                  T.C. Memo. 2005-76



                UNITED STATES TAX COURT



    JOHANN KEIL AND CATHERINE KEIL, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 15206-02.             Filed April 7, 2005.



     In the summer of 2000, Ps, H and W, retained an
attorney, M, to represent them as to their 1993 and
1994 income taxes. W was M’s contact person for Ps,
and W specifically told M at the time of his retention
that he could not accept any settlement that affected
Ps without her consideration and approval of it. On
Dec. 9, 2003, M settled approximately 45 out of 50
issues in the case; M did not first seek or receive the
approval of either P. One day later, M signed and
caused to be filed with the Court a stipulation of
settled issues (first stipulation of settled issues)
that described the terms of this settlement. Neither P
was aware that M had settled these issues nor that he
had filed the first stipulation of settled issues, and
neither P authorized either of these acts. On or
before Dec. 14, 2003, M settled the remaining five
issues, without seeking or receiving the approval of
either P. After the latest settlement, M contacted W
to obtain her acceptance of both settlements without
telling her that he had already accepted them on behalf
                              - 2 -

     of Ps. W declined to accept the settlements. On
     Dec. 15, 2003, M called H to attempt to persuade H to
     accept the settlements on behalf of Ps, without telling
     H that M had already accepted both settlements on
     behalf of Ps. H declined to accept the settlements.
     Afterwards, through Dec. 17, 2003, M spoke separately
     to W and H on a number of occasions in an attempt to
     persuade either of them to accept the settlements.
     Neither P ever did so. On Jan. 14, 2004, unbeknownst
     to Ps, M caused to be filed with the Court a settlement
     stipulation that showed Ps’ 1993 and 1994 Federal
     income tax liability, as computed on the basis of the
     settlements. On Jan. 27, 2004, the Court entered a
     stipulated decision that reflected the amounts shown in
     the settlement stipulation. In February 2004, Ps moved
     the Court to vacate the stipulated decision and to set
     aside the related stipulations of settlement. Ps
     asserted in their motion that M was unauthorized to
     agree to the settlements on their behalf.
          Held: The Court shall grant Ps’ motion in that we
     find that M was not authorized by Ps to agree to either
     settlement on their behalf.



     Michael D. Stewart, Ronald A. Feuerstein, Candace M. Van den

Bosch, and Gary H. Kuwada, for petitioners.1

     Elliot H. Kajan, for third party in interest Dwight M.

Montgomery.

     Karen Nicholson Sommers, for respondent.




     1
       Dwight M. Montgomery petitioned the Court on behalf of
petitioners and continued to represent them until he withdrew on
Apr. 9, 2004. Ronald A. Feuerstein entered the case on Feb. 25,
2004. Candace M. Van den Bosch and Michael D. Stewart entered
the case on Apr. 28, 2004. A. Lavar Taylor and Robert S.
Horowitz entered the case on June 9, 2004, and withdrew on
July 15, 2004. Gary H. Kuwada entered the case on June 22, 2004.
                                 - 3 -

                MEMORANDUM FINDINGS OF FACT AND OPINION


     LARO, Judge:     Petitioners petitioned the Court to

redetermine deficiencies of $862,621 and $1,528,818 in their

Federal income taxes for 1993 and 1994, respectively, and related

additions thereto totaling $389,285 and $688,169, respectively.

On December 10, 2003, the parties filed with the Court a

stipulation of settled issues (first stipulation of settled

issues) that stated the terms of a settlement (first settlement)

of approximately 45 out of 50 issues in the case.    Six days

later, respondent lodged with the Court a second stipulation of

settled issues (second stipulation of settled issues) that

repeated the substance of the first stipulation of settled issues

and stated the terms of a settlement (second settlement) of the

five issues which were not previously settled.    On January 14,

2004, the parties filed with the Court a settlement stipulation

that showed petitioners’ income tax liability (inclusive of any

addition thereto) for 1993 and 1994, as computed on the basis of

the first settlement and the second settlement (collectively,

settlements).    On January 27, 2004, the Court entered a

stipulated decision that reflected the amounts shown in the

settlement stipulation.

     On February 27, 2004, petitioners moved the Court to vacate

the stipulated decision and to set aside the related stipulations

of settlement.    Petitioners asserted in their motion that their
                               - 4 -

former counsel, Dwight M. Montgomery (Montgomery), was

unauthorized to agree to the settlements on their behalf.2

Following an evidentiary hearing on petitioners’ motion, we

decide whether to vacate the stipulated decision and to set aside

the related stipulations of settlement.     We hold that we shall.

                         FINDINGS OF FACT

     Some facts were stipulated.   We incorporate herein by this

reference the parties’ stipulation of facts and the exhibits

submitted therewith.   We find the stipulated facts accordingly.

Petitioners attached certain documents to their opening brief as

an appendix.   These documents and the statements therein are not

evidence.   We give these documents and statements no

consideration except to the extent that they are duplicative of a

document or statement otherwise in evidence.    See Rule 143(b);3

see also Harris v. Commissioner, T.C. Memo. 1998-332 (documents

attached to a brief are not evidence).

     Petitioners, husband and wife, resided in San Juan

Capistrano, California, when their petition was filed.    During

1993 and 1994, they worked in a business that provided physical,

occupational, and speech therapy services to nursing homes.


     2
       Although this motion was filed as a motion to vacate the
decision, we understand and treat it as a request by petitioners
to vacate the stipulations of settlement as well.
     3
       Unless otherwise indicated, section references are to the
Internal Revenue Code applicable to the relevant years. Rule
references are to the Tax Court Rules of Practice and Procedure.
                               - 5 -

Petitioners’ S corporation, Continuum Health, Inc. (Continuum),

exercised daily management functions and operated the business.

Petitioners’ wholly owned C corporation, Continue Care

Corporation (CCC), processed the business’s payroll.     Petitioner

Catherine Keil (Ms. Keil), a licensed physical therapist, handled

the business’s daily operation and finances.     Ms. Keil also dealt

with the business’s accountants and lawyers.     Petitioner Johann

Keil (Mr. Keil) handled the business’s development and public

relations.   Mr. Keil had no involvement in the business’s daily

operation.

     In or around 1999, respondent audited petitioners’ personal

1993 and 1994 Federal income tax returns and the related returns

of Continuum and CCC.   Through a referral, Ms. Keil met

Montgomery in the summer of 2000, and petitioners and CCC

retained him to handle the audits.     Ms. Keil was Montgomery’s

contact person for petitioners as to this representation, and she

informed him at the time of his retention that he could not

accept any settlement as to the case without her consideration

and approval of it.   Until December 15, 2004, Montgomery dealt

exclusively with Ms. Keil as to the subject matter of the audits.

His only interaction with Mr. Keil before December 15, 2004, was

that they spoke with each other on several occasions in October

2004 about an unrelated matter concerning a nonprofit foundation.
                               - 6 -

     Montgomery instructed Ms. Keil to forward to him any

tax-related document that she received as to the subject years,

and he told her that he would take care of those documents.    On

November 21, 2000, respondent mailed to Ms. Keil a notice of

deficiency determining a $518,939 deficiency in CCC’s 1994

Federal income tax and related additions thereto totaling

$233,522.55.   She forwarded that notice to Montgomery, and he

petitioned the Court with respect to it.   On July 13, 2001, the

Court dismissed CCC’s case as untimely filed.    Montgomery never

told Ms. Keil that CCC’s case was dismissed.    Approximately 6

weeks before that dismissal, Montgomery had noted that the

Court’s dismissal of CCC’s case as untimely filed would cost CCC

approximately $1.2 million to litigate its case in a U.S.

District Court.

     On June 25, 2002, respondent issued to petitioners the

notice of deficiency as to their 1993 and 1994 Federal income

taxes.   As to those respective years, the notice determined

income tax deficiencies of $862,621 and $1,528,818, section

6651(a)(1) additions to tax of $216,761 and $382,405, and section

6662(a) accuracy-related penalties of $172,524 and $305,764.      On

or about September 22, 2002, petitioners authorized Montgomery to

petition the Court with respect to this notice.    On September 26,

2002, Montgomery filed such a petition with the Court, seeking a

redetermination of unreported income, business expenses, personal
                               - 7 -

deductions, additions to tax under section 6651(a), and

accuracy-related penalties under section 6662(a).   The Court

calendared the resulting case for trial on the Court’s regular 2-

week session in San Diego, California, commencing on October 20,

2003 (regular San Diego session), and notified the parties of

this action on May 22, 2003.   Montgomery did not prepare to try

petitioners’ case at the regular San Diego session but assured

Ms. Keil that he would cause the case to be continued until the

spring of 2004.   Early in October 2003, Ms. Keil called

Montgomery to ask him about the scheduled trial, and she inquired

into whether he was going to prepare petitioners for it.   He

reiterated that he was going to have the case continued, and he

asked Ms. Keil to give him a good reason to continue the case.

He added that the case was not ready to be tried during the

regular San Diego session.

     Pursuant to Montgomery’s request, petitioners presented him

with a two-sentence letter from a medical doctor stating that “I

am treating Mr. Keil for an episode of Major Depression.   He is

being treated with an antidepressant, Paxil, and cognitive

psychotherapy”.   Montgomery attached this letter to a motion for

continuance.   In relevant part, he asserted in that motion that

Mr. Keil was suffering from depression and that Mr. Keil was

critical to petitioners’ case because he was more actively

involved with the business’s income and expenses than was Ms.
                               - 8 -

Keil.   Montgomery filed that motion with the Court at the call of

the calendar of the regular San Diego session.    The Court denied

this motion and informed the parties’ counsel that petitioners’

case would be tried during the second week of the regular San

Diego session.   Montgomery told Ms. Keil that this motion was

denied.   He did not tell her that petitioners’ case was set for

trial during the second week of the regular San Diego session.

     Near the end of the first week of the regular San Diego

session, the Court concluded that wildfires in the San Diego area

could be dangerous during the remainder of that session.     On

October 27, 2003, the Court sua sponte continued the trial of

petitioners’ case to December 16, 2003, and notified the parties

of the same.   On November 28, 2003, Montgomery filed with the

Court a motion to continue petitioners’ case from December 16,

2003, asserting that he would be outside the United States on a

family vacation during that time.   Montgomery informed Ms. Keil

that this motion would be granted, and she and Mr. Keil made

separate plans to be in the States of Hawaii and Washington,

respectively, over the new trial date.    The Court denied

Montgomery’s motion on December 1, 2003.    Montgomery never

informed petitioners of this action, and petitioners traveled

pursuant to their plans.

     Subsequently, Montgomery and respondent settled all issues

in the case before December 16, 2003.    They filed the first
                               - 9 -

stipulation of settled issues on December 10, 2003, that

reflected their settlement of approximately 45 out of 50 issues.

The first stipulation of settled issues stated that the only

issues remaining in dispute were (1) whether petitioners could

deduct for 1993 contract labor in excess of $463,577, (2) whether

Continuum (and thus petitioners) could deduct business expenses

for 1994 in excess of $871,480, (3) whether petitioners could

deduct for 1994 a stock loss under section 1244 as to Quest

Therapy, Inc. (Quest), (4) whether petitioners were liable for

the section 6662(a) accuracy-related penalty determined by

respondent for 1993, and (5) whether petitioners were liable for

the section 6662(a) accuracy-related penalty determined by

respondent for 1994.   Montgomery did not inform either petitioner

that he had agreed to and signed the first stipulation of settled

issues on December 9, 2003, or that he had caused it to be filed

with the Court the next day, nor did either petitioner expressly

authorize him to do any of those acts.   On or before Sunday,

December 14, 2003, without seeking or receiving the approval of

either petitioner, Montgomery settled the five remaining issues.

     Afterwards on December 14, 2003, Montgomery called Ms. Keil

in Hawaii to obtain her acceptance of the settlements.   He told

her that the settlements were a “proposal” that she need not

accept but, if she declined to do so, that petitioners would have

to try their case in the spring of 2004.   Ms. Keil did not accept
                              - 10 -

the “proposal” because she did not understand it.   She told

Montgomery that this was so and that she wanted to discuss the

“proposal” with her accountant, Joann Ong Tan (Tan), before

acting on it.   Montgomery asked Ms. Keil if he could talk to Mr.

Keil about the “proposal”.   Ms. Keil replied that the matter was

between her and Montgomery, and she reminded him that she had to

agree to any settlement on her part.   She also told him that she

might not necessarily agree with a settlement accepted by Mr.

Keil.   Following this conversation, Montgomery transmitted to Ms.

Keil in Hawaii an 18-page facsimile that included an unsigned

copy of the second stipulation of settled issues and Montgomery’s

analysis of the terms of that second stipulation.   He also at or

about that time transmitted by facsimile to Tan the same 18

pages, but for a slight change in the message on the cover sheet

and an alteration or deletion of a paragraph concerning payment

concerns, and he stated on the cover sheet addressed to her that

the second stipulation of settled issues represented a “proposed

IRS settlement”.   Also on December 14, 2003, petitioners

discussed with each other the status of the case and, more

specifically, the facsimile that Ms. Keil had received from

Montgomery.   Mr. Keil expressed no opinion on the second

stipulation of settled issues but stated that he wanted an

accountant first to review it.   At or about the same time, Ms.

Keil also spoke by telephone with Tan and explained that
                               - 11 -

respondent had made a “proposal” to petitioners.   Ms. Keil asked

Tan to review Montgomery’s analysis of the “proposal” and to

discuss it with her.

     On December 15, 2003, Montgomery spoke for the first time

with Tan.   Later that day in the evening, Montgomery spoke with

Tan a second time for at least 2 hours.   During the later call,

Montgomery and Tan discussed the second stipulation of settled

issues and Montgomery’s analysis of it.   During no time on that

date (or at any other time) did Montgomery inform Tan that he had

already accepted the settlements on behalf of petitioners, or

that he had signed the first stipulation of settled issues

approximately 1 week before.

     Also on December 15, 2004, before he had spoken to Tan in

the evening of that day, Montgomery called Mr. Keil in Washington

to attempt to persuade him to accept the settlements on behalf of

petitioners.   The two spoke for approximately 25 minutes, with

Montgomery referring to the second stipulation of settled issues

as a “proposal” and recommending that Mr. Keil accept it.    Mr.

Keil responded that he first wanted the “proposal” to be reviewed

by an accountant.   In an attempt to persuade Mr. Keil to accept

the second stipulation of settled issues at that time, Montgomery

stated that his law firm would remedy any error reflected in that

stipulation, if one in fact existed.    When Mr. Keil continued to

resist, Montgomery threatened to resign as petitioners’ counsel
                              - 12 -

unless Mr. Keil accepted the settlements.   Mr. Keil did not

accept any part of the settlements, and he did not instruct

Montgomery to settle any part of the case on behalf of either

petitioner.   Nor did Mr. Keil tell Montgomery that Mr. Keil would

get Ms. Keil to accept the second stipulation of settled issues.

     On the morning of December 16, 2003, Montgomery spoke to Tan

briefly and concluded their conversation by stating that he had

to go to court.   When this case was called for trial at 10 a.m.,

on December 16, 2003, neither Montgomery nor petitioners were

present.   Respondent’s counsel, Karen Nicholson Sommers

(Sommers), appeared on behalf of respondent and informed the

Court that she had spoken to Montgomery that morning.   She stated

that Montgomery had told her that he would be transmitting to her

office by facsimile a signed stipulation that reflected their

resolution of all issues in the case.   She stated that she had

recently verified that this document was then in her office.    She

informed the Court that the parties had settled all issues in the

case but that Montgomery had told her that he would like 30 days

to file the settlement stipulation so that petitioners’

accountant could review the tax computations shown therein.4    The


     4
       As we understood it then and continue to understand it
today, the accountant’s review related only to the calculation of
petitioners’ tax liability that would be shown in the settlement
stipulation; the accountant’s review was not a contingency to the
settlement of any of the issues underlying that stipulation. To
be sure, the settlement stipulation, set forth infra pp. 16-17,
                                                   (continued...)
                             - 13 -

Court granted this request and again confirmed with Sommers that

the parties had resolved all issues arising out of the notice of

deficiency issued to petitioners.   Respondent at that time also

lodged with the Court a signed (by Montgomery and Sommers) copy

of the second stipulation of settled issues.   The second

stipulation of settled issues was generally a copy of the first

stipulation of settled issues modified to state the terms of the

settlement of the five issues which were listed in the first

stipulation of settled issues as then still in dispute.     The

lodged document stated as to these five issues that (1) for 1993,

petitioners could deduct $158,320 of contract labor in excess of

the $463,577 referenced in the first stipulation of settled

issues (i.e., a total deduction of $621,897), (2) for 1994,

Continuum (and thus petitioners) could not deduct any business

expenses in excess of the $871,480 referenced in the first

stipulation of settled issued, but that Continuum (and thus

petitioners) had to realize additional income of $225,411,

(3) for 1994, petitioners could not under section 1244 deduct any

stock loss as to Quest, (4) for 1993, petitioners were liable for

the section 6662(a) accuracy-related penalty, and (5) for 1994,


     4
      (...continued)
merely states the amount of petitioners’ tax liability for the
relevant years and makes no mention of any specific issue
underlying that liability. The parties’ settlement of the issues
underlying the settlement stipulation, on the other hand, was set
forth in the first stipulation of settled issues and the second
stipulation of settled issues.
                              - 14 -

petitioners were liable for the section 6662(a) accuracy-related

penalty.

     During the afternoon of December 16, 2003, Montgomery held a

telephonic conference with Ms. Keil and Tan, and he tried to

persuade Ms. Keil to accept the settlements.   He told Ms. Keil

and Tan that if they later found any mistake in his computations,

his law firm and his insurance carrier would pay for the mistake,

the accounting fee, and the tax bill.   Ms. Keil refused to accept

the settlements.

     Near the end of this conference, Montgomery asked Tan to

hang up so that he could speak privately with Ms. Keil.   After

Tan did so, Montgomery asked Ms. Keil if she was proceeding with

her plans to divorce Mr. Keil.   Ms. Keil replied that she was and

that Mr. Keil would be served with divorce papers in January

2004.   Montgomery replied that the divorce was good news in that

either petitioner alone could now settle petitioners’ case and

then, if either petitioner wanted, argue later that the resulting

decision should be vacated because neither petitioner was

entitled to settle on behalf of both petitioners due to their

pending divorce.   Montgomery suggested that he (on her behalf)

could then accept the settled amount or see if he could get a

better deal.   Ms. Keil declined this offer.   Later that evening,

Montgomery spoke to Tan for approximately 2 hours.   Montgomery

relayed to Tan his scheme of filing with the Court a stipulated
                               - 15 -

decision authorized by only one petitioner, believing that

petitioners could later attack it as improperly authorized by

only one of them while they were undergoing a divorce.

     At midnight of that evening, Montgomery called Tan again and

spoke to her for 3 hours trying to convince her that the

settlements were good for petitioners.    Tan did not have any of

petitioners’ 1993 or 1994 financial records, and she told

Montgomery that she required those records before opining on the

settlements.   During the morning of December 17, 2003, Montgomery

drove approximately 2 hours to Tan’s office to hand deliver

petitioners’ files to her and to discuss the settlements.    He met

with Tan from approximately 11 a.m. to 4 p.m.    Tan informed

Montgomery at the end of that meeting that she still was unable

to opine on the settlements because she was uncomfortable with

the accuracy of certain numbers used by his accountant in

computing amounts reflected in the settlements.    Montgomery told

Tan not to worry because his insurance carrier would cover any

expense resulting from an inaccurate computation by him or his

accountant.    Tan continued to decline to opine at that time.

     Also on December 17, 2003, Montgomery spoke to Mr. Keil for

approximately 10 minutes.    During that call, Montgomery again

tried to convince Mr. Keil to approve the settlements and stated

that any mistake in them would be remedied by his law firm.      Mr.

Keil declined to accept the settlements.    Montgomery informed Mr.
                                    - 16 -

Keil that petitioners could review the settlements with Tan while

Montgomery was away on vacation and that he and petitioners could

then discuss the settlements when he returned in January 2004.

     On December 18, 2003, Montgomery left the United States on

his scheduled vacation.       After he returned, he signed both the

settlement stipulation and the stipulated decision on January 6,

2004.     After he returned to the United States, he did not first

talk to either petitioner or Tan as to the matter.          Sommers

signed both of those documents on January 13, 2004, and the

parties filed the settlement stipulation with the Court on

January 14, 2004.       The settlement stipulation stated:

          It is hereby stipulated that the following
     statement shows petitioners* income tax liability for
     the taxable year 1993:

     Tax Liability, computed without allowance
       for net operating loss carryback from
       taxable year 1995 to taxable year 1993            $168,045.00

     Tax assessed:                                        $64,718.00


            Payments (April   15,   1994)   $20,500.00
                     (April   15,   1995)   $ 1,751.00
                  (November   28,   1997)   $ 5,000.00
                   (January   22,   1998)   $ 5,000.00

             Paid                           $32,251.00

             Not paid                       $32,467.00

        Deficiency, without allowance for net
          operating loss carryback                       $103,327.00

        Reduction-in liability due to net
          operating loss carryback                        $86,904.00
                              - 17 -


     Deficiency, after allowance for net
       operating loss carryback                      $16,423.00

     No net operating loss carryback claim filed.

          It is further stipulated that there is a
     deficiency in income tax due from petitioners for the
     taxable year 1994 in the amount of $238,769.00.

          It is further stipulated that there are additions
     to tax due from petitioners for the taxable years 1993
     and 1994, under the provisions of I.R.C. § 6651(a)(1),
     in the amounts of $25,831.75 and $47,869.80,
     respectively.

          It is further stipulated that there are penalties
     due from petitioners for the taxable years 1993 and
     1994, under the provisions of I.R.C. § 6662(a), in the
     amounts of $20,665.40 and $47,753.80.

          It is further stipulated that interest will be
     assessed as provided by law on the deficiencies,
     penalties, and additions to tax due from petitioners.

On January 27, 2004, the Court entered the stipulated decision.

The stipulated decision reflected the amounts shown in the

settlement stipulation.

     On February 4, 2004, Montgomery called Tan on a different

matter.   During that conversation, she learned that he had

settled petitioners’ case in full.     Tan then notified Ms. Keil

that petitioners’ case had been settled.     On February 27, 2004,

petitioners moved the Court to vacate the stipulated decision and

to set aside the related stipulations of settlement.     Petitioners

asserted in their motion that this action should be taken because

Montgomery was unauthorized to agree to the settlements on their

behalf.
                                - 18 -

     On March 16, 2004, the Court ordered Montgomery to file with

the Court a statement as to his understanding of his authority to

settle this case.   Montgomery responded that he had been

authorized by Mr. Keil to settle this case in accordance with the

amounts shown in the stipulated decision, that petitioners had

been clients of his for approximately 4 years, and that

petitioners had previously allowed one of them to speak on behalf

of (and bind) both of them.    Montgomery also stated that on

December 15, 2003, he had explained the second stipulation of

settled issues to Mr. Keil and recommended its acceptance, Mr.

Keil had authorized Montgomery on behalf of petitioners to accept

the settlements reflected in that stipulation, and Mr. Keil had

informed him that Mr. Keil would obtain Ms. Keil’s acceptance of

the settlements.

                                OPINION

     Petitioners argue that the Court should vacate the

stipulated decision and set aside the related stipulations of

settlement because Montgomery was not authorized to agree to the

settlements on their behalf.    Petitioners bear the burden of

proving that Montgomery lacked the requisite settlement

authority.   See Dahl v. Commissioner, T.C. Memo. 1995-179, affd.

85 F.3d 643 (11th Cir. 1996).    We presume that a duly licensed

attorney appearing in this Court is authorized to act on behalf

of a litigant whom the attorney purports to represent.      Id.
                               - 19 -

However, as the United States Supreme Court has observed as to

such a presumption:

     the utter want of power of an attorney, by virtue of
     his general retainer only, to compromise his client’s
     claim, cannot, we think, be successfully disputed.

          A judgment entered upon such a compromise is
     subject to be set aside on the ground of the lack of
     authority in the attorney to make the compromise upon
     which the judgment rests. Prima facie, the act of the
     attorney in making such compromise and entering or
     permitting to be entered such judgment is valid,
     because it is assumed the attorney acted with special
     authority, but when it is proved he had none, the
     judgment will be vacated on that ground. Such judgment
     will be set aside upon application in the cause itself
     if made in due time or by a resort to a court of equity
     where relief may be properly granted. [United States
     v. Beebe, 180 U.S. 343, 352 (1901).]

     Absent a stipulation to the contrary, an appeal of this case

lies to the Court of Appeals for the Ninth Circuit.   See sec.

7482(b)(1)(A).   That court has held that settlement agreements

are contracts whose enforceability is governed by “familiar

principles of contract law”.   Jeff D. v. Andrus, 899 F.2d 753,

759 (9th Cir. 1989); see also Harrop v. W. Airlines, Inc.,

550 F.2d 1143, 1145 (9th Cir. 1977).    These “familiar principles”

are drawn from the local law that applies to the general

interpretation of contracts.   Jeff D. v. Andrus, supra at 759.

The applicable local law, California contract law, invokes the

law of agency to determine whether Montgomery was authorized to

settle all or part of petitioners’ case, with the important

caveat that only express authority from petitioners suffices to
                                - 20 -

confer the requisite settlement authority upon Montgomery.      See

Levy v. Superior Court, 896 P.2d 171 (Cal. 1995); Blanton v.

Womancare, Inc., 696 P.2d 645, 649-653 (Cal. 1985); see also

Harrop v. W. Airlines, Inc., supra at 1145 (“an attorney has no

authority, either actual or implied, to settle an action without

the express permission of his client”).5

     Respondent argues primarily that Montgomery during his

December 15, 2003, telephone conversation with Mr. Keil received

express settlement authority.    We disagree.   Whether Montgomery

at that time obtained express authority to settle some or all of

petitioners’ case is a question of fact.    Adams v. Commissioner,

85 T.C. 359, 369-372 (1985).    The facts at hand support a

conclusion contrary to that argued by respondent.    Although



     5
       We also note a recent observation by the U.S. Supreme
Court in Banks v. Commissioner, 543 U.S.    , 125 S. Ct. 826
(2005). There, the Court stated:

     The relationship between client and attorney,
     regardless of the variations in particular compensation
     agreements or the amount of skill and effort the
     attorney contributes, is a quintessential
     principal-agent relationship. * * * The client may
     rely on the attorney’s expertise and special skills to
     achieve a result the client could not achieve alone.
     That, however, is true of most principal-agent
     relationships, and it does not alter the fact that the
     client retains ultimate dominion and control over the
     underlying claim. The control is evident when it is
     noted that, although the attorney can make tactical
     decisions without consulting the client, the plaintiff
     still must determine whether to settle or proceed to
     judgment and make, as well, other critical decisions.
     [Id. at    , 125 S.Ct. at 832-833.]
                              - 21 -

Montgomery testified that he believed that Mr. Keil during the

telephone conversation of December 15, 2003, authorized him to

settle this case on behalf of both petitioners, we find this

testimony incredible when viewed against the record as a whole.

Before that conversation, Montgomery had been dealing exclusively

with Ms. Keil as to petitioners’ 1993 and 1994 income taxes, and

Montgomery had never spoken directly to Mr. Keil as to that

matter.6   Given our additional finding that the December 15,

2003, telephone conversation between Montgomery and Mr. Keil

lasted 25 minutes at the most, we decline to find on the basis of

Montgomery’s uncorroborated and incredible testimony that Mr.

Keil authorized Montgomery during their brief conversation to

accept any settlement on behalf of both petitioners.7   See Ruark

v. Commissioner, 449 F.2d 311, 312 (9th Cir. 1971), affg. per

curiam T.C. Memo. 1969-48; Clark v. Commissioner, 266 F.2d 698,

708-709 (9th Cir. 1959), affg. in part and remanding on another

ground T.C. Memo. 1957-129.


     6
       While Montgomery testified in one breath that he met with
both petitioners at the start of the audit and discussed the
audit with them at that time, he testified adamantly in a second
breath that he never had a face-to-face meeting with petitioners.
     7
       Even if Montgomery had received Mr. Keil’s consent on
Dec. 15, 2003, as he claimed, that day was at least 1 day after
Montgomery agreed to the second settlement and 6 days after he
agreed to the first settlement. Of course, the mere fact that
the parties filed the settlement stipulation with the Court on
Jan. 14, 2004, does not mean that a settlement occurred only on
that date. See Dorchester Indus., Inc. v. Commissioner, 108 T.C.
320 (1997), affd. 208 F.3d 205 (3d Cir. 2000).
                              - 22 -

     Such is especially so given our finding that Mr. Keil

testified credibly that he never discussed the subject matter of

the audit with Montgomery before December 15, 2003, that he never

had a face-to-face meeting with Montgomery, and that he never

authorized Montgomery to settle this “complex” case.   Ms. Keil

also testified credibly that she repeatedly informed Montgomery

that she had to approve any settlement in this case, and

Montgomery had for all practical purposes been retained by her to

represent petitioners as to this matter.   Even Montgomery

testified that he always understood that he needed consent from

both petitioners to settle their tax matters and that Ms. Keil

never expressly agreed to settle the case.8

     While Montgomery testified that he had established a

relationship with both petitioners where the word of one was

sufficient to bind both, we do not find that such was so.    In

addition to the fact that this testimony is inconsistent with the

testimony just noted in the last sentence of the prior paragraph,

the record does not persuade us that Ms. Keil ever allowed Mr.

Keil to speak on behalf of her or to bind her to any agreement

that he made on her behalf.   Indeed, the fact that Montgomery

repeatedly called Ms. Keil as to the settlements supports our

contrary finding that he knew that he needed the approval of Ms.


     8
       We also note that Tan’s testimony was consistent with the
testimony of each petitioner and that Tan during the testimony of
both petitioners was sequestered pursuant to Rule 145(a).
                                - 23 -

Keil for any settlement and that she was the spokesperson for

petitioners.

     We conclude on the basis of documentary evidence and the

testimony of petitioners and Tan, witnesses whom we find to be

more reliable than Montgomery, that at no time did either

petitioner, by word or deed, authorize Montgomery to agree to

either of the settlements.     Because we find that Montgomery acted

without authority when he agreed to those settlements, and we do

not find that petitioners ratified that action after the fact, we

shall vacate the stipulated decision and set aside the related

stipulations of settlement.9

     We have considered all arguments made in this case and have

rejected those arguments not discussed herein as without merit.

Accordingly,



                                           An appropriate order will

                                      be issued.




     9
       We also note our disagreement with respondent’s argument
that petitioners cannot prevail as to their motion because they
have not proven that vacating the decision will result in a
lesser liability to them. Suffice it to say that our conclusion
that Montgomery was unauthorized to agree to the settlements on
behalf of petitioners is sufficient under the facts herein to
vacate the stipulated decision. See United States v. Beebe,
180 U.S. 343, 352 (1901).
