intense pressures and stresses for a number of years both before and after

2009 that were attributable to the critical illness of his spouse and her death in

February 2008 from that illness as well as his dealing for over three years after her

death with resolving the problems associated with a franchise business that his

spouse and he had operated.

      In furtherance of the goal (discussed above) that Mr. Niehus recommended

to Mr. Shamrock and Ms. Bigg during their initial meeting of settling all, and

litigating none, of the examination issues for each of the taxable years 2007, 2008,

and 2009, Mr. Niehus performed as part of his representation of them before the

IRS, inter alia, the following services, some of which the Court will discuss in

more detail below. Mr. Niehus assisted Mr. Shamrock and Ms. Bigg in identify-

ing, locating, and gathering the documents that they needed to present to the IRS

in order to substantiate the position that they had taken with respect each of the

examination issues for each of those years, including the claimed Elm Court loss

that they had raised in their second amended 2009 return. Mr. Niehus also

prepared and sent letters to the IRS in which he advanced arguments explaining

how and why the documents that Mr. Shamrock and Ms. Bigg provided to the IRS

and the applicable tax law supported each of those positions and advocated

acceptance of each of those positions. In addition, Mr. Niehus, accompanied by
                                       - 13 -

[*13] Mr. Shamrock and Ms. Bigg, had a number of meetings with representatives

of the Appeals Office of the IRS (Appeals Office) as well as with representatives

of the Office of Chief Counsel of the IRS (Chief Counsel’s office) that took place

both before and after they filed the petition commencing this case. During those

various meetings, Mr. Niehus continued to (1) advance arguments explaining how

and why the documents that Mr. Shamrock and Ms. Bigg provided to the IRS and

the applicable tax law supported each of their positions with respect to each of the

examination issues for each of the taxable years 2007, 2008, and 2009, including

the claimed Elm Court loss that they had raised in their second amended 2009

return, and (2) advocate acceptance of each of those positions. During those

meetings, Mr. Niehus was proactive in protecting the interests of his clients, Mr.

Shamrock and Ms. Bigg. To illustrate, during a meeting with a counsel for

respondent that took place in February 2013 after Mr. Shamrock and Ms. Bigg had

filed the petition and respondent had filed the answer in this case, Mr. Niehus

successfully prevented Mr. Shamrock from saying something inculpatory in

response to certain questions of that counsel with respect to matters that she had

raised at that meeting but that were unrelated to and outside the scope of the

examination issues for the taxable years 2007 through 2009.
                                       - 14 -

[*14] Although Mr. Niehus attempted during the several months after he was

retained in June 2011 to resolve all of the examination issues, no resolution of

those issues was reached. That was because many of the examination issues

involved expenses that Mr. Shamrock and Ms. Bigg had claimed but were unable

to substantiate with appropriate documentation. In addition, other examination

issues involved unreported income that they were unable to refute. Nonetheless,

before respondent issued the respective notices of deficiency for taxable years

2007, 2008, and 2009 on which this case is based, Mr. Shamrock and Ms. Bigg

were not willing to concede those issues.

      On November 7, 2011, respondent issued a notice of deficiency (notice) to

Mr. Shamrock for the taxable year 2007 (2007 notice), a notice to Ms. Bigg and

him for the taxable year 2008 (2008 notice), and a notice to them for the taxable

year 2009 (2009 notice). The 2009 notice did not allow Mr. Shamrock and Ms.

Bigg the claimed Elm Court loss that they had claimed for the first time in their

second amended 2009 return.

      After respondent issued the 2007 notice, the 2008 notice, and the 2009

notice, petitioners filed the petition and thereby commenced this case.9 After

      9
       Mr. Niehus did not sign the petition in this case. Nor did he submit an
entry of appearance form in this case until, as discussed below, the Court ordered
                                                                       (continued...)
                                         - 15 -

[*15] respondent filed the answer, respondent’s counsel referred the case to the

Appeals Office for further settlement discussions. Mr. Shamrock and Ms. Bigg

understood that Mr. Niehus intended to focus, and they wanted him to focus, his

efforts during those settlement discussions on persuading the IRS to accept their

position with respect to certain examination issues that were of particular and

major importance to them because of the respective amounts involved, namely, the

claimed Elm Court loss for the taxable year 2009 and another claimed loss from a

certain partnership for petitioners’ taxable year 2008 (claimed 2008 partnership

loss).

         On June 19, 2012, the Appeals officer whom the Appeals Office had

assigned to petitioners’ case sent petitioners a letter that referred to a telephone

discussion that he had had with Mr. Shamrock on March 9, 2012, during which

Mr. Shamrock had asked the Appeals officer to consider additional information

that the revenue agent who conducted the IRS examination had not reviewed. In

his letter, the Appeals officer asked petitioners to provide that additional informa-

tion to him by July 9, 2012.


         9
       (...continued)
him to do so on October 28, 2013, when he first appeared before the Court on
behalf of petitioners at the call of this case from the calendar for the Court’s trial
session in Chicago that commenced on that date.
                                         - 16 -

[*16] On July 11, 2012, Mr. Niehus sent a letter and certain documents to the

Appeals officer that related to certain examination issues other than the claimed

Elm Court loss.

      On August 29, 2012, the Appeals officer held a meeting with petitioners and

Mr. Niehus. The revenue agent was also present at that meeting.

      As far as the Appeals officer was concerned, not only was the nature (i.e.,

ordinary vs. capital) of the claimed Elm Court loss still in dispute, but the claimed

tax basis of petitioners in the Elm Court property and thus the amount, if any, of

the claimed Elm Court loss on the disposition of that property also were in dispute.

      By facsimile (fax) dated November 20, 2012 (Mr. Niehus’ November 20,

2012 fax), Mr. Niehus sent the Appeals officer a draft of a letter dated November

20, 2012 (draft November 20, 2012 letter) and certain documents that related to

the claimed Elm Court loss. In Mr. Niehus’ November 20, 2012 fax, he indicated

that the enclosed letter was “a draft copy (preliminary) to the final letter forthcom-

ing the week of Nov. 26, 2012.” Mr. Niehus explained in that fax that the letter

was a draft because “the final #’s are still being finalized, but #’s noted are close.”

In his draft November 20, 2012 letter, Mr. Niehus summarized what he believed

were the pertinent facts relating to the claimed Elm Court loss. He also set forth in

that letter relevant tax authority and analyzed why the application of that authority
                                         - 17 -

[*17] to those facts supported petitioners’ position that they are entitled to that

claimed loss and advocated acceptance of that position. Included in the tax

authority that Mr. Niehus discussed and analyzed in his draft November 20, 2012

letter was section 165(a), which he described in that draft letter as “[t]he starting

point” in analyzing whether petitioners are entitled to the claimed Elm Court loss

and which he quoted as follows: “[T]here shall be allowed as a deduction any loss

sustained during the taxable year and not compensated by insurance or otherwise.”

Mr. Niehus then pointed out in his draft November 20, 2012 letter that “IRC

[section] 165(c) limits the deduction for losses for individuals * * * to those who

[sic] are: (1) incurred in a trade or business [or] (2) losses incurred in any transac-

tion entered into [for] profit, though not connected with a trade or business.”

Thereafter in his draft November 20, 2012 letter, Mr. Niehus discussed and

analyzed the relevant regulations promulgated under section 165(c) and certain

caselaw decided under that section and applied those authorities to what Mr.

Shamrock and Ms. Bigg had led him to believe were the pertinent facts relating to

the claimed Elm Court loss, which he set forth in that letter. Mr. Niehus con-

cluded his draft November 20, 2012 letter as follows: “The taxpayer[s] ha[ve]

demonstrated by their actions and prior professional experience that they did

convert a residence into a business venture which unfortunately did not result in a
                                       - 18 -

[*18] profit for the taxpayers due to the extreme downturn in the real estate market

in 2008 thru today. Thus their 2009 tax return should reflect a section 1231 loss in

the amount of”.10

      By fax dated December 5, 2012, Mr. Niehus sent to the Appeals officer a

letter dated December 6, 2012, and certain documents that related to the claimed

Elm Court loss. In that letter, Mr. Niehus stated: “Please note that we have

enclosed final numbers regarding the sale of 1249 Elm [Court] for Bigg[], Sham-

rock. Please review and advise if you need any additional information. My client

and I are available to meet with you in person or by phone at your earliest conve-

nience to resolve this [claimed Elm Court loss] matter.”

      By fax dated January 9, 2013, Mr. Niehus sent to the Appeals officer a letter

and certain documents that related to certain examination issues other than the

claimed Elm Court loss.

      On January 16, 2013, the Appeals officer held a second meeting with

petitioners and Mr. Niehus.




      10
       Mr. Niehus did not provide the amount of the claimed Elm Court loss in
Mr. Niehus’ draft November 20, 2012 letter. That is because, as noted previously,
Mr. Niehus had pointed out in Mr. Niehus’ November 20, 2012 fax that the
numbers “are still being finalized”.
                                        - 19 -

[*19] On January 25, 2013, Mr. Niehus sent to the Appeals officer a letter (Janu-

ary 25, 2013 letter) and certain documents that related to the claimed Elm Court

loss. In that letter, Mr. Niehus stated in pertinent part: “[W]e would like to

provide further documentation regarding the * * * property at 1249 Elm Court”.

In his January 25, 2013 letter, Mr. Niehus described the documents that he

enclosed with that letter as follows:

      •      Detailed expenses totaling $168,312 which my clients spent on
             the 1249 Elm Court property.

      •      Several comparable real estate listings in reference to the
             property at 1249 Elm Court to establish property value.

      •      Letter from Kim Benjamin, Principal of The Lord Companies,
             LLC, dated January 23, 2013 to establish land/property value.

      •      Detailed Disbursement listing from bank.

      Mr. Niehus closed his January 25, 2013 letter to the Appeals officer as

follows: “Please review and advise if you need additional information. My client

and I are available to meet with you in person or by phone at your earliest conve-

nience to resolve this matter expeditiously.”

      By fax dated February 4, 2013, Mr. Niehus sent the Appeals officer a letter

dated February 6, 2013, and certain documents that related to the claimed Elm

Court loss. In that letter, Mr. Niehus stated in pertinent part: “Attached are copies
                                        - 20 -

[*20] of checks from Libertyville Land Partners regarding the property at 1249

Elm Court in Glenview, Illinois. If possible, we would like to meet with you as

soon as possible to reconcile [sic] this pending real estate issue. Please review and

advise if you need any additional information.”

      At a time not established by the record, Mr. Niehus provided the Appeals

officer with a written timeline of events relating to the claimed Elm Court loss.

      At a time not established by the record around February 2013, the Appeals

officer ultimately offered to settle the claimed Elm Court loss by allowing peti-

tioners a loss of $50,000 with respect to the Elm Court property ($50,000 IRS

Appeals Office settlement offer). That settlement offer amounted to a concession

by respondent of only approximately 11 percent of the $435,751 loss that petition-

ers had claimed with respect to that property in their second amended 2009 return.

Mr. Niehus informed the Appeals officer that he believed that petitioners had a

better than 50-50 chance of prevailing in court on the claimed Elm Court loss.

The Appeals officer was unwilling to increase the $50,000 IRS Appeals Office

settlement offer. Mr. Niehus advised petitioners to reject that offer, and they did.

      By February 2013, the Appeals officer and Mr. Niehus had been able to

reach a basis of settlement at the IRS Appeals Office as to each of the examination

issues except the claimed Elm Court loss and the claimed 2008 partnership loss.
                                        - 21 -

[*21] Subsequently, the IRS Appeals Office returned the case to the Chief Coun-

sel’s office for trial preparation. That was because the Court had set this case for

trial at its trial session in Chicago that was to commence on March 11, 2013

(March 11, 2013 Chicago trial session).

      On February 13, 2013, counsel for respondent to whom the Chief Counsel’s

office had assigned this case calendared for trial at the Court’s March 11, 2013

Chicago trial session (first counsel for respondent) held a so-called Branerton

conference (Branerton conference)11 with petitioners and Mr. Niehus. They

agreed at that conference that the only issues in the case that remained in dispute

were the claimed Elm Court loss and the claimed 2008 partnership loss. The

parties discussed those two remaining issues at the Branerton conference.12 In


      11
           See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974).
      12
         Mr. Niehus also advanced arguments at the Branerton conference with the
first counsel for respondent that petitioners should not be liable for the accuracy-
related penalties under sec. 6662(a) that respondent had determined in the
respective notices to impose for the taxable years 2007, 2008, and 2009. It is not
clear from the record whether Mr. Niehus and petitioners had reached a final
resolution with the IRS Appeals Office of the respective accuracy-related penalty
issues for the taxable years 2007 and 2009 when they met with the first counsel for
respondent on February 13, 2013. Regardless of whether they had, Mr. Niehus
was still advocating for them that they should not be liable for those penalties. As
discussed below, the stipulation of settled issues which petitioners and respondent
signed, which resolved certain issues for only taxable years 2007 and 2009 (not
for taxable year 2008), and which they filed with the Court on February 28, 2013,
                                                                         (continued...)
                                         - 22 -

[*22] those discussions, Mr. Niehus continued to advocate on petitioners’ behalf,

inter alia, that petitioners were entitled to ordinary loss treatment for the entire

amount of the claimed Elm Court loss. He continued to advise petitioners that he

believed that they had a better than 50-50 chance of prevailing in court on the

claimed Elm Court loss.

      Not only was the nature (i.e., ordinary vs. capital) of the claimed Elm Court

loss still in dispute at the Branerton conference with the first counsel for respon-

dent, but the claimed tax basis of petitioners in the Elm Court property and thus

the amount, if any, of the claimed loss on the disposition of that property also were

in dispute.

      On February 22, 2013, the first counsel for respondent sent a letter to

petitioners (February 22, 2013 letter), who were pro sese in this case, and sent a

copy of that letter to Mr. Niehus. In that letter, the first counsel for respondent

summarized the then status of the case in pertinent part as follows:

      You agreed that the only remaining issues in your case were 1) the
      Libertyville partnership losses claimed on your 2008 income tax

      12
        (...continued)
reflected their agreement that Mr. Shamrock is liable for the taxable year 2007 and
that Ms. Bigg and he are liable for the taxable year 2009 for the accuracy-related
penalty. None of the examination issues for petitioners’ taxable year 2008 (i.e.,
the claimed 2008 partnership loss, certain claimed itemized deductions, and the
accuracy-related penalty issue) was settled in that stipulation of settled issues.
                                        - 23 -

[*23] return[] [claimed 2008 partnership loss] and 2) whether, and/or to
      what extent you are entitled to claim a loss from the sale of the prop-
      erty located at 1249 Elm Court.[13] We also discussed that we would
      need additional documentation in order to resolve the remaining
      issues. Due to your case being on the [Court’s] March 11, 2013 Trial
      Calendar, we agreed that it would be best to file a motion for continu-
      ance on your case in order to allow you additional time to provide the
      additional documentation.

      Accordingly, I have prepared a stipulation of settled issues and joint
      motion for continuance of trial. The stipulation of settled issues
      reflects the issues that were agreed to at Appeals. Please sign in blue
      ink the original and three copies of the stipulation of settled issues
      and the joint motion for continuance of trial. * * *

      On February 28, 2013, the parties filed with the Court a stipulation of

settled issues (February 28, 2013 stipulation of settled issues) that petitioners, not

Mr. Niehus,14 and the first counsel for respondent on behalf of respondent had

signed. That stipulation of settled issues resolved each of the examination issues

for taxable years 2007 and 2009 except the claimed Elm Court loss and none of

the examination issues for taxable year 2008, including the claimed 2008 partner-

ship loss.

      On March 11, 2013, the Court called this case from the calendar for its

March 11, 2013 Chicago trial session. Pursuant to the parties’ agreement set forth



      13
           See supra note 12.
      14
           See supra note 9.
                                           - 24 -

[*24] in the first counsel for respondent’s February 22, 2013 letter, the parties

filed with the Court at that calendar call a joint motion for continuance of trial.

The Court granted that motion.

        At the end of May 2013, the Court set this case for trial at its trial session in

Chicago that was to commence on October 28, 2013 (October 28, 2013 Chicago

trial session). Sometime during the summer of 2013, Mr. Niehus and petitioners

met (summer 2013 meeting) with the counsel for respondent to whom the Chief

Counsel’s office had assigned this case calendared for that trial session (second

counsel for respondent).15 At that meeting, Mr. Niehus discussed the two major

issues that remained unresolved, namely, petitioners’ claimed Elm Court loss and

their claimed 2008 partnership loss.16 Mr. Niehus advocated to that counsel that

petitioners are entitled to the entire amount of each of those claimed losses. He

continued to advise petitioners that he believed that they had a better than 50-50

chance of prevailing in court on the claimed Elm Court loss.




        15
             The second counsel for respondent was not the first counsel for respon-
dent.
        16
       The accuracy-related penalty for the taxable year 2008 that respondent had
determined in the notice for that year also remained at issue as well as an adjust-
ment of under $1,000 relating to claimed itemized deductions for that year.
                                        - 25 -

[*25] With respect to the claimed Elm Court loss, in addition to advocating to the

second counsel for respondent that petitioners’ basis in the Elm Court property

was significantly less than the amount that they had received when they disposed

of that property and that therefore petitioners had incurred a loss for tax purposes

in the amount that they claimed in their second amended 2009 return, Mr. Niehus

also advocated to that counsel during the summer 2013 meeting, as he had

advocated when he was dealing with the IRS Appeals officer and the first counsel

for respondent, that the claimed Elm Court loss was an ordinary, not a capital,

loss. Mr. Niehus knew, and advised petitioners, that, given their tax situation for

the taxable years 2007, 2008, and 2009 (and their anticipated tax situation thereaf-

ter),17 a capital loss for taxable year 2009 with respect to the Elm Court property

would have been of virtually no tax benefit to them. Mr. Niehus also advised

petitioners that, even if the IRS were willing to concede the entire amount (i.e.,

$435,751) of the claimed Elm Court loss as a capital, not an ordinary, loss, any

such concession, given petitioners’ tax situation, would have been of virtually no

tax benefit to them for the taxable year 2009 or for any other taxable year. That


      17
        Petitioners did not have capital gain for any of the years at issue (and did
not anticipate having any substantial capital gain for subsequent taxable years)
that would have been reduced by the claimed Elm Court loss if that loss had been
treated as a capital loss.
                                         - 26 -

[*26] was because, Mr. Niehus told petitioners, under the relevant tax law the

maximum amount of capital loss (in excess of capital gain) that is allowable each

year to an individual is $3,000. He also told them that, in contrast to that capital

loss tax treatment, under the relevant tax law there is no similar limitation on the

use of an ordinary loss to reduce ordinary income. Mr. Niehus further informed

petitioners that consequently a concession by the IRS of an ordinary loss with

respect to the Elm Court property in an amount that was significantly smaller than

a capital loss for the entire amount of the loss that petitioners claimed in their

second amended return with respect to that property would be significantly more

beneficial for tax purposes to petitioners. In this regard, petitioners made conces-

sions, as reflected in the stipulations of settled issues, of many IRS determinations

that would have resulted in a substantial increase in their ordinary income for each

of the taxable years 2007, 2008, and 2009. Mr. Niehus advised petitioners that if

the IRS were to agree to allow an ordinary loss for taxable year 2009 with respect

to the Elm Court property, even in an amount that was significantly less that the

entire amount of the claimed Elm Court loss, any such ordinary loss, in contrast to

treating the claimed Elm Court loss as a capital loss, would have benefited

petitioners dollar for dollar in reducing the additional amount of ordinary income

for each of those years that they would have as a result of those concessions.
                                        - 27 -

[*27] At the conclusion of the summer 2013 meeting, the second counsel for

respondent was very skeptical of petitioners’ position that their claimed Elm Court

loss was an ordinary loss, not a capital loss. In fact, that counsel offered to resolve

the claimed Elm Court loss issue by allowing petitioners a capital loss with respect

to the Elm Court property for the taxable year 2009.18 Mr. Niehus rejected that

offer on behalf of petitioners, and he proceeded to advocate again to the second

counsel for respondent why the full amount of the claimed Elm Court loss should

be allowed as an ordinary loss for petitioners’ taxable year 2009. He also contin-

ued to advise petitioners that he believed that they had a better than 50-50 chance

of prevailing in court on the claimed Elm Court loss.

      The second counsel for respondent was skeptical not only of the ordinary

nature of the claimed Elm Court loss but also of the basis that petitioners were

claiming with respect to the Elm Court property and that they used in determining

the amount of the loss that they had claimed with respect to that property in the

second amended 2009 return. In an effort to address the concerns of the second

counsel for respondent regarding the basis of petitioners in the Elm Court prop-

erty, on August 22, 2013, Mr. Niehus sent to that counsel a letter and certain

      18
       The record does not establish the amount of capital loss that the second
counsel for respondent offered to allow petitioners in an effort to resolve the
claimed Elm Court loss.
                                       - 28 -

[*28] documents that related to the claimed Elm Court loss. In that letter, Mr.

Niehus stated in pertinent part:

      This letter is being sent to you to follow-up on the pending issues
      regarding the Bigg/Shamrock case for [sic] which you are handling.
      Attached are expense ledgers pertaining to the property at 1249 Elm
      Court in Glenview, Illinois. These ledgers and receipts [that] sub-
      stantiate $140K of the $168K of expenses regarding the above prop-
      erty. The remaining $28K of expenses was expensed in other months
      and this documentation is forthcoming and will be mailed to you
      under separate cover. However, this documentation solidifies the
      majority of the $168K in expenses.

      We will also be forwarding you more documentation on these ex-
      penses that is forthcoming from the bank the [sic] further substanti-
      ates these expenditures.

      If possible, we would like to meet with you as soon as possible to
      reconcile this pending real estate issue.

      In a continuing effort to address the concerns of the second counsel for

respondent regarding the basis of petitioners in the Elm Court property, by fax

dated September 23, 2013, Mr. Niehus sent to that counsel a letter dated Septem-

ber 20, 2013 (September 20, 2013 letter) and certain documents that related to the

claimed Elm Court loss. In that letter, Mr. Niehus stated in pertinent part:

      This letter is being sent to you to follow-up on the pending issues
      regarding the Bigg/Shamrock case for [sic] which you are handling.
      As my client has been attempting to gather all needed information
      you requested, there has been material changes in the proper calcula-
      tion of the 1249 Elm [Court] tax basis.
                                        - 29 -

[*29] Thus the correct basis is as follows:

      1.)    Land does not change $468,500.

      2.)    The original loan authorized was $781,221, per closing state-
             ment, Item “A”. The Taxpayer wrote 3 checks $45,000,
             $40,000 and $30,000 totaling $115,000. Per attachment “C”
             final. The total amount invested is $897,221. Per Bank state-
             ment total is $895,779 with the difference being accrued inter-
             est.

      3.)    The taxpayer’s out of pocket was $168,000 but must be re-
             duced by the $115,000 of checks written to Bank--thus total
             * * * out of pocket paid by taxpayer is $53,000.

      4.)    Lastly, per the closing statement, “B” $200,000 was paid as a
             final draw to pay various subcontractors. These payments
             originated from the seller’s funds at closing, and were the last
             payments to complete the project.

             In summary, total Basis is calculated as follows:

             Land                         $468,500

             Bank                         $895,000

             Taxpayer Funds               $ 53,000

             Closing                      $200,000

             Total                      $1,616,500

      In his September 20, 2013 letter, Mr. Niehus further stated in pertinent part:

“I do know this may be confusing, therefore, the taxpayer and I can meet ASAP in
                                        - 30 -

[*30] order to more easily track the flow of cash investments and basis. Also,

enclosed is a history of Mr. Shamrock’s real estate development projects over the

last 20 plus years.”

      As is apparent from Mr. Niehus’ September 20, 2013 letter, as late as the

date of that letter, which was more than two years after petitioners had retained

him, they were sending documents to him that they had not previously given him

(new documents) or the IRS, some of which contradicted certain documents that

they had previously given him (old documents) and the IRS. They wanted and

expected Mr. Niehus to present those new documents that contradicted certain old

documents (new and contradictory documents) to the second counsel for respon-

dent and to continue to advance and advocate their position that they were entitled

to ordinary loss treatment for the entire amount of the claimed Elm Court loss.

Mr. Niehus did what petitioners wanted and expected and continued to advocate

acceptance by the IRS of petitioners’ position with respect to that loss. Petitioners

and Mr. Niehus knew, or should have known, that presenting those new and

contradictory documents to the second counsel for respondent would likely cause

that counsel and other representatives of the IRS involved in this case to continue

to be suspicious of, and to have trust and credibility issues with, petitioners and

their claims, as certain IRS representatives previously had because of events that
                                       - 31 -

[*31] had occurred during the IRS examination and before they had retained Mr.

Niehus to represent them with respect to the IRS examination.

      On October 1, 2013, a week after Mr. Niehus had faxed to the second

counsel for respondent on September 23, 2013, his September 20, 2013 letter and

certain documents that related to the claimed Elm Court loss, the Federal Govern-

ment closed because of certain funding issues that had arisen in Congress. The

Federal Government reopened on October 17, 2013.

      After the Federal Government reopened, Mr. Niehus on behalf of petition-

ers and the second counsel for respondent resumed their settlement discussions

with respect to, inter alia, the claimed Elm Court loss. Shortly before the October

28, 2013 Chicago trial session commenced, the second counsel for respondent

informed Mr. Niehus and petitioners that he would be willing to settle that major

issue as well as the second unresolved major issue, i.e., the claimed 2008 partner-

ship loss, as follows: Petitioners (1) would be entitled for taxable year 2009 to an

ordinary loss of $217,728 with respect to the claimed Elm Court loss that they had

reported as an ordinary loss deduction in petitioners’ second amended 2009 return

and would concede the balance (i.e., $218,023) of that claimed loss19 and (2)

      19
       In offering to allow petitioners for the taxable year 2009 an ordinary loss
of $217,728 with respect to the claimed Elm Court loss, the second counsel for
                                                                       (continued...)
                                       - 32 -

[*32] would concede in full the IRS determination in the notice to disallow their

claimed 2008 partnership loss.20

      Mr. Niehus recommended to petitioners that they accept the respective bases

on which the second counsel for respondent had offered to resolve the claimed

Elm Court loss and (for reasons set forth in note 20) the claimed 2008 partnership

loss. Mr. Niehus gave a detailed explanation to petitioners as to why he recom-



      19
        (...continued)
respondent was willing to allow them approximately one-half of the total claimed
Elm Court loss of $435,751 that they had reported as an ordinary loss in
petitioners’ second amended 2009 return.
      20
         Petitioners were willing to concede in full the claimed 2008 partnership
loss because they were unable to provide documentation to the IRS establishing
that Mr. Shamrock had incurred that loss as they and Mr. Niehus on their behalf
had previously contended before the IRS. That was because the documents that
petitioners ultimately were able to find at the request of the IRS showed that it was
not Mr. Shamrock who had made capital contributions to the partnership with
respect to which petitioners were claiming the claimed 2008 partnership loss.
Instead, it was a company that Mr. Shamrock owned which had made capital
contributions to that partnership. When Mr. Niehus was advocating at several
meetings with certain IRS representatives at which petitioners were present
petitioners’ position that they were entitled to the claimed 2008 partnership loss,
he was not aware that Mr. Shamrock had not in or before taxable year 2008 made
capital contributions to the partnership with respect to which petitioners were
claiming that loss. Mr. Niehus became aware of that fact when Mr. Shamrock told
him that the documents that Mr. Shamrock had found showed that a company that
Mr. Shamrock owned had made capital contributions to that partnership. Before
and at the time petitioners decided to concede in full the claimed 2008 partnership
loss, Mr. Shamrock had no problem with the way in which Mr. Niehus had
advocated petitioners’ position to the IRS that they were entitled to that loss.
                                        - 33 -

[*33] mended that they accept the basis of settling the claimed Elm Court loss that

the second counsel for respondent had proposed. Consequently, Mr. Shamrock

and Ms. Bigg understood very well the consequences of their accepting that

proposed basis of settlement as well as the consequences of rejecting it.

      Mr. Niehus based his recommendation with respect to the offer of the

second counsel for respondent regarding the claimed Elm Court loss on a number

of factors that he discussed with petitioners. He first advised petitioners that he

believed that the second counsel for respondent would be unwilling to offer to

concede an amount of the claimed Elm Court loss of $435,751 that was larger than

the $217,728 that he had indicated he was willing to concede.

      Mr. Niehus next explained to petitioners that, because the second counsel

for respondent was adamant about not allowing petitioners a larger amount of the

claimed Elm Court loss, the only two avenues available to them would be to

accept the settlement that that counsel had proposed or to litigate that loss. Mr.

Niehus further explained to petitioners that if they decided to litigate the claimed

Elm Court loss, they would be litigating the entire amount of that loss, not just the

portion of that loss that the second counsel for respondent was unwilling to allow.

      Mr. Niehus also described for petitioners what he believed to be the so-

called hazards of litigating the claimed Elm Court loss, which he told them they
                                         - 34 -

[*34] should take into account in deciding whether to litigate the claimed Elm

Court loss. Mr. Niehus informed petitioners that the principal hazard of litigating

that issue was that the Court might reject their position that they are entitled to the

entire amount of the claimed Elm Court loss as an ordinary loss for the taxable

year 2009--a result that would provide them no tax benefit from that claimed loss

and that obviously would be worse than the result if they had accepted the settle-

ment offer of the second counsel for respondent. Another litigating hazard about

which Mr. Niehus advised petitioners was that the Court might hold that although

petitioners had incurred a loss from the disposition of the Elm Court property, that

loss was a capital loss, and not an ordinary loss--a result that would provide them

virtually no tax benefit21 from that claimed loss and that obviously would be worse

than the result if they had accepted the settlement offer of the second counsel for

respondent. Another hazard of litigation was that the Court might find that

petitioners failed to establish their tax basis in the Elm Court property and thus

had failed to establish that there was any loss on the disposition of that property.

      Mr. Niehus also informed petitioners that another factor that they should

consider in deciding whether to accept the settlement with respect to the claimed

      21
        As discussed above, Mr. Niehus had previously advised petitioners that
treating the claimed Elm Court loss as a capital loss would provide them with only
a $3,000 annual tax benefit over a period of many years. See supra note 17.
                                         - 35 -

[*35] Elm Court loss that the second counsel for respondent had proposed or to

reject it and to litigate that issue was the cost of litigation. Mr. Niehus told

petitioners that it would be expensive to litigate the claimed Elm Court loss.

       After Mr. Niehus explained to petitioners why he was recommending that

they accept the settlement offer of the second counsel for respondent with respect

to the claimed Elm Court loss, Ms. Bigg told him and Mr. Shamrock that she

wanted to accept that offer and thereby put the case pending in the Court behind

her.

       On October 28, 2013, this case was called from the trial calendar for the

Court’s October 28, 2013 Chicago trial session (calendar call). The second

counsel for respondent appeared on behalf of respondent. Although Mr. Niehus

had not entered an appearance in the case and petitioners were acting pro sese, Mr.

Niehus appeared at the calendar call on their behalf. The Court asked Mr. Niehus

whether he had entered an appearance in the case on behalf of petitioners, to

which he responded that he had not. The Court then asked Mr. Niehus whether he

had a completed an entry of appearance form to file with the Court, to which he

responded that he had not. The Court asked him to explain why he did not have

such a completed form to file with the Court. Mr. Niehus replied that he did not

expect to be appearing in Court on behalf of petitioners because the second
                                        - 36 -

[*36] counsel for respondent and he expected as late as a few days before the

commencement of the Court’s October 28, 2013 Chicago trial session that the case

would be settled. Under the circumstances, the Court recognized Mr. Niehus pro

hac vice.

      Thereafter at the calendar call, the second counsel for respondent informed

the Court that both he and Mr. Niehus believed that they had agreed on a basis on

which to settle the issues that remained in the case after the parties had filed the

February 28, 2013 stipulation of settled issues. The second counsel for respondent

explained that a supplemental stipulation of facts had been prepared but that the

parties had not yet signed it. He added that he believed that there was “no dis-

agreement as to the contents of the [supplemental] stip”. Instead, according to the

second counsel for respondent, “[p]etitioners had some concerns about signing it

[supplemental stipulation of settled issues] prior to receiving a computation” that

showed the tax that they would owe for each of the years at issue pursuant to the

filed February 28, 2013 stipulation of settled issues and the unsigned and unfiled

supplemental stipulation of settled issues.

      The Court asked Mr. Niehus at the calendar call to elaborate on what the

second counsel for respondent had informed the Court regarding the status of the

case. The following exchange took place between Mr. Niehus and the Court:
                                    - 37 -

[*37] Mr. Niehus:     [T]here is [sic] about 50 issues that were originally
                      under audit, 48 were agreed upon. The last two
                      are large and material in nature, and before the
                      Petitioners wanted to know, they wanted to know
                      what the net liability would be, because the last
                      issue took about a year to settle or come to an
                      agreement to. And they’d like to know what the
                      bottom line is before they would settle. We under-
                      stand in 30 to 60 days that final number will be
                      then reviewed, sent to us, we’d like to review it
                      and then sign off and the matter will be settled.
                      [Emphasis added.]

     The Court:       Then you don’t have a settlement and we’ll go to
                      trial.

     Mr. Niehus:      I’d rather not go because all we’re doing is look-
                      ing to review a computation.

     *            *      *           *          *           *            *

     The Court:       * * * if you sign the supplement[al] * * *
                      stipulat[ion of settled] issues and your clients
                      don’t like the bottom line number.

     Mr. Niehus:      Oh, no, they just want to know what it is.

     The Court:       Okay, they’ll know what it is before you submit
                      the decision documents reflect[ing] * * * the sup-
                      plemental stipulation of settled issues.

     Mr. Niehus:      Okay, then that’s what we’ll need.

     The Court:       * * * I thought you were saying you weren’t going
                      to sign the supplemental stipulation of settled
                      issues until you knew and however long it takes
                                    - 38 -

[*38]                  you to do the computations [of] what the [tax]
                       number is.

        Mr. Niehus:    Well, we prefer to do that. If that is not possible
                       then we would sign it today.

        The Court:     That’s not possible.

        Mr. Niehus:    Then we’ll sign it today.

        The Court:     Okay, do you have it with you?

        Mr. Shelton:   We do.

        The Court:     Let’s sign it right now, but I want your entry of
                       appearance first.

        Mr. Shelton:   Judge, the [supplemental] stipulation [of settled
                       issues is] * * * actually made out for Petitioner’s
                       [sic] pro se signatures. If we could have, or if the
                       Court could recall us at the end of the call we
                       could probably get these signed.

        Mr. Niehus:    They’re right here to sign it now.

        The Court:     Oh, so you’re--

        Mr. Niehus:    My client, the client, the taxpayers are here right
                       now.

        The Court:     But you’re going to enter an appearance, too?

        Mr. Niehus:    Yes.

        The Court:     Your signature would have to be on it, too. Okay,
                       why don’t I recall this case at the end of the calen-
                       dar call. Will that give you enough time?
                                         - 39 -

[*39] Mr. Shelton:          It will give us enough time to get Petitioners’ sig-
                            nature, if not to reprint new one for Petitioners’
                            counsel’s signature, Your Honor.

       The Court:           He can just add his signature at the bottom of the
                            page, put his name, put his, but I want it, I don’t
                            want it without your entry of appearance.

       Mr. Niehus:          Yes.

       The Court:           Okay? And if you’re not ready at the end of the
                            calendar call then we’ll call it later today.

       On October 28, 2013, this case was recalled from the trial calendar for the

Court’s October 28, 2013 Chicago trial session (recall). The second counsel for

respondent appeared at the recall on behalf of respondent. Mr. Niehus appeared at

the recall on behalf of petitioners. At that recall, the second counsel for respon-

dent informed the Court that the parties wanted to file with the Court a supplemen-

tal stipulation of settled issues.

       The Court asked Mr. Niehus whether he had an entry of appearance form to

file with the Court, to which he replied that he did. The Court asked Mr. Niehus to

provide that form to the trial clerk and instructed the trial clerk to “make sure it’s

in proper order.” The Court asked the trial clerk whether the entry of appearance

form that Mr. Niehus had provided to her was in proper order, to which she replied

that it was. The trial clerk was wrong in her response, but the Court did not know
                                        - 40 -

[*40] that she was wrong at that time. The entry of appearance form that Mr.

Niehus had provided to the trial clerk did not show a “Tax Court Bar Number” in

the appropriate place in that entry of appearance form that requires such a number

to be shown. That was because Mr. Niehus had not applied to be, and conse-

quently was not, admitted to practice before the Court before the October 28, 2013

Chicago trial session commenced. As a result, the Court had not assigned a Tax

Court bar number to him.22

      After the trial clerk informed the Court at the recall, albeit erroneously, that

the entry of appearance form that Mr. Niehus had given to her was in proper order,

the Court proceeded to discuss with respective counsel for the parties the status of

the case. The following exchange between the Court and counsel took place:

      The Court:          [Y]ou have a supplemental stipulation of settled
                          issues that’s been signed?

      Mr. Niehus:         Yes, Your Honor.

      The Court:          Which, together with the stipulation of settled
                          issues you said was filed some months ago, settles
                          all issues in the case, is that right?

      22
         Because Mr. Niehus had not applied to be, and consequently was not,
admitted to practice before the Court before the October 28, 2013 Chicago trial
session commenced, the entry of appearance form that Mr. Niehus had provided to
the trial clerk was not filed with the Court and consequently is not part of the
official record in this case. That entry of appearance form is, however, preserved
with that record.
                                           - 41 -

[*41] Mr. Shelton:        It does, Your Honor.

      The Court:          Is that right?

      Mr. Niehus:         I agree.

      The Court:          Okay, you may approach with the supplemental
                          stipulation of settled issues that will be filed. And
                          how much time do you need for the stipulated
                          decision document?

      Mr. Shelton:        We’d ask for 30 days, Judge.

      *            *         *              *       *           *           *

      The Clerk:          30 days is November 27th.

      At the Court’s direction at the calendar call of this case on October 28,

2013, the supplemental stipulation of settled issues (October 28, 2013 supplemen-

tal stipulation of settled issues), which the second counsel for respondent had

signed on behalf of respondent and that the parties filed with the Court at the

recall of this case on that date, was signed by each petitioner and by Mr. Niehus on

behalf of petitioners. Paragraph 22 of that supplemental stipulation of settled

issues, which pertained to the claimed Elm Court loss for petitioners’ taxable year

2009,23 set forth the agreement of respondent and petitioners that “[p]etitioners are

      23
         Paragraphs 19 through 21 of the October 28, 2013 supplemental
stipulation of facts also set forth the agreement of respondent and petitioners that
petitioners conceded the three determinations that respondent had made in the
                                                                        (continued...)
                                        - 42 -

[*42] entitled to claim an ordinary loss in the amount of $217,728 that was not

claimed on their 2009 individual income tax return.”24 The following agreement

of respondent and petitioners appeared immediately below paragraph 22 of the

October 28, 2013 supplemental stipulation of settled issues and immediately above

the respective signatures of Mr. Shamrock and Ms. Bigg on behalf of themselves

and the signature of the second counsel for respondent on behalf of respondent:25

“The parties hereby agree to this supplemental stipulation of settlement.”

      At the recall of this case at the Court’s October 28, 2013 Chicago trial

session, the Court ordered the parties to submit to the Court on or before Novem-

ber 27, 2013, a date that the second counsel for respondent had requested, stipu-

lated decision documents reflecting the stipulations of settled issues.

      After the Court’s October 28, 2013 Chicago trial session, the second

counsel for respondent had computations (tax computations) undertaken of any



      23
        (...continued)
2008 notice with respect to the taxable year 2008, including the agreement that
petitioners conceded the claimed 2008 partnership loss. See supra note 20.
      24
           See supra note 19.
      25
         As stated above, at the direction of the Court at the calendar call on
October 28, 2013, Mr. Niehus also signed the October 28, 2013 supplemental
stipulation of settled issues. His signature appeared below the respective
signatures of petitioners and the second counsel for respondent.
                                        - 43 -

[*43] deficiency, any addition to tax, and any accuracy-related penalty for which

Mr. Shamrock for the taxable year 2007 was and Mr. Shamrock and Ms. Bigg for

each of the taxable years 2008 and 2009 were liable pursuant to the February 28,

2013 stipulation of settled issues and the October 28, 2013 supplemental stipula-

tion of settled issues that they had signed and filed with the Court. After those tax

computations had been completed, the second counsel for respondent sent a letter

dated November 20, 2013 (November 20, 2013 letter) to petitioners and enclosed

those tax computations. He also sent copies of that letter and those tax computa-

tions to Mr. Niehus. In the November 20, 2013 letter, the second counsel for

respondent stated in pertinent part:

      The IRS has computed the amounts of taxes and penalties that result
      from our settlement in your Tax Court case. To conclude the case, we
      must file a decision with the court. Please review the enclosed deci-
      sion and the accompanying computation and if you agree that the
      computation properly reflects our settlement, please sign the original
      and one copy of the decision and return them to my office. * * *

      After Mr. Niehus received from the second counsel for respondent and

reviewed the copies of the November 20, 2013 letter and the tax computations,

Mr. Niehus contacted that counsel and pointed out to him a computational error in

respondent’s favor with respect to certain itemized deductions that appeared in

those tax computations. The second counsel for respondent agreed with Mr.
                                        - 44 -

[*44] Niehus that the tax computations did include the error that Mr. Niehus had

pointed out. Thereafter, the second counsel for respondent requested that the tax

computations be revised to correct that error. He also obtained from the Court an

extension of time until December 26, 2013, within which the parties were to

submit stipulated decision documents reflecting the parties’ stipulations of settled

issues.

        After the tax computations had been revised to correct the error that Mr.

Niehus had pointed out (revised tax computations), the second counsel for respon-

dent sent to Mr. Niehus by fax dated November 25, 2013, a copy of the revised tax

computations with a note on the fax transmission sheet that stated in pertinent

part: “I reran the numbers * * * to include the adjustments to Itemized Deductions

in 2009. Here is the revised computation. I’ve reviewed the executed stipulations

of settled issues and the notices of deficiency and I believe that everything we

agreed to in writing comports with this revised computation.” The revised tax

computations also were sent to Mr. Shamrock and Ms. Bigg on November 25,

2013.

        After Mr. Shamrock reviewed the tax computations and thereafter the

revised tax computations that the second counsel for respondent had provided to

petitioners and Mr. Niehus, he was not pleased with what the revised tax computa-
                                         - 45 -

[*45] tions showed he and Ms. Bigg were required to pay to the IRS for the years

at issue. If Mr. Shamrock had been pleased with what the revised tax computa-

tions showed he and Ms. Bigg were required to pay to the IRS for the years at

issue, he would not have objected to, but would have signed, the decision docu-

ments that respondent had prepared for this case and that reflected those revised

tax computations, which in turn reflected the February 28, 2013 stipulation of

settled issues and the October 28, 2013 supplemental stipulation of settled issues.

That is to say, if Mr. Shamrock had been pleased with what the revised tax

computations showed he and Ms. Bigg were required to pay to the IRS for the

years at issue, Mr. Shamrock would not have contested the settlement with respect

to their claimed Elm Court loss to which he and Ms. Bigg had agreed, as reflected

in paragraph 22 of the October 28, 2013 supplemental stipulation of settled issues,

and he would not have refused to sign the decision documents that reflected the

agreements of the parties set forth in that stipulation of settled issues as well as in

the February 28, 2013 stipulation of settled issues.

      Because of his displeasure with what he and Ms. Bigg were required to pay

to the IRS for the years at issue, as shown in the revised tax computations, Mr.

Shamrock decided to consult, on the same day on which he was provided those

revised computations, Mr. Drobny, who had represented him on certain tax
                                        - 46 -

[*46] matters. If Mr. Shamrock had been pleased with what the revised tax

computations showed he and Ms. Bigg were required to pay to the IRS for the

years at issue, he would not have consulted Mr. Drobny. When Mr. Shamrock

spoke with Mr. Drobny about taxable years 2007, 2008, and 2009, Mr. Drobny

checked on Mr. Niehus’ professional background and learned that after 2009 Mr.

Niehus no longer was authorized to practice law in Illinois. Mr. Drobny informed

Mr. Shamrock about what he had learned regarding Mr. Niehus’ status with the

Illinois State bar, about which Mr. Shamrock had been unaware.

      When Mr. Shamrock spoke with Mr. Drobny about his displeasure with

what the revised tax computations showed he and Ms. Bigg were required to pay

to the IRS for the years at issue, Mr. Drobny also informed Mr. Shamrock about,

and gave him a copy of, the Opinion in Gates v. Commissioner, 135 T.C. 1 (2010),

(sometimes, Gates Opinion). Mr. Drobny told Mr. Shamrock that he believed that

Mr. Niehus had erred in recommending to petitioners that they accept respondent’s

proposal to settle the claimed Elm Court loss by treating approximately 50 percent

of that claimed loss as a deductible ordinary loss, instead of treating 100 percent of

that claimed loss as a deductible ordinary loss. Mr. Drobny held that belief

because, in his opinion, the Gates Opinion required resolution of the Elm Court

loss entirely in petitioners’ favor by treating it as a deductible ordinary loss. Mr.
                                       - 47 -

[*47] Drobny did not understand why Mr. Niehus had not brought the Gates

Opinion to the attention of any representative of respondent with whom Mr.

Niehus and petitioners had dealt during the period they had been negotiating with

them in an attempt to resolve, inter alia, the claimed Elm Court loss.

      On November 25, 2013, the same day on which Mr. Shamrock was provided

the revised tax computations and on which Mr. Shamrock consulted Mr. Drobny

about his displeasure with what he and Ms. Bigg were required to pay to the IRS

for the years at issue, as shown in those revised tax computations, Mr. Drobny

contacted the second counsel for respondent and gave him Form 2848. In that

form, Mr. Shamrock, but not Ms. Bigg, authorized Mr. Drobny to represent him

before the IRS with respect to tax matters for Mr. Shamrock’s taxable years 2004

through 2012.26 In Form 2848, part II, that Mr. Drobny signed, Mr. Drobny

indicated that he was a C.P.A. who was authorized to practice as such in the State




      26
         As expressly stated in preprinted Form 2828 authorizing Mr. Drobny to
represent Mr. Shamrock, the filing of that form with the IRS “automatically
revoke[d] all earlier power(s) of attorney on file with the Internal Revenue Service
for the same tax matters and years or periods covered by” that form. Conse-
quently, the filing of that form automatically revoked as to Mr. Shamrock Form
2848 that Mr. Shamrock (and Ms. Bigg) had filed with the IRS authorizing Mr.
Niehus to represent Mr. Shamrock (and Ms. Bigg) with respect to tax matters for
the taxable years 2007, 2008, and 2009.
                                        - 48 -

[*48] of Illinois. On December 2, 2013, Mr. Drobny filed with the Court an entry

of appearance form with respect to Mr. Shamrock.

      Ms. Bigg was unwilling to retain Mr. Drobny when Mr. Shamrock first

retained him with respect to this case, even though Mr. Drobny and/or Mr.

Shamrock had informed her that Mr. Niehus was no longer authorized to practice

law in Illinois. That was because Ms. Bigg wanted to put this case behind her.

Shortly thereafter, Ms. Bigg changed her mind and decided to retain Mr. Drobny

to represent her with respect to this case. The reason that Ms. Bigg changed her

mind was that Mr. Drobny, who represented to her that he was a tax attorney when

he was not, had also represented to her, as he had represented to Mr. Shamrock,

that if Mr. Niehus had brought the Gates Opinion to the attention of the represen-

tatives of respondent with whom he and petitioners had been dealing, respondent

would have conceded as a deductible ordinary loss the entire claimed Elm Court

loss, not just 50 percent of that claimed loss as reflected in paragraph 22 of the

October 28, 2013 supplemental stipulation of settled issues. Ms. Bigg relied on

Mr. Drobny’s representations to her and concluded that he was more knowledge-

able than Mr. Niehus in that Mr. Drobny was aware of the Gates Opinion about

which Mr. Niehus was apparently unaware and which Mr. Drobny represented to

her controlled resolution of that claimed loss entirely in petitioners’ favor as a
                                         - 49 -

[*49] deductible ordinary loss. Consequently, Ms. Bigg retained Mr. Drobny to

represent her with respect to this case. Mr. Drobny did not disclose to Ms. Bigg

when she retained him or at any time thereafter that in Drobny v. Commissioner,

86 T.C. 1326 (1986), the Court had found him liable for so-called civil fraud under

then section 6653(b).27 On December 17, 2013, Mr. Drobny filed with the Court

an entry of appearance form with respect to Ms. Bigg.

      In reliance upon the advice and the representations of Mr. Drobny regarding

the Gates Opinion, petitioners refused to sign the decision documents that the

second counsel for respondent had prepared reflecting the February 28, 2013

stipulation of settled issues and the October 28, 2013 stipulation of settled issues.

Consequently, on December 17, 2013, respondent filed a motion for entry of

decision in which respondent asked the Court to enter a decision in the case that

reflected the agreement of the parties as set forth in those stipulations of settled

issues.

      On December 26, 2013, Mr. Drobny filed on behalf of petitioners a response

to respondent’s motion for entry of decision. In that response, Mr. Drobny

opposed that motion on behalf of petitioners on essentially two grounds. The first

      27
        Sec. 6653(b) is the predecessor of sec. 6663 that Congress enacted to be
effective for tax returns, the due date for which (determined without regard to
extensions) was after December 31, 1989.
                                       - 50 -

[*50] ground was that Mr. Niehus was no longer an active member of the Illinois

State bar when petitioners had authorized him, by signing part I of Form 2848 on

June 1, 2011, to represent them with respect to tax matters for the taxable years

2007, 2008, and 2009. Mr. Drobny further indicated in petitioners’ response to

respondent’s motion for entry of decision that Mr. Shamrock and Ms. Bigg were

not aware that after 2009 Mr. Niehus no longer was an active member of the

Illinois State bar when petitioners had authorized him, by signing part I of Form

2848 on June 1, 2011, to represent them with respect to tax matters for the taxable

years 2007, 2008, and 2009. Mr. Drobny claimed on behalf of petitioners in their

response to respondent’s motion for entry of decision that consequently Mr.

Niehus “should not have been allowed to represent petitioners during their audit of

2007-2009.”

      The second ground that Mr. Drobny advanced on behalf of petitioners in

their response to respondent’s motion for entry of decision was that “Mr. Niehus

improperly handled the issue [claimed Elm Court loss]”. That was because,

according to Mr. Drobny,

      in Gates v. Comm’r, 135 T.C. 1 (July 1, 2010), this court ruled that
      the teardown of a former principle [sic] residence and rebuilding the
      house without occupying it would disqualify the home from the
      exclusion of gain under Section 121 as a principle [sic] residence.
      The former principle [sic] residence did not exist according to this
                                         - 51 -

[*51] court and it denied the exclusion. The fact that the Petitioners house
      was not a principle [sic] residence and they lost $435,751 on the sale
      should make that deductible because the IRS cannot have it both
      ways. The aforementioned case was identified easily and should have
      been presented to the IRS before settling on 1/2 of a deduction that
      should have been allowed if the Petitioners had adequate representa-
      tion.

      Mr. Niehus’ not informing petitioners that after 2009 he no longer was

authorized to practice law in Illinois because of his failure to satisfy certain

Illinois State bar attorney status requirements and not bringing the Gates Opinion

to the attention of respondent’s representatives with whom he was dealing on

behalf of petitioners did not result in their suffering any prejudice, let alone any

injustice, when they agreed to settle the claimed Elm Court loss as set forth in

paragraph 22 of the October 28, 2013 supplemental stipulation of settled issues.

      The Court granted respondent’s motion for entry of decision and entered a

decision on January 27, 2014, that reflected the parties’ February 28, 2013

stipulation of settled issues and the parties’ October 28, 2013 supplemental

stipulation of settled issues.

      On February 5, 2014, Mr. Drobny filed on behalf of petitioners a motion to

vacate or revise pursuant to Rule 162 (motion to vacate). In support of that

motion, petitioners advanced the following two grounds: “‘fraud on this Court’
                                       - 52 -

[*52] and breach of contract by respondent.” The Court denied petitioners’

motion to vacate on February 19, 2014.

      On March 12, 2014, Mr. Drobny filed on behalf of petitioners a motion for

reconsideration of findings or opinion pursuant to Rule 161. In that motion, Mr.

Drobny asked again on behalf of petitioners that the Court vacate the decision

entered in this case on January 27, 2014. In support of that motion, Mr. Drobny

alleged that respondent had a duty to disclose to petitioners that Mr. Niehus “did

not qualify to represent them.” On March 18, 2014, the Court denied petitioners’

motion for reconsideration of findings or opinion pursuant to Rule 161.

      On March 31, 2014, Mr. Drobny filed on behalf of petitioners another

motion to vacate or revise pursuant to Rule 162. That motion was not filed within

the time prescribed by Rule 162. On April 2, 2014, the Court denied that motion.

      Petitioners timely appealed the Court’s decision in this case to the Court of

Appeals. The Court of Appeals vacated the Court’s Order and Decision entered

on January 27, 2014, and remanded this case “for further proceedings, in accor-

dance with the decision of this court entered on September 22, 2014.” In the order

of the Court of Appeals filed on September 22, 2014, the Court of Appeals stated

in pertinent part:
                                       - 53 -

[*53] Although the couple [petitioners] filed their petition pro se, they had
      hired Grant Niehus, who told them he is a lawyer and CPA, to repre-
      sent them before the IRS and the Tax Court. Niehus has a law degree
      but hasn’t been authorized to practice law since 2009 and he is not a
      CPA.[28]

      *          *           *          *           *          *           *

      The Tax Court’s rules require that the parties stipulate to relevant
      issues whenever possible; generally these stipulations are binding but
      may be altered or withdrawn when “justice requires.” TAX CT. R.
      91(a), (e). The rules give the Tax Court discretion to relieve a party
      of a stipulation. * * * The Commissioner likened the petitioners’
      stipulations to “settlement agreements” that are “governed by general
      principals of contract law.” But the petitioners signed pretrial stipula-
      tions, which did not reflect the computation of the deficiency and
      penalties or purport to resolve conclusively the petitioners’ liability.
      See Lovenguth v. C.I.R., 93 T.C.M. (CCH) 1040, at *3-*4 (2007)

      28
         On the record before the Court that was established at the March 30, 2015
evidentiary hearing that it held on remand from the Court of Appeals, the Court is
unable to find that Mr. Niehus told petitioners that he was a C.P.A. Nor is the
Court able to find on that record that petitioners had hired Mr. Niehus to represent
them before this Court. In fact, we have found that Mr. Niehus made it clear to
Mr. Shamrock and Ms. Bigg when they first retained him that although he was
willing to represent them in attempting to resolve with the IRS all of the
examination issues for taxable years 2007, 2008, and 2009, he was unwilling to
represent them in the event that they and the IRS were unable to reach a mutually
satisfactory resolution of all of those examination issues and they wanted to
litigate the unresolved issues. That was because, as he told Mr. Shamrock and Ms.
Bigg at their first meeting, he was not a trial lawyer. We have also found that Mr.
Niehus indicated to petitioners that in the event that they wanted a trial with
respect to any unresolved examination issues, he would recommend a trial lawyer
to represent them. We have further found that during Mr. Niehus’ representation
of petitioners, which ended in December 2013, they never asked him to
recommend a trial lawyer to them.
                                        - 54 -

[*54] (distinguishing stipulations under Rule 91 from “settlement stipula-
      tions” and stating that Rule 91 “allows us to consider factors that
      might not be sufficient to upset a contract”). The Tax Court, by
      enforcing the petitioners’ stipulations solely for the “reasons stated”
      by the Commissioner, likewise failed to consider the petitioners’
      asserted justification for setting aside those stipulations.

      *           *          *           *          *           *          *

      The Commissioner insisted that the parties had “settled the issue
      50/50 because the outcome was uncertain” for both sides, not “be-
      cause Mr. Niehus ‘improperly handled the issue.’” But that’s the
      Commissioner’s view, not a determination made by the Tax Court.
      The court’s decision is silent about Niehus’s deceit, and that decision
      does not show that the judge exercised any discretion when accepting
      the Commissioner’s request that the petitioners’ stipulations be
      enforced.

             The Commissioner makes much of the fact that the petitioners
      did not have a right to effective assistance of a lawyer in their civil
      tax case. * * * As we understand the Commissioner’s argument, a
      taxpayer should be bound by any stipulation induced by his representa-
      tive’s deceit so long as the Commissioner was unaware of the fraud.
      That contention * * * does not resolve whether these petitioners have
      articulated a valid reason to set aside the stipulation relating to the
      2009 [claimed Elm Court] loss. Even though the petitioners had no
      right to an effective lawyer, the petitioners and even the Commis-
      sioner’s counsel all believed they were dealing with an attorney
      authorized to represent taxpayers before the IRS and the Tax Court.
      The Commissioner minimizes that deception, but the Tax Court
      should have evaluated whether it provided good cause to set aside the
      petitioners’ stipulations.

      The Court of Appeals issued a mandate on November 17, 2014, in accor-

dance with its order filed on September 22, 2014, and its judgment filed on
                                         - 55 -

[*55] September 23, 2014, and, as discussed above, remanded this case for further

proceedings in accordance with that order and decision.

      On November 25, 2014, this Court issued an Order in which it ordered the

parties to “file a joint report in which they * * * [were to] indicate what they

believe should be done in this Court on remand in order to comply with the order

and judgment of the U.S. Court of Appeals for the Seventh Circuit.”

      On December 11, 2014, the parties filed a joint status report (parties’ joint

status report). In that report, the parties set forth their respective views regarding

further proceedings in this Court. The view of petitioners, as set forth by Mr.

Drobny in the parties’ joint status report, was that

      based upon the facts [alleged in the parties’ joint status report by Mr.
      Drobny on behalf of petitioners] and law cited by the Court of Ap-
      peals, a hearing on this matter is unnecessary because the facts in this
      case are self evident. Asking the taxpayers [petitioners] or Mr.
      Niehus about this matter in a hearing does not change the fact that
      Niehus falsely represented to taxpayers, the Commissioner, and this
      Court that he was unqualified [sic] to practice and indeed gave the
      taxpayers clearly erroneous advice.

      The view of respondent, as set forth in the parties’ joint report, was that the

Court should “set this case for an evidentiary hearing”. According to respondent,

“[p]etitioners should be put to their proof at an evidentiary hearing where a record

can be built and, after cross-examination, petitioners’ credibility can be gauged by
                                       - 56 -

[*56] the Court.” Respondent then proffered in the parties’ joint status report that

the following facts would be established at an evidentiary hearing:

      (1) petitioners were full participants in the events leading to their
      stipulations; (2) petitioners caused their predicament and tied Niehus’
      hands by failing to provide Niehus the documents necessary to sub-
      stantiate their positions; (3) petitioners went to Sheldon Drobny after
      they received respondent’s final settlement computations but before
      they learned that Niehus was not licensed to practice law, i.e., their
      dissatisfaction with the settlement had nothing to do with Niehus’
      licensure [sic] and everything to do with the amount of money they
      owed; and (4) petitioners did not, as the Seventh Circuit believed,
      sign mere pretrial stipulations (or, in Tax Court parlance, stipulations
      of fact) but rather settlement stipulations, which are held to a higher
      standard.

      In its January 15, 2015 Order, the Court set this case for an evidentiary

hearing at a special session that was to, and did, take place on March 30, 2015, in

Chicago. As stated in that Order, the March 30, 2015 evidentiary hearing was set

for the purpose of giving the parties the opportunity to present evidence as to

whether the parties’ February 28, 2013 stipulation of settled issues and the parties’

October 28, 2013 supplemental stipulation of settled issues should be set aside.

On March 13, 2015, petitioners filed a second supplement to the prehearing

memorandum that they had filed on January 21, 2015. In that second supplement,

petitioners narrowed the scope of the March 30, 2015 evidentiary hearing to
                                         - 57 -

[*57] whether only paragraph 22 of the parties’ October 28, 2013 supplemental

stipulation of settled issues should be set aside.29

                                      OPINION

      It is petitioners’ position that the Court should set aside paragraph 22.

Respondent disagrees.

      Before addressing the parties’ respective positions, the Court summarizes its

evaluation of the following witnesses whom respondent called as witnesses at the

March 30, 2015 evidentiary hearing:30 Mr. Shamrock, Ms. Bigg, Mr. Niehus,




      29
         Paragraph 22 of the parties’ supplemental stipulation of settled issues
pertains to the claimed Elm Court loss that petitioners had raised as an affirmative
issue in their second amended 2009 return. Although Mr. Shamrock took the
position during his testimony at the March 30, 2015 evidentiary hearing that the
entire February 28, 2013 stipulation of settled issues and the entire October 28,
2013 supplemental stipulation of settled issues should be set aside, he changed his
mind upon prodding by Mr. Drobny at that hearing. (For convenience, the Court
will sometimes refer to paragraph 22 of the October 28, 2013 supplemental
stipulation of settled issues as paragraph 22.)
      30
        Petitioners did not call any witnesses at the March 30, 2015 evidentiary
hearing. Instead, they chose to have Mr. Drobny cross-examine respondent’s
witnesses at that hearing.
                                        - 58 -

[*58] Terrence Brennan,31 and Lauren May.32 Except for the testimony of Mr.

Shamrock, the Court found the respective testimonies of respondent’s witnesses to

be credible. With respect to Mr. Shamrock, the Court did not find his testimony to

be credible in certain material respects. In addition, the Court found that he had a

selective memory during the second counsel for respondent’s examination of him

at the March 30, 2015 evidentiary hearing. The Court finds that Mr. Shamrock’s

selective memory in responding to the second counsel for respondent’s questions

was nothing more than an attempt on his part to evade answering certain of those

questions that he wanted to avoid answering because he believed that those

answers, if truthful, would have not have supported petitioners’ position that

paragraph 22 should be set aside. The Court will not rely on Mr. Shamrock’s

testimony to establish petitioners’ position that the Court should set aside para-

graph 22. See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77 (1986).


      31
       Terrance Brennan is the Appeals officer who met with petitioners and Mr.
Niehus after petitioners filed the petition in an attempt to settle some or all of the
examination issues.
      32
         Lauren May is the first counsel for respondent who met with petitioners
and Mr. Niehus after the petition was filed and after petitioners and Mr. Niehus
had met with the Appeals officer. It was she who signed the February 28, 2013
stipulation of settled issues on behalf of respondent and who discussed with
petitioners and Mr. Niehus possible settlement of petitioners’ claimed Elm Court
loss. They were unable to reach a basis on which to settle the claimed Elm Court
loss issue.
                                         - 59 -

[*59] The Court turns now to the mandate of the Court of Appeals. As the Court

understands the Court of Appeals’ order filed on September 22, 2014, which is

part of that mandate, the Court of Appeals concluded that the February 28, 2013

stipulation of settled issues and the October 28, 2013 supplemental stipulation of

settled issues are not stipulations of settlement because those stipulations of settled

issues “did not reflect the computation of the deficiency and penalties or purport to

resolve conclusively the petitioners’ liability.” Shamrock v. Commissioner, No.

14-1916, order at 3 (7th Cir. Sept. 22, 2014); see Shah v. Commissioner, 790 F.3d

767, 771 (7th Cir. 2015). Instead, according to the Court of Appeals, the February

28, 2013 stipulation of settled issues and the October 28, 2013 supplemental

stipulation of settled issues are governed by Rule 91.

      Rule 91 governs “STIPULATIONS FOR TRIAL”. In the case of stipula-

tions of settlement or stipulations of settled issues, such as the February 28, 2013

stipulation of settled issues and the October 28, 2013 supplemental stipulation of

settled issues, the Court has held that that type of stipulation will not be set aside

unless there is a showing of a “lack of formal consent, fraud, mistake, or some

similar ground”. Dorchester Indus., Inc. v. Commissioner, 108 T.C. 320, 335

(1997), aff’d without published opinion, 208 F.3d 205 (3d Cir. 2000).
                                         - 60 -

[*60] The Court of Appeals itself has held that courts should be hesitant to set

aside agreements of settlement that the parties reached knowingly and voluntarily.

See, e.g., Billhartz v. Commissioner, 794 F.3d 794, 799 (7th Cir. 2015) (treating a

settlement agreement that did not set forth the deficiency in Federal estate tax to

be paid as a result of the settlement agreement and that consequently did not

resolve definitively the amount of the estate’s liability as a contract, not as a

stipulation subject to Rule 91).

      Assuming arguendo, as the Court of Appeals concluded, that the February

28, 2013 stipulation of settled issues and the October 28, 2013 supplemental

stipulation of settled issues are governed by Rule 91, we consider Rule 91(e),

which addresses the binding effect of a stipulation governed by Rule 91. That

Rule provides that a stipulation is to be treated, to the extent of its terms, as a

conclusive admission by the parties to the stipulation, unless otherwise permitted

by the Court or agreed upon by those parties. Rule 91(e) further provides that the

Court will not permit a party to a stipulation to qualify, change, or contradict a

stipulation in whole or in part, except that it may do so where justice requires.

      The Court has concluded that, “[w]ith ‘justice’ as our standard, we do have

broad discretion to determine [under Rule 91(e)] when it is appropriate to set aside

a stipulation.” Lovenguth v. Commissioner, T.C. Memo. 2007-70, 2007 WL
                                        - 61 -

[*61] 922231, at *3. However, the Court has also concluded that its discretion in

setting aside a stipulation under Rule 91(e) “is tempered by the importance of

making stipulations stick--we enforce stipulations unless not just ‘injustice,’ but

‘manifest injustice’ would result.” Id. In exercising its discretion under Rule

91(e), the Court may “consider factors that might not be sufficient to upset a

contract.” Id. at *4. That is to say, “something less than a contractual defense is a

permissible ground for letting one party to a pretrial stipulation out of his agree-

ment.” Id.

      As we understand petitioners’ position, they maintain that paragraph 22

must be set aside because when they signed the stipulations of settled issues they

relied on Mr. Niehus’s representation that he was authorized to practice law in

Illinois when in fact he was not. According to petitioners, those facts, standing

alone, “denied [p]etitioners adequate representation” and show that they were not

well represented by Mr. Niehus and had suffered injustice and prejudice. The

Court agrees with respondent that “[p]etitioners are essentially arguing per se

injustice” is present in this case for purposes of Rule 91(e) (petitioners’ per se

injustice argument).

      Before considering the merits of petitioners’ per se injustice argument, the

Court notes that under that argument petitioners logically should be asking the
                                         - 62 -

[*62] Court to set aside not only paragraph 22 of the October 28, 2013 supplemen-

tal stipulation of settled issues but also that entire supplemental stipulation of

settled issues and the entire February 28, 2013 stipulation of settled issues.33

      The Court considers now petitioners’ per se injustice argument. The Court

rejects that argument because it is legally flawed and factually flawed. The Court

addresses first why petitioners’ per se injustice argument is legally flawed. The

Court has not applied, and will not apply here, any kind of per se rule in determin-

ing whether under Rule 91(e) “justice requires” the Court to exercise its discretion

to “permit a party to a stipulation [governed by Rule 91] to qualify, change, or

contradict a stipulation”. See, e.g., Lovenguth v. Commissioner, 2007 WL

922231, at *3 (quoting Rule 91(e)). The Court has applied, and will apply here, a

facts and circumstances test in determining whether to exercise its discretion under

Rule 91(e). See, e.g., id.


      33
         The Court believes that the reason petitioners are asking the Court to set
aside only paragraph 22, which is illogical and inconsistent with the reasons they
advance for asking the Court to do so, is that they believe on the basis of Mr.
Drobny’s advice that this Court will set aside that paragraph or the Court of
Appeals will if this Court does not. In that event, the other IRS examination issues
that petitioners conceded in the parties’ stipulations of settled issues and that
resulted in a substantial increase in their ordinary income for each of the taxable
years 2007, 2008, and 2009 would be offset dollar for dollar, thereby reducing the
amount of tax that petitioners would otherwise have been required to pay for each
of those years because of their concessions.
                                        - 63 -

[*63] In addition, certain caselaw of the Court of Appeals and the State of Illinois,

as well as certain rules of the Supreme Court of Illinois (Illinois Supreme Court),

highlights the legal flaws in petitioners’ per se injustice argument. In considering

that argument as it relates to Mr. Niehus’ no longer being authorized to practice

law in Illinois after 2009 because he failed to pay required dues after that year,

Reese v. Peters, 926 F.2d 668, 669 (7th Cir. 1991), provides helpful insight. In

that case, a defendant in a criminal case claimed that his representation at his

criminal trial by a lawyer who had been suspended from the Illinois State bar for

failing to pay required dues was an “automatic” violation of his right to counsel

under the Sixth amendment of the U.S. Constitution (Sixth Amendment). Accord-

ing to the defendant, “a lawyer who has been suspended from the bar is always

ineffective assistance of counsel” for purposes of the Sixth Amendment. Id.

Although in considering the defendant’s position in Reese the Court of Appeals

was addressing the meaning of the word “counsel” in the Sixth Amendment, the

Court finds the reasoning of that court in rejecting that position to be instructive in

considering petitioners’ per se injustice argument. In Reese, the Court of Appeals,

which was willing to proceed on the assumption that the lawyer who had repre-

sented the defendant at his criminal trial “could have been imprisoned for unautho-

rized practice of law”, id., examined the history of the adoption of the Sixth
                                        - 64 -

[*64] Amendment. The Court of Appeals concluded on the basis of that examina-

tion that the “constitutional question” under the Sixth Amendment was “whether

the court has satisfied itself of the advocate’s competence and authorized him to

practice law.” Id. at 670. According to the Court of Appeals,

      persons who obtain [legal] credentials by fraud * * * are classes apart
      from persons who satisfied the court of their legal skills but later ran
      afoul of some technical rule. Lawyers who do not pay their dues
      violate a legal norm, but not one established for the protection of
      clients; suspensions used to wring money from lawyers’ pockets do
      not stem from any doubt about their ability to furnish zealous and
      effective assistance.

Id.

      The Court of Appeals ended its discussion of the defendant’s Sixth Amend-

ment argument by observing:

      Illinois may if it wishes annul the convictions of persons represented
      by lawyers whose licenses have been suspended for financial reasons.
      But the unpublished decision in Reese’s case, together with People v.
      Elvart, 189 Ill. App. 3d 524, 136 Ill. Dec. 807, 545 N.E.2d 331 (1st
      Dist. 1989), shows that Illinois does not doubt the ability of lawyers
      suspended for nonpayment of dues to furnish effective assistance.

Id.; see Ill. Sup. Ct. R. 756(i) (attorney who fails to pay dues may be reinstated as

a matter of course upon paying the dues and certain fees).

      In Reese, the focus of the Court of Appeals in rejecting the defendant’s

Sixth Amendment argument was on whether a court was satisfied that the lawyer
                                        - 65 -

[*65] was competent to practice law and had in fact authorized the lawyer to do

so. The Illinois Supreme Court had authorized Mr. Niehus to practice law in

Illinois on May 1, 1980, and he was authorized to do so for approximately three

decades thereafter. Since he was first admitted to practice law in Illinois in 1980,

Mr. Niehus has never been disciplined or disbarred. There is nothing in the record

to support any finding that after 2009, when Mr. Niehus failed to pay periodic

dues to the Illinois State bar, he was stripped of his years of technical knowledge,

training, and experience and was no longer competent to practice law merely

because he failed to pay those required dues. See Reese, 926 F.2d 668. Indeed,

the record rejects any such finding.

      The Court considers next the legal flaws in petitioners’ per se injustice

argument as it relates to Mr. Niehus’ no longer being authorized to practice law in

Illinois after 2009 because he did not satisfy certain CLE requirements after that

year. The Court notes initially that the Illinois State bar did not have CLE require-

ments until September 29, 2005, and that the first period with respect to which Mr.

Niehus was required to file a report with the Illinois State bar regarding his

compliance with those CLE requirements did not end until June 30, 2009. See Ill.

Sup. Ct. R. 790, 794(a) and (b), 796.
                                        - 66 -

[*66] Ill. Sup. Ct. Rule 796(e) specifies that the consequence of the removal from

the so-called master roll of attorneys authorized to practice law in Illinois of an

attorney who has failed to satisfy the Illinois State bar’s CLE requirements “is not

a disciplinary sanction.” Indeed, Ill. Sup. Ct. Rule 796(h) provides that such an

attorney may be reinstated as an attorney authorized to practice law in Illinois by

paying a fee and showing proof that the attorney has sufficient CLE credits for the

periods during which the attorney had failed to comply with the Illinois State bar

CLE requirements. Similarly, Ill. Sup. Ct. Rule 756(i) provides that an attorney

who no longer is authorized to practice law in Illinois because the attorney failed

to pay required annual dues (so-called annual registration fee) to the Illinois State

bar may be reinstated as an attorney authorized to practice law in Illinois by

registering and paying prescribed fees for each of the periods during which the

annual fee was not paid. Illinois thus treats in essentially the same manner

reinstatement to practice law after a failure to satisfy periodically certain CLE

requirements and reinstatement to practice law after a failure to pay required dues.

The Court believes that the reasoning of the Court of Appeals in Reese as to why

there was not an “automatic” violation of a criminal defendant’s Sixth Amendment

right to counsel where the defendant was represented at his criminal trial by an

attorney who no longer was authorized to practice law in Illinois for failure to pay
                                        - 67 -

[*67] required dues to the Illinois State bar would apply where the defendant was

represented at his criminal trial by an attorney who no longer is authorized to

practice law in Illinois for failure to satisfy certain CLE requirements of the

Illinois State bar. As the Court found above with respect to Mr. Niehus’ failure

after 2009 to pay required dues to the Illinois State bar, there is nothing in the

record to support any finding that after 2009, when Mr. Niehus failed to satisfy

certain CLE requirements, he was stripped of his years of technical knowledge,

training, and experience and was no longer competent to practice law merely

because he failed to satisfy those requirements. Cf. Reese, 926 F.2d 668. Indeed,

the record rejects any such finding.

      The Court turns now to why petitioners’ per se injustice argument is

factually flawed. The short answer is that the facts that the Court has found belie

that argument. Contrary to petitioners’ unfounded contentions, the Court has

found that Mr. Shamrock refused to sign the decision documents because (1) he

was not pleased with what the revised tax computations showed he and Ms. Bigg

were required to pay to the IRS for the years at issue and (2) Mr. Drobny made a

representation to him, and shortly thereafter to Ms. Bigg,34 that if Mr. Niehus had

      34
       Ms. Bigg was willing to sign the decision documents that the second
counsel for respondent had had prepared in order to put this case behind her. Ms.
                                                                      (continued...)
                                       - 68 -

[*68] brought Gates v. Commissioner, 135 T.C. 1, to the attention of respondent’s

representatives, respondent would have conceded as a deductible ordinary loss the

entire claimed Elm Court loss, not just 50 percent of that claimed loss as reflected

in paragraph 22 of the October 28, 2013 supplemental stipulation of settled issues.

The Court also has found that if Mr. Shamrock had been pleased with what the

revised tax computations showed he and Ms. Bigg were required to pay to the IRS

for the years at issue, he would have signed the decision documents that respon-

dent had prepared and that reflected the February 28, 2013 stipulation of settled

issues and the October 28, 2013 supplemental stipulation of settled issues. The

Court also believes that if Mr. Shamrock had been pleased with what the revised

tax computations showed he and Ms. Bigg were required to pay to the IRS for the

years at issue, he would not have consulted and retained Mr. Drobny to represent

petitioners in this case. If Mr. Shamrock had not consulted and retained Mr.

      34
         (...continued)
Bigg changed her mind because Mr. Drobny, who represented to her that he was a
tax attorney when he was not, had also represented to her, as he had represented to
Mr. Shamrock, that if Mr. Niehus had brought Gates v. Commissioner, 135 T.C. 1
(2010), to the attention of respondent’s representatives, respondent would have
conceded as a deductible ordinary loss under sec. 165 the entire claimed Elm
Court loss, not just 50 percent of that claimed loss as reflected in paragraph 22.
Ms. Bigg relied on Mr. Drobny’s representations to her, as did Mr. Shamrock, and
concluded that Mr. Drobny was more knowledgeable than Mr. Niehus in that Mr.
Drobny was aware of the Gates Opinion about which Mr. Niehus was apparently
unaware.
                                        - 69 -

[*69] Drobny, Mr. Drobny would not have made representations to him, and

shortly thereafter to Ms. Bigg, about the Gates Opinion, which, as discussed

below, the Court concludes are erroneous.

      In the Gates Opinion, the taxpayers razed their principal residence on

certain real property that they owned. Thereafter, they constructed a new resi-

dence on the same real property, sold the real property before occupying the new

residence, and realized a gain from that sale that exceeded $500,000. See id. at 2-

3. The taxpayers in Gates claimed that $500,000 of that gain was excludible from

their income under section 121, which provides that gross income does not include

certain amounts of gain from the sale of property if a taxpayer used the property as

a principal residence for at least two of the five years immediately preceding the

sale. See id. at 5-6. The Court held in Gates that the taxpayers were not entitled

to exclude any gain from the sale of the property in question. That was because,

after they razed their principal residence on the property and built a new residence

thereon, they did not reside in the new residence for at least two years before

selling that property. See id. at 13.

      The Gates Opinion is inapposite to the resolution of whether petitioners are

entitled under section 165 to deduct as an ordinary loss the claimed Elm Court

loss. At best, the Gates Opinion arguably might provide some support for a
                                       - 70 -

[*70] contention by petitioners that, because they never occupied the new house

that they had built on the Elm Court property before they sold it, the new house

was not their residence at the time of that sale and thus was not used by them for a

personal use at that time.35 See sec. 1.165-9(b), Income Tax Regs.

      Mr. Droby seems to believe, and he evidently represented to petitioners, that

under the Gates Opinion if the new house on the Elm Court property was not their

principal residence when they sold it in 2009, petitioners are automatically entitled

to deduct under section 165 the claimed Elm Court loss as an ordinary loss. Mr.

Drobny’s belief and representations to petitioners are wrong.

      The Gates Opinion addressed only whether $500,000 of the gain that the

taxpayers there realized on the sale of a new house that they had built on the real

property where their personal residence had been located was to be excluded under

section 121. The Gates Opinion did not address the deductibility of a loss under

section 165, which is the issue presented by the claimed Elm Court loss. Indeed,

the taxpayers in the Gates Opinion did not even have a loss that they wanted to




      35
        Respondent conceded at the March 30, 2015 evidentiary hearing that the
new house on the Elm Court property was no longer petitioners’ principal
residence when they sold it in 2009. However, respondent made no other con-
cessions regarding that property at that hearing.
                                        - 71 -

[*71] deduct. They had a gain that they wanted to exclude from their income

under section 121.

      It is section 165, not section 121, that governs whether petitioners are

entitled to deduct the claimed Elm Court loss as an ordinary loss. Under section

165(c)(1) and (2), taxpayers, like petitioners, who are individuals are not entitled

to deduct under section 165(a) as an ordinary loss a loss from the sale of property

unless the loss was incurred in a trade or business or in a transaction entered into

for profit. The Gates Opinion does not even mention section 165, let alone control

or resolve questions, including the following legal and factual questions, that must

be considered in determining whether petitioners are entitled to ordinary loss

deduction treatment under that section: (1) What is petitioners’ basis in the Elm

Court property in question? See secs. 165(b), 1011. (2) Was the loss from the

sale of the Elm Court property incurred in a trade or business? See secs.

165(c)(1), 162. (3) Was the loss from the sale of the Elm Court property incurred

in an activity in which Mr. Shamrock engaged with the intent of making a profit?

See secs. 165(c)(2), 183. (4) Was the Elm Court property a capital asset? See

secs. 165(f), 1221.

      The Gates Opinion has nothing to do with, does not discuss, and does not

govern whether property is used in a trade or business, see sec. 165(c)(1), or
                                         - 72 -

[*72] whether property is used in a transaction entered into for profit, see sec.

165(c)(2). The Gates Opinion simply does not control, as Mr. Drobny erroneously

believes and as he erroneously represented to petitioners, resolution of the claimed

Elm Court loss, let alone a resolution of that issue that would allow them to deduct

under section 165 as an ordinary loss the entire amount (i.e., $435,751) of that

claimed loss.

      Petitioners’ per se injustice argument is also factually flawed because that

argument appears to proceed on the factual assumption that, because after 2009

Mr. Niehus no longer was authorized to practice law in Illinois on account of his

failure to satisfy certain Illinois State bar attorney status requirements and because

he had failed to bring the Gates Opinion to the attention of respondent’s represen-

tatives with whom he was dealing on petitioners’ behalf, petitioners were not well

represented by him and consequently they suffered prejudice when they agreed to

settle the claimed Elm Court loss as set forth in paragraph 22 of the October 28,

2013 supplemental stipulation of settled issues. The Court’s findings belie those

contentions. The Court has found that Mr. Niehus’ not informing petitioners that

after 2009 he no longer was authorized to practice law in Illinois on account of his

failure to satisfy certain Illinois State bar attorney status requirements and not

bringing the Gates Opinion to the attention of respondent’s representatives with
                                        - 73 -

[*73] whom he was dealing on behalf of petitioners did not result in their suffering

any prejudice, let alone any injustice, when they agreed to settle the claimed Elm

Court loss as set forth in paragraph 22 of the October 28, 2013 supplemental

stipulation of settled issues.

      Not only did petitioners not suffer any prejudice, let alone injustice, when

they agreed to settle the claimed Elm Court loss as set forth in paragraph 22, but,

contrary to the suggestion of petitioners in their posthearing memorandum, the

Court has found that they were well represented by Mr. Niehus. See Reese, 926

F.2d at 668-670; Lovenguth v. Commissioner, 2007 WL 922231, at *4 (citing

Associated Beverages Co. v. P. Ballantine & Sons, 287 F.2d 261, 263 (5th Cir.

1961)); see also Ill. Sup. Ct. R. 756(i), 796(e), (h). In short, the Court has found

that throughout his representation of Mr. Shamrock and Ms. Bigg from early June

2011 until December 2013 Mr. Niehus provided to them competent, valuable,

diligent, and effective assistance. He did so in the face of and despite petitioners’

acknowledgement at their first meeting with him that he would be starting at a

disadvantage if they were to retain him to represent them with respect to the IRS

examination. In fact, during their initial meeting with Mr. Niehus, Mr. Shamrock

and Ms. Bigg characterized the then-current situation with respect to the IRS

examination of the taxable years 2007, 2008, and 2009 as a “mess”, an assessment
                                         - 74 -

[*74] with which Mr. Niehus agreed after he learned more about the IRS examina-

tion, the events that occurred during that examination, how it had been handled by

petitioners’ prior representative, and the trust and credibility issues that certain

IRS representatives had had with petitioners before they retained him. Mr.

Shamrock and Ms. Bigg understood fully when they had their first meeting with

Mr. Niehus in June 2011 that Mr. Niehus was being placed in the difficult situa-

tion of persuading the IRS to trust and accept what Mr. Shamrock and Ms. Bigg

maintained were the salient facts regarding the examination issues, including the

claimed Elm Court loss. That was because Mr. Shamrock and Ms. Bigg knew

before that initial meeting took place that, as a result of certain events that had

occurred during the IRS examination, certain representatives of the IRS who were

involved in that examination already had grown suspicious of, and had trust and

credibility issues with, them and their claims regarding at least some of the

examination issues.

      Mr. Niehus set a goal for himself and petitioners when he agreed to repre-

sent them at the end of the initial meeting that he had with them in June 2011. Mr.

Niehus advised petitioners that they and he, as their representative, needed to

address with the IRS the examination issues with a goal of resolving all of them

and avoiding litigating any of them. In furtherance of that goal, Mr. Niehus
                                         - 75 -

[*75] engaged in considerable negotiations with various IRS representatives. In

particular, the agreement of the parties with respect to the claimed Elm Court loss

as set forth in paragraph 22 was the result of considerable negotiations and

bargaining by Mr. Niehus on behalf of petitioners. See Lovenguth v. Commis-

sioner, 2007 WL 922231, at *4 (citing Associated Beverages Co. v. P. Ballantine

& Sons, 287 F.2d at 263); Markin v. Commissioner, T.C. Memo. 1989-665, 58

T.C.M. (CCH) 994, 996 (1989). Those negotiations proved to be difficult not only

because of the reasons discussed previously but also because petitioners had not

even raised the claimed Elm Court loss until they filed their second amended 2009

return. Petitioners did not claim that loss in their 2009 return or in their first

amended 2009 return. In fact, Mr. Shamrock and Ms. Bigg had originally claimed

“developer expenses” of $162,898 in Schedule C, that they had included as part of

their 2009 return and that related to what was described in that schedule as Ms.

Bigg’s “DENTAL PRACTICE & DEVELOPER”. However, in the worksheet

relating to the claimed Elm Court loss that they included as part of the second

amended 2009 return, petitioners explained, inter alia, that “developer expenses”

of $162,898 had been “TRANSFERRED TO FROM [sic] 4797”, which was from

the form titled “SALES OF BUSINESS PROPERTY” in which they reported that

claimed loss for the first time.
                                        - 76 -

[*76] The Court now highlights some of the competent, valuable, diligent, and

effective assistance that Mr. Niehus provided petitioners with respect to the IRS

examination issues. Mr. Niehus assisted Mr. Shamrock and Ms. Bigg in identify-

ing, locating, and gathering the documents that they needed to present to the IRS

in order to substantiate the position that they had taken with respect to each of the

examination issues for each of the taxable years 2007, 2008, and 2009, including

the claimed Elm Court loss that they had raised in their second amended 2009

return. Mr. Niehus also prepared and sent to the IRS letters in which he advanced

arguments explaining how and why the documents that Mr. Shamrock and Ms.

Bigg provided to the IRS and the applicable tax law supported each of those

positions and advocated acceptance of each of those positions. In addition, Mr.

Niehus, accompanied by Mr. Shamrock and Ms. Bigg, had a number of meetings

with representatives of the Appeals Office as well as with representatives of the

Chief Counsel’s office that took place both before and after they filed the petition

commencing this case. During those various meetings, Mr. Niehus continued to

(1) advance arguments explaining how and why the documents that Mr. Shamrock

and Ms. Bigg provided to the IRS and the applicable tax law supported each of

their positions with respect to each of the examination issues for each of the

taxable years 2007, 2008, and 2009, including the claimed Elm Court loss that
                                         - 77 -

[*77] they had raised in their second amended 2009 return and (2) advocate

acceptance of each of those positions. During those meetings, Mr. Niehus was

proactive in protecting the interests of his clients.

      Mr. Niehus’ competent, valuable, diligent, and effective representation of

petitioners continued after petitioners filed the petition, thereby commencing this

case. As detailed in the Court’s findings of fact Mr. Niehus corresponded and

met, along with petitioners, at various times with the Appeals officer in an attempt

to negotiate a settlement of all of the examination issues, including the Elm Court

loss. With respect to the claimed Elm Court loss, around February 2013 the

Appeals officer ultimately offered to settle that issue by allowing petitioners a loss

of $50,000 with respect to the Elm Court property. That settlement offer amount-

ed to a concession by respondent of only approximately 11 percent of the

$435,751 loss that petitioners had claimed with respect to that property in their

second amended 2009 return. Mr. Niehus informed the Appeals officer that he

believed that petitioners had a better than 50-50 chance of prevailing in court on

the claimed Elm Court loss. The Appeals officer was unwilling to increase the

$50,000 IRS Appeals Office settlement offer. Mr. Niehus advised petitioners to

reject that offer, and they did.
                                        - 78 -

[*78] By February 2013, the Appeals officer and Mr. Niehus had been able to

reach a basis of settlement at the IRS Appeals Office as to each of the examination

issues except the claimed Elm Court loss and the claimed 2008 partnership loss.

Subsequently, the IRS Appeals Office returned the case to the first counsel for

respondent for preparation for trial at the Court’s March 11, 2013 Chicago trial

session. Mr. Niehus’ competent, valuable, diligent, and effective representation of

petitioners continued after the Appeals officer returned the case to that counsel for

trial preparation. Mr. Niehus and the first counsel for respondent discussed the

two remaining major issues at the Branerton conference.36 In those discussions,

Mr. Niehus continued to advocate on petitioners’ behalf, inter alia, that petitioners

were entitled to ordinary loss treatment for the entire amount of the claimed Elm

Court loss. He continued to advise petitioners that he believed that they had a

better than 50-50 chance of prevailing in court on the claimed Elm Court loss.

      Not only was the nature (i.e., ordinary vs. capital) of the claimed Elm Court

loss still in dispute at the Branerton conference with the first counsel for respon-

dent, but the claimed tax basis of petitioners in the Elm Court property and thus

      36
         Mr. Niehus also advanced arguments at the Branerton conference with the
first counsel for respondent that petitioners should not be liable for the accuracy-
related penalties under sec. 6662(a) that respondent had determined in the
respective notices to impose for the taxable years 2007, 2008, and 2009. See
supra note 12.
                                         - 79 -

[*79] the amount, if any, of the claimed loss on the disposition of that property

also were in dispute.

      On February 22, 2013, the first counsel for respondent sent to petitioners,

who were pro sese in this case,37 the February 22, 2013 letter and sent a copy of

that letter to Mr. Niehus. In that letter, the first counsel for respondent summa-

rized the then status of the case in pertinent part as follows:

      You agreed that the only remaining issues in your case were 1) the
      Libertyville partnership losses claimed on your 2008 income tax
      return[] [claimed 2008 partnership loss] and 2) whether, and/or to
      what extent you are entitled to claim a loss from the sale of the prop-
      erty located at 1249 Elm Court. We also discussed that we would
      need additional documentation in order to resolve the remaining
      issues. Due to your case being on the [Court’s] March 11, 2013 Trial
      Calendar, we agreed that it would be best to file a motion for continu-
      ance on your case in order to allow you additional time to provide the
      additional documentation.

      Accordingly, I have prepared a stipulation of settled issues and joint
      motion for continuance of trial. The stipulation of settled issues
      reflects the issues that were agreed to at Appeals. Please sign in blue
      ink the original and three copies of the stipulation of settled issues
      and the joint motion for continuance of trial. * * *

      On February 28, 2013, petitioners, not Mr. Niehus, and the first counsel for

respondent on behalf of respondent signed a stipulation of settled issues (i. e.,

February 28, 2013 stipulation of settled issues) and filed that stipulation with the


      37
           See supra note 9.
                                        - 80 -

[*80] Court. The February 28, 2013 stipulation of settled issues resolved each of

the examination issues for taxable years 2007 and 2009 except the claimed Elm

Court loss and none of the examination issues for taxable year 2008, including the

claimed 2008 partnership loss.

      Mr. Niehus’ competent, valuable, diligent, and effective representation of

petitioners continued after the parties filed with the Court the February 28, 2013

stipulation of settled issues. Mr. Niehus continued settlement discussions with a

different counsel for respondent, namely, the second counsel for respondent, with

respect to the two major issues that remained unresolved in the case, i.e., the

claimed Elm Court loss and the claimed 2008 partnership loss. Mr. Niehus

advocated to the second counsel for respondent that petitioners are entitled to the

entire amount of each of those claimed losses. He continued to advise petitioners

that he believed that they had a better than 50-50 chance of prevailing in court on

the claimed Elm Court loss.

      In addition to advocating to the second counsel for respondent that petition-

ers’ basis in the Elm Court property was significantly less than the amount that

they had received when they disposed of that property and that therefore petition-

ers had incurred a loss for tax purposes in the amount that they claimed in their

second amended 2009 return, Mr. Niehus also advocated to that counsel at a
                                         - 81 -

[*81] meeting in the summer of 2013 (i.e., the summer 2013 meeting), as he had

advocated when he was dealing with the Appeals officer and the first counsel for

respondent, that the claimed Elm Court loss was an ordinary loss, not a capital

loss. Mr. Niehus knew, and advised petitioners, that, given their tax situation for

the taxable years 2007, 2008, and 2009 (and their anticipated tax situation thereaf-

ter),38 a capital loss for taxable year 2009 with respect to the Elm Court property

would have been of virtually no tax benefit to them for the taxable year 2009 or

for any other taxable year. Mr. Niehus also advised petitioners that, even if the

IRS were willing to concede the entire amount (i.e., $435,751) of the claimed Elm

Court loss as a capital loss, not an ordinary loss, any such concession, given

petitioners’ tax situation, would have been of virtually no tax benefit to them for

the taxable year 2009 or for any other taxable year. That was because, Mr. Niehus

told petitioners, under the relevant tax law the maximum amount of capital loss (in

excess of capital gain) that is allowable each year to an individual is $3,000. He

also told them that, in contrast to that capital loss tax treatment, under the relevant

tax law there is no similar limitation on the use of an ordinary loss to reduce


      38
        Petitioners did not have capital gain for any of the years at issue (and did
not anticipate having any substantial capital gain for subsequent taxable years)
that would have been reduced by the claimed Elm Court loss if that loss had been
treated as a capital loss.
                                         - 82 -

[*82] ordinary income. Mr. Niehus further informed petitioners that consequently

a concession by the IRS of an ordinary loss with respect to the Elm Court property

in an amount that was significantly smaller than a capital loss for the entire

amount of the loss that petitioners claimed in their second amended return with

respect to that property would be significantly more beneficial for tax purposes to

petitioners. In this regard, petitioners conceded, as reflected in the stipulations of

settled issues, many IRS determinations that would have resulted in a substantial

increase in their ordinary income for each of the taxable years 2007, 2008, and

2009. Mr. Niehus advised petitioners that if the IRS were to agree to allow an

ordinary loss for taxable year 2009 with respect to the Elm Court property, even in

an amount that was significantly less that the entire amount of the claimed Elm

Court loss, any such ordinary loss, in contrast to treating the claimed Elm Court

loss as a capital loss, would have benefited petitioners dollar for dollar in reducing

the additional amount of ordinary income for each of those years that they would

have as a result of those concessions.

      At the conclusion of the discussions at the summer 2013 meeting among

Mr. Niehus, petitioners, and the second counsel for respondent, the second counsel

for respondent was very skeptical of petitioners’ position that their claimed Elm

Court loss was an ordinary loss, not a capital loss. In fact, that counsel offered to
                                        - 83 -

[*83] resolve the claimed Elm Court loss issue by allowing petitioners a capital

loss with respect to the Elm Court property for the taxable year 2009.39 Mr.

Niehus rejected that offer on behalf of petitioners, and Mr. Niehus proceeded to

advocate again to the second counsel for respondent why the full amount of the

claimed Elm Court loss should be allowed as an ordinary loss for petitioners’

taxable year 2009. He also continued to advise petitioners that he believed that

they had a better than 50-50 chance of prevailing in court on the claimed Elm

Court loss.

      The second counsel for respondent was skeptical not only of the ordinary

nature of the claimed Elm Court loss but also of the basis that petitioners were

claiming with respect to the Elm Court property and that they used in determining

the amount of the loss that they were claiming with respect to that property. In an

effort to address the concerns of the second counsel for respondent regarding the

basis of petitioners in the Elm Court property, on August 22, 2013, Mr. Niehus

sent to that counsel a letter and certain documents that related to the claimed Elm

Court loss. In that letter, Mr. Niehus stated in pertinent part:




      39
       The record does not establish the amount of capital loss that the second
counsel for respondent offered to allow petitioners in an effort to resolve the
claimed Elm Court loss.
                                         - 84 -

[*84] This letter is being sent to you to follow-up on the pending issues
      regarding the Bigg/Shamrock case for [sic] which you are handling.
      Attached are expense ledgers pertaining to the property at 1249 Elm
      Court in Glenview, Illinois. These ledgers and receipts [that] sub-
      stantiate $140K of the $168K of expenses regarding the above prop-
      erty. The remaining $28K of expenses was expensed in other months
      and this documentation is forthcoming and will be mailed to you
      under separate cover. However, this documentation solidifies the
      majority of the $168K in expenses.

      We will also be forwarding you more documentation on these ex-
      penses that is forthcoming from the bank the [sic] further substanti-
      ates these expenditures.

      If possible, we would like to meet with you as soon as possible to
      reconcile this pending real estate issue.

      In a continuing effort to address the concerns of the second counsel for

respondent regarding the basis of petitioners in the Elm Court property, by fax

dated September 23, 2013, Mr. Niehus sent to that counsel the September 20, 2013

letter and certain documents that related to the claimed Elm Court loss. In that

letter, Mr. Niehus stated in pertinent part:

      This letter is being sent to you to follow-up on the pending issues
      regarding the Bigg/Shamrock case for [sic] which you are handling.
      As my client has been attempting to gather all needed information
      you requested, there has been material changes in the proper calcula-
      tion of the 1249 Elm [Court] tax basis.
                                         - 85 -

[*85]         Thus the correct basis is as follows:

        1.)   Land does not change $468,500.

        2.)   The original loan authorized was $781,221, per closing state-
              ment, Item “A”. The Taxpayer wrote 3 checks $45,000,
              $40,000 and $30,000 totaling $115,000. Per attachment “C”
              final. The total amount invested is $897,221. Per Bank state-
              ment total is $895,779 with the difference being accrued inter-
              est.

        3.)   The taxpayer’s out of pocket was $168,000 but must be re-
              duced by the $115,000 of checks written to Bank--thus total
              * * * out of pocket paid by taxpayer is $53,000.

        4.)   Lastly, per the closing statement, “B” $200,000 was paid as a
              final draw to pay various subcontractors. These payments
              originated from the seller’s funds at closing, and were the last
              payments to complete the project.

              In summary, total Basis is calculated as follows:

              Land                         $468,500

              Bank                         $895,000

              Taxpayer Funds               $ 53,000

              Closing                      $200,000

              Total                      $1,616,500

        In his September 20, 2013 letter, Mr. Niehus further stated in pertinent part:

“I do know this may be confusing, therefore, the taxpayer and I can meet ASAP in
                                        - 86 -

[*86] order to more easily track the flow of cash investments and basis. Also,

enclosed is a history of Mr. Shamrock’s real estate development projects over the

last 20 plus years.”

      As is apparent from Mr. Niehus’ September 20, 2013 letter, as late as the

date of that letter, which was more than two years after petitioners retained Mr.

Niehus, petitioners were sending documents to him that they had not previously

given him (i.e., new documents) or the IRS, some of which contradicted certain

documents that they had previously given him (i.e., old documents) and the IRS.

They wanted and expected Mr. Niehus to present those new documents that

contradicted certain old documents (i.e., the new and contradictory documents) to

the second counsel for respondent and to continue to advance and advocate their

position that they were entitled to ordinary loss treatment for the entire amount of

the claimed Elm Court loss. Mr. Niehus did what petitioners wanted and expected

and continued to advocate acceptance by the IRS of petitioners’ position with

respect to that loss. Petitioners and Mr. Niehus knew, or should have known, that

presenting those new and contradictory documents to the second counsel for

respondent would likely cause that counsel and other representatives of the IRS

involved in this case to continue to be suspicious of, and to have trust and credibil-

ity issues with, petitioners and their claims, as certain IRS representatives previ-
                                        - 87 -

[*87] ously had because of events that had occurred during the IRS examination

and before they retained Mr. Niehus to represent them with respect to the IRS

examination.

      Approximately 10 days before the October 28, 2013 Chicago trial session

commenced, Mr. Niehus, on behalf of petitioners, and the second counsel for

respondent resumed their settlement discussions with respect to, inter alia, the

claimed Elm Court loss, which had been interrupted by a shutdown of the Federal

Government from October 1 to 17, 2013. Shortly before the October 28, 2013

Chicago trial session commenced, the second counsel for respondent informed Mr.

Niehus and petitioners that he would be willing to settle that issue as follows:

Petitioners (1) would be entitled for taxable year 2009 to an ordinary loss of

$217,728 with respect to the claimed Elm Court loss, or approximately one-half of

the total claimed Elm Court loss of $435,751 that they had reported as an ordinary

loss deduction in petitioners’ second amended 2009 return and (2) would concede

the balance (i.e., $218,023) of that claimed loss.40

      40
         As part of the settlement of the two major issues that were not resolved by
the February 28, 2013 stipulation of settled issues, the second counsel for
respondent sought petitioners’ concession of the claimed 2008 partnership loss.
Petitioners were willing to concede that loss in full because they were unable to
provide documentation to the IRS establishing that Mr. Shamrock had incurred
that loss as they and Mr. Niehus on their behalf had previously contended before
                                                                        (continued...)
                                       - 88 -

[*88] Mr. Niehus continued his competent, valuable, diligent, and effective

representation of petitioners when he recommended to them that they accept the

basis on which the second counsel for respondent had offered to resolve the

claimed Elm Court loss. Because of Mr. Niehus’ detailed explanation to petition-

ers as to why he recommended that they accept the basis of settling the claimed

Elm Court loss that the second counsel for respondent had proposed, Mr. Sham-

rock and Ms. Bigg understood very well the consequences of their accepting that

proposed basis of settlement as well as the consequences of rejecting it. See

Lovenguth v. Commissioner, 2007 WL 922231, at *5.

      Mr. Niehus based his recommendation to petitioners that they accept the

basis on which the second counsel for respondent had offered to resolve the

claimed Elm Court loss on a number of factors that he discussed with them. He

first advised petitioners that he believed that the second counsel for respondent

would be unwilling to offer to concede an amount of the claimed Elm Court loss

of $435,751 that was larger than the $217,728 that he had indicated he was willing

to concede.




      40
        (...continued)
the IRS. See supra note 20.
                                         - 89 -

[*89] Mr. Niehus next explained to petitioners that, because the second counsel

for respondent was adamant about not allowing petitioners a larger amount of the

claimed Elm Court loss, the only two avenues available to them would be to

accept the settlement that that counsel had proposed or to litigate that loss.41 Mr.

Niehus further explained to petitioners that if they decided to litigate the claimed

Elm Court loss, they would be litigating the entire amount of that loss, not just the

portion of that loss that the second counsel for respondent was unwilling to allow.

      Mr. Niehus also described for petitioners what he believed to be other so-

called hazards of litigating the claimed Elm Court loss, which he told them they

should take into account in deciding whether to litigate the claimed Elm Court

loss. Mr. Niehus informed petitioners that the principal hazard of litigating that

issue was that the Court might reject their position that they are entitled to that loss


      41
         At the first meeting that Mr. Niehus had with Mr. Shamrock and Ms. Bigg,
he made it clear to them that although he was willing to represent them in attempt-
ing to resolve with the IRS all of the examination issues for taxable years 2007,
2008, and 2009, he was unwilling to represent them in the event that they and the
IRS were unable to reach a mutually satisfactory resolution of all of those
examination issues and they wanted to litigate the unresolved issues. That was
because, as he told Mr. Shamrock and Ms. Bigg at their first meeting, he was not a
trial lawyer. However, Mr. Niehus had indicated to petitioners at the initial
meeting with them that in the event that they wanted a trial with respect to any
unresolved examination issues, he would recommend a trial lawyer to represent
them. During Mr. Niehus’ representation of petitioners, they never asked him to
recommend a trial lawyer to them.
                                        - 90 -

[*90] for the taxable year 2009--a result that would provide them no tax benefit

from that claimed loss and that obviously would be worse than the result if they

had accepted the settlement offer of the second counsel for respondent. Another

litigating hazard about which Mr. Niehus advised petitioners was that the Court

might hold that although petitioners had incurred a loss from the disposition of the

Elm Court property, that loss was a capital loss, and not an ordinary loss--a result

that would provide them virtually no tax benefit42 from that claimed loss and that

obviously would be worse than the result if they had accepted the settlement offer

of the second counsel for respondent. Another hazard of litigation was that the

Court might find that petitioners had failed to establish their tax basis in the Elm

Court property and thus had failed to establish that there was any loss on the

disposition of that property.

      Mr. Niehus also informed petitioners that another factor that they should

consider in deciding whether to accept the settlement with respect to the claimed

Elm Court loss that the second counsel for respondent had proposed or to reject it

and to litigate that issue was the cost of litigation. Mr. Niehus told petitioners that

it would be expensive to litigate the claimed Elm Court loss.

      42
        As indicated above, Mr. Niehus had previously advised petitioners that
treating the claimed Elm Court loss as a capital loss would provide them with only
a $3,000 annual tax benefit over a period of many years. See supra note 17.
                                         - 91 -

[*91] After Mr. Niehus explained to petitioners why he was recommending that

they accept the settlement offer of the second counsel for respondent with respect

to the claimed Elm Court loss, Ms. Bigg told him and Mr. Shamrock that she

wanted to accept that offer and thereby put the case pending in the Court behind

her.

         Before signing the October 28, 2013 supplemental stipulation of settled

issues, petitioners wanted to know how much they would be required to pay to the

IRS with respect to taxable years 2007, 2008, and 2009 as a result of the agree-

ments that they had reached with respondent and that were set forth in that

stipulation and in the February 28, 2013 stipulation of settled issues. In this

connection, at the calendar call for the Court’s October 28, 2013 Chicago trial

session, the following exchange, inter alia, took place between Mr. Niehus and the

Court:

         Mr. Niehus:        [T]here is [sic] about 50 issues that were originally under
                            audit, 48 were agreed upon. The last two are large and
                            material in nature, and before the Petitioners wanted to
                            know, they wanted to know what the net liability would
                            be, because the last issue took about a year to settle or
                            come to an agreement to. And they’d like to know what
                            the bottom line is before they would settle. We under-
                            stand in 30 to 60 days that final number will be then
                            reviewed, sent to us, we’d like to review it and then sign
                            off and the matter will be settled. [Emphasis added.]
                                     - 92 -

[*92] The Court:       Then you don’t have a settlement and we’ll go to
                       trial.

     Mr. Niehus:       I’d rather not go because all we’re doing is look-
                       ing to review a computation.

     *             *      *           *            *         *            *

     The Court:        * * * if you sign the supplement[al] * * *
                       stipulat[ion of settled] issues and your clients
                       don’t like the bottom line number.

     Mr. Niehus:       Oh, no, they just want to know what it is.

     The Court:        Okay, they’ll know what it is before you submit
                       the decision documents reflect[ing] * * * the sup-
                       plemental stipulation of settled issues.

     Mr. Niehus:       Okay, then that’s what we’ll need.

     The Court:        * * * I thought you were saying you weren’t going
                       to sign the supplemental stipulation of settled
                       issues until you knew and however long it takes
                       you to do the computations [of] what the [tax]
                       number is.

     Mr. Niehus:       Well, we prefer to do that. If that is not possible
                       then we would sign it today.

     The Court:        That’s not possible.

     Mr. Niehus:       Then we’ll sign it today.

     The Court:        Okay, do you have it with you?

     Mr. Shelton:      We do.
                                 - 93 -

[*93] The Court:    Let’s sign it right now, but I want your entry of
                    appearance first.

     Mr. Shelton:   Judge, the [supplemental] stipulation[ of settled
                    issues is] * * * actually made out for Petitioner’s
                    [sic] pro se signatures. If we could have, or if the
                    Court could recall us at the end of the call we
                    could probably get these signed.

     Mr. Niehus:    They’re right here to sign it now.

     The Court:     Oh, so you’re--

     Mr. Niehus:    My client, the client, the taxpayers are here right now.

     The Court:     But you’re going to enter an appearance, too?

     Mr. Niehus:    Yes.

     The Court:     Your signature would have to be on it, too. Okay,
                    why don’t I recall this case at the end of the calen-
                    dar call. Will that give you enough time?

     Mr. Shelton:   It will give us enough time to get Petitioners’ sig-
                    nature, if not to reprint new one for Petitioners’
                    counsel’s signature, Your Honor.

     The Court:     He can just add his signature at the bottom of the
                    page, put his name, put his, but I want it, I don’t
                    want it without your entry of appearance.

     Mr. Niehus:    Yes.

     The Court:     Okay? And if you’re not ready at the end of the
                    calendar call then we’ll call it later today.
                                         - 94 -

[*94] On October 28, 2013, petitioners signed the October 28, 2013 supplemental

stipulation of settled issues, as did Mr. Niehus and the second counsel for respon-

dent, and the parties filed it with the Court.

      Thereafter, respondent had tax computations undertaken that showed the

total liability of Mr. Shamrock for taxable year 2007 and of Mr. Shamrock and

Ms. Bigg for each of the taxable years 2008 and 2009 pursuant to the stipulations

of settled issues that petitioners and a counsel for respondent had signed and filed

with the Court. The second counsel for respondent had revised tax computations

prepared to correct a computational issue that Mr. Niehus, because of his

competent, valuable, diligent, and effective representation of petitioners, had

found and pointed out to that counsel.

      To summarize the Court’s findings that make apparent the factual flaws in

petitioners’ per injustice argument, Mr. Shamrock refused to sign the decision

documents because (1) he was not pleased with what the revised tax computations

showed he and Ms. Bigg were required to pay to the IRS for the years at issue and

(2) Mr. Drobny made an erroneous representation to him, and shortly thereafter to

Ms. Bigg, that if Mr. Niehus had brought Gates v. Commissioner, 135 T.C. 1, to

the attention of respondent’s representatives, respondent would have conceded as

a deductible ordinary loss under the entire claimed Elm Court loss, not just 50
                                        - 95 -

[*95] percent of that claimed loss as reflected in paragraph 22 of the October 28,

2013 supplemental stipulation of settled issues. If Mr. Shamrock had been pleased

with what the revised tax computations showed he and Ms. Bigg were required to

pay to the IRS for the years at issue, he would have signed the decision documents

that respondent had prepared. If Mr. Shamrock had been pleased with what the

revised tax computations showed he and Ms. Bigg were required to pay to the IRS

for the years at issue, he would not have consulted and retained Mr. Drobny to

represent petitioners in this case. If Mr. Shamrock had not consulted and retained

Mr. Drobny, Mr. Drobny would not have made representations to him, and shortly

thereafter to Ms. Bigg, about the Gates Opinion, which are erroneous.

      Mr. Niehus’ representation of petitioners with respect to taxable years 2007,

2008, and 2009, including when they signed the February 28, 2013 stipulation of

settled issues and the October 28, 2013 supplemental stipulation of settled issues

that included paragraph 22, was competent, valuable, diligent, and effective, and

petitioners were well represented by him. There were considerable negotiations

and bargaining by Mr. Niehus on petitioners’ behalf in an attempt to settle all of

the examination issues, in particular the claimed Elm Court loss. Because of Mr.

Niehus’ detailed explanation to petitioners of the so-called pros and cons of

accepting or rejecting the basis of settling the claimed Elm Court loss that the
                                          - 96 -

[*96] second counsel for respondent had proposed, Mr. Shamrock and Ms. Bigg

understood very well the consequences of their accepting that proposed basis of

settlement as well as the consequences of rejecting it.

      Based upon the Court’s examination of the entire record before the Court,

certain caselaw, and certain rules of the Illinois Supreme Court, the Court rejects

petitioners’ per se injustice argument.

      Before addressing the second issue of whether to grant respondent’s motion

to impose sanctions under section 6673(a)(2) on Mr. Drobny (respondent’s

motion), we address one final matter regarding the first issue of whether the Court

should set aside paragraph 22. At times throughout the proceedings in this Court,

petitioners have suggested that that paragraph should be set aside because there

was “fraud upon the court”. In Drobny v. Commissioner, 113 F.3d 670, 677-679

(7th Cir. 1997), aff’g T.C. Memo. 1995-209, the Court of Appeals reaffirmed in all

material respects the principles that it had articulated in its earlier decision in

Kenner v. Commissioner, 387 F.2d 689, 691 (7th Cir. 1968), which addressed the

concept “fraud upon the court”. Those principles include the following.

      The concept “fraud upon the court” does not encompass “all deceptive or

improper conduct”. Drobny v. Commissioner, 113 F.3d at 677 (quoting Kenner v.

Commissioner, 387 F.2d at 691). That concept “embrace[s] only that species of
                                         - 97 -

[*97] fraud which does, or attempts to, defile the court itself, or is a fraud perpe-

trated by officers of the court so that the judicial machinery can not perform in the

usual manner its impartial task of adjudging cases that are presented for adjudica-

tion.” Id. at 677-678 (quoting Kenner v. Commissioner, 387 F.2d at 691). The

party “who seeks to impeach an order or decree of a court” has a “heavy burden”

to “come forward with ‘specific facts which will pretty plainly impugn the official

record.’” Id. at 677 (quoting Kenner v. Commissioner, 387 F.2d at 691). That

party must show “not only that” conduct was engaged in “that was intended to

mislead the court, but--of paramount importance--that the actual conduct affected

the outcome of the[ ] case.” Id. at 678; see Kenner v. Commissioner, 387 F.2d at

692.

       On the record before the Court, the Court finds that Mr. Niehus’ failure to

inform petitioners that after 2009 he no longer was authorized to practice law in

Illinois because he did not pay certain required dues to the Illinois State bar and

did not comply with certain CLE requirements43 did not negatively affect the

       43
         The Court has found that in Part II, Declaration of Representative, of Form
2848, which Mr. Niehus signed, he represented that he was a member in good
standing of the Illinois State bar. We have also found that although Mr. Niehus
did not intend to misstate his status with the Illinois State bar or to deceive the IRS
or petitioners when he signed part II of Form 2848, his representation in that part
that he was a member in good standing of the Illinois State bar was not accurate.
                                                                          (continued...)
                                       - 98 -

[*98] outcome of petitioners’ case. On that record, the Court finds that there was

no fraud upon the Court.

      Based upon the Court’s examination of the entire record before the Court,

certain caselaw, certain rules of the Illinois Supreme Court, and Rule 91(e), the

Court finds that justice does not require that the Court set aside under Rule 91(e)

paragraph 22 of the October 28, 2013 supplemental stipulation of settled issues.

      The Court considers now respondent’s motion. Section 6673(a)(2) autho-

rizes the Court to require any person admitted to practice before the Court who has

multiplied the proceedings in any case unreasonably and vexatiously to pay

personally the excess costs, expenses, and attorney’s fees reasonably incurred

because of such conduct.

      The Court believes that Mr. Drobny multiplied the proceedings on remand

of this case unreasonably and vexatiously. Nonetheless, the Court will not


      43
         (...continued)
We have further found that Mr. Niehus simply did not have in mind, and may not
even have been aware, when he signed part II of Form 2848 that after 2009 he no
longer was authorized to practice law in the State of Illinois on account of his
failure to comply with certain Illinois State bar attorney status requirements. That
was because of the intense pressures and stresses to which he had been subjected
as a result of the critical illness of his spouse and her death from that illness as
well as his dealing for over three years after her death with resolving the problems
associated with a franchise business that his spouse and he had operated.
                                       - 99 -

[*99] sanction him at this time under section 6673(a)(2). The Court cautions Mr.

Drobny that he may be subject to such a sanction if in the future he multiplies the

proceedings in any case before this Court unreasonably and vexatiously. See Nis

Family Tr. v. Commissioner, 115 T.C. 523, 547-553 (2000).

      The Court has considered all of the contentions and arguments of petitioners

that are not discussed herein, and the Court finds them to be without merit,

irrelevant, and/or moot.

      To reflect the foregoing,


                                                An appropriate order and decision

                                       will be entered.
