Opinion
No. 695CV837
June 27, 2000
ORDER
Came on for Consideration Plaintiff's Motion to Enforce Settlement (Doc. # 73). At issue is whether the Internal Revenue Service, the Department of Justice and the Plaintiffs had reached an enforceable settlement. After due consideration, this Court finds that the Motion to Enforce Settlement should be denied.
SUMMARY OF THE FACTS
Plaintiffs Gandy Nursery, Inc., Dennis C. Gandy, d/b/a Dennis Gandy Nursery, Gandy Marketing and Trucking, Inc., and Dennis C. Gandy, brought the instant tax refund suit against the United States on November 13, 1995. On August 26, 1996, one of the plaintiffs, Dennis Gandy, filed a suit against the United States pursuant to Section 7431 of Title 26 alleging that the Criminal Investigation Division of the Internal Revenue Service wrongfully disclosed certain tax return information, and seeking damages for such disclosure.
The plaintiff Dennis C. Gandy has incurred a federal income tax liability which, together with interest and penalties, now stands at approximately $2.2 million. Gandy v. Commissioner, 197 WL 736880 (U.S. Tax Ct.). There is a pending appeal by Plaintiff Gandy of a wrongful disclosure verdict issued by Judge John Hannah, Jr., on appeal in the Fifth Circuit. The United States was the prevailing party in that case.
The parties attempted to reach an amicable resolution to this litigation. On March 9, 2000, Mr. Bill Roberts, the plaintiffs attorney, Mr. Hobart Miller, the attorney representing the Department of Justice and Mr. Wally Banks of the Internal Revenue Service met and attempted to reach a global settlement that would conclude all claims in this case. The plaintiff alleges at the meeting Mr. Banks stated that he had settlement authority on behalf of the Internal Revenue Service. At the end of the meeting, Mr. Banks stated the terms of the possible settlement: Tax Liability would be reduced from $2.4 million to $1.3 million paid over two years without interest and the Plaintiffs would dismiss both this case and the pending Fifth Circuit case.
On March 20, 2000, plaintiff Gandy met with Mr. Miller and Mr. Banks and discussed reducing the dollar amount associated with the tax liability for over two hours. Mr. Banks held firm to the dollar demand he made at the March 9, 2000, meeting.
Throughout that week, the parties negotiated back and forth. On March 24, 2000, the plaintiff agreed with the Internal Revenue Service dollar amount to settle this case. Two payment dates were agreed upon. The pending Fifth Circuit action was also part of the settlement and required the plaintiffs to dismiss the appeal. That afternoon, Mr. Banks faxed to both Mr. Roberts and Mr. Miller the terms of the agreement. The Fax read:
Terms are agreeable as presented, use Form 656 (rev 1-2000) and add a collateral agreement to the 656. Terms must be agreeable to DJ Tax on settling the 2 suits and add the attached wording for a Taxpayer involved in a joint assessment.
Government Exhibit 3.
On March 29, 2000, the plaintiffs were informed the Department of Justice Tax Appellate Section did not want to settle. Mr. Miller relayed a message to the plaintiff that the Internal Revenue Service did not want to settle unless it covered all outstanding litigation between the plaintiffs and the Internal Revenue Service.
The plaintiffs allege that attorneys in the Department of Justice's Tax Appellate Section torpedoed the settlement. The plaintiff believes the Department of Justice wants to continue the litigation for a case they won and can finalize the victory. The plaintiff believes the settlement was reached in good faith and asks that it be enforced.
On June 2, 2000, this court held a hearing where Mr. Roberts and Mr. Miller representing their respective clients presented testimony and submitted exhibits demonstrating whether or not this Court should enforce this proposed settlement.
ANALYSIS
The role of settlement agreements have always been a favored means of resolving disputes. Williams v. First National Bank, 216 U.S. 582 (1910). The law does encourage and favors the settlement of a disputed claim and will sustain such settlements because it is in the interest of the state and the parties that there should be an end to litigation. D.H. Overmyer Co. v. Loflin, 440 F.2d 1213 (5th Cir. 1971).
"[M]en must turn square corners when they deal with the Government." Rock Island, A. L. R. Co. v. United States, 254 U.S. 141, 143 (1920). If the Government attaches even purely formal conditions to its consent to be sued, those conditions must be complied with. Id. The United States is not bound by the unauthorized acts of its agents. Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380 (1947).
Sections 7121 and 7122 of the Internal Revenue Code, Title 26 U.S.C. (The "Code") govern the compromise of a federal tax matter. Bowling v. United States, 510 F.2d 112, 113 (5th Cir. 1975). These provisions are exclusive and are to be strictly construed. Id. As the plaintiff states in their Reply Motion, Section 7122 of the Code, is the pertinent section governing this Motion to Enforce Settlement. Title 26 U.S.C. § 7122(a) states: The Secretary may compromise any civil or criminal case arising under the internal revenue laws prior to reference to the Department of Justice for prosecution or defense; and the Attorney General or his delegate may compromise any such case after reference to the Department of Justice for prosecution or defense.
The plaintiff argues that the agent delegated with authority to settle on behalf of the United States in this case was Mr. Sumner, the Chief of Internal Revenue Service Appeals for the Northern District of Texas. The plaintiff further alleges that Mr. Miller, on behalf of the Department of Justice stated that the Internal Revenue Service had settlement authority. The plaintiff next alleges that Mr. Sumner was apprized of all terms by Mr. Larry McKutchen, the Acting Associate Chief of Internal Revenue Service Appeals, and Mr. Wally Banks, the Internal Revenue Service Appeals Officer. The plaintiff states that when the parties reached a settlement on March 24, 2000, Mr. Sumner agreed and both this case and an appeal to the Fifth Circuit by Plaintiff Gandy were settled.
In determining whether to enforce the settlement in this case, the Court relies on the germane sections of the Code and the March 24, 2000, fax from Mr. Banks to Mr. Roberts and Mr. Miller. The Code is quite clear that very specific procedures must be employed when compromising a case. While the Court agrees that settlement agreements are a favored means of resolving disputes, the Court is also aware of the truth behind Justice Holmes holding in 1920, that if the government attaches even purely formal conditions to its consent to be sued, those conditions must be complied with. Rock Island A. L. R. Co., 254 U.S. at 143. The Code is quite clear that the Attorney General or a proper delegate must approve a settlement after reference to the Department of Justice. The evidence before the Court never demonstrates the Department of Justice agreed to settling this litigation. Despite this being a technical condition, this condition must be complied with for an enforceable settlement to have been created.
The language found in Section 7122(a) of the Code is consistent with Mr. Banks summation of the proposed settlement to the plaintiff. This summation can be found in the fax dated March 24, 2000 addressed to the plaintiff Government Exhibit 3. This Exhibit explicitly states the terms of this settlement must be agreeable to "DJ Tax" on settling the 2 suits. This Exhibit clearly demonstrates the Department of Justice Tax Appellate section must approve or disprove this settlement, in accordance with Section 7122(a) of the Code. The Department of Justice rejected this settlement.
The government's actions in this case could discourage litigants from participating in good faith settlement negotiations with the United States in future litigation. However, this is not a compelling reason to enforce a settlement when the Statute clearly dictates proper procedures that have to be followed. These type of negotiations require the turning of square corners and these conditions must be complied with. Accordingly, it is
ORDERED that the Plaintiffs' Motion to Enforce Settlement (Doc. #73) is denied.
ORDER
Came on for Consideration Plaintiff's Motion For Rule 16(f) Sanctions (Doc. # 76). At issue is whether the Internal Revenue Service and the Department of Justice approached settlement negotiations in good faith. After due consideration, this Court finds that the Motion for Sanctions should be denied.
SUMMARY OF THE FACTS
Plaintiffs Gandy Nursery, Inc., Dennis C. Gandy, d/b/a Dennis Gandy Nursery, Gandy Marketing and Trucking, Inc., and Dennis C. Gandy, brought the instant tax refund suit against the United States on November 13, 1995. On August 26, 1996, one of the plaintiffs, Dennis Gandy, filed a suit against the United States pursuant to Section 7431 of the Internal Revenue Code alleging that the Criminal Investigation Division of the Internal Revenue Service wrongfully disclosed certain tax return information, and seeking damages for such disclosure.
The plaintiff Dennis C. Gandy has incurred a federal income tax liability which, together with interest and penalties, now stands at approximately $2.2 million. Gandy v. Commissioner, 197 WL 736880 (U.S. Tax Ct.). There is a pending appeal by Plaintiff Gandy of a wrongful disclosure verdict issued by Judge John Hannah, Jr., on appeal in the Fifth Circuit. The United States was the prevailing party in that case.
The parties attempted to reach an amicable resolution to this litigation. On March 9, 2000, Mr. Bill Roberts, the plaintiffs attorney, Mr. Hobart Miller, the attorney representing the Department of Justice and Mr. Wally Banks of the Internal Revenue Service met and attempted to reach a universal settlement that would drop all claims in this case. The plaintiff alleges at the meeting Mr. Banks stated that he had settlement authority on behalf of the Internal Revenue Service. At the end of the meeting, Mr. Banks stated the terms of the possible settlement: Tax Liability would be reduced from $2.4 million to $1.3 million paid over two years without interest and the Plaintiffs would dismiss both this case and the pending Fifth Circuit case.
On March 20, 2000, plaintiff Gandy met with Mr. Miller and Mr. Banks and discussed reducing the dollar amount associated with the tax liability for over two hours. Mr. Banks held firm to the dollar demand he made at the March 9, 2000, meeting.
Throughout that week, the parties negotiated back and forth. At no time was not dismissing the Fifth Circuit appeal raised. On March 24, 2000, the plaintiff agreed with the Internal Revenue Service dollar amount to settle this case. Two payment dates were agreed upon. The pending Fifth Circuit action was also part of the deal and required the plaintiffs dismissal. That afternoon, Mr. Banks faxed to both Mr. Roberts and Mr. Miller the terms of the agreement.
On March 29, 2000, the plaintiffs were informed the Department of Justice Tax Appellate Section did not want to settle. Mr. Miller relayed that the Internal Revenue Service did not want to settle unless it covered all outstanding litigation between the plaintiffs and the Internal Revenue Service. On March 30, 2000, the Internal Revenue Service stated the settlement was off, but for $300,000 more, the case could be settled.
On June 23, 2000, this Court denied Plaintiff's Motion to Enforce Settlement. The Plaintiff brings this Motion on the grounds that the Internal Revenue Service represented to the plaintiffs that they had the authority to settle this matter when settlement authority belonged to the Department of Justice. The plaintiff alleges that the Department of Justice is engaged in a turf war and sought to rescind the agreement. The plaintiff further alleges this represents a lack of good faith on the part of the United States. The plaintiff requests that the government be barred from introducing evidence at trial; a stipulation that prior to trial, the United States did not treat Plaintiffs in good faith; and attorney's fees and costs associated with settlement.
ANALYSIS
The role of settlement agreements have always been a favored means of resolving disputes. Williams v. First National Bank, 216 U.S. 582 (1910). The law does encourage and favors the settlement of a disputed claim and will sustain such settlements because it is in the interest of the state and the parties that there should be an end to litigation. D.H. Overmyer Co. v. Loflin, 440 F.2d 1213 (5th Cir. 1971).
Sections 7121 and 7122 of the Internal Revenue Code (26 U.S.C.) (The "Code") govern the compromise of a federal tax matter. Bowling v. United States, 510 F.2d 112, 113 (5th Cir. 1975). These provisions are exclusive and are to be strictly construed. Id.
The necessity of strictly complying with the Code's term can lead to frustration on behalf of the plaintiff and the United States. The Court has not been presented with evidence the Department of Justice or Internal Revenue Service acted in bad faith or dishonestly represented themselves during the settlement negotiations. As this Court ruled in the denial of Plaintiffs' Motion to Enforce the Settlement, there are required government procedures for evaluating and approving a settlement. Some of these procedures were not completed. The Internal Revenue Service and the Department of Justice did not display a lack of good faith or misconduct in failing to complete this settlement. Rather, the settlement was not completed as a result of the stringent procedures set forth in the Internal Revenue Code that must be strictly complied with to have an enforceable settlement.
Accordingly, it is
ORDERED that the Plaintiffs' Motion for Sanctions (Doc. #76) is denied.