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Bailey v. Commissioner (T.C. Memo. 2021-55)

On May 10, 2021, the Tax Court issued a Memorandum Opinion in the case of Bailey v. Commissioner (T.C. Memo. 2021-55). The primary issue presented in Bailey was whether the petitioners should (or could) be relieved from the stipulation of facts that they voluntarily entered into with the IRS before trial.

Background

The petitioners’ personal income tax returns (and a related corporate return) were audited for a number of years (from 2008-2012), and the IRS made adjustments to all periods, especially with respect to the petitioners’ claimed deductions.  The petitioners filed petitions with respect to the two notices of deficiency, the cases were consolidated, and they were set for trial.

In November 2019, the parties filed a stipulation of settled issues. The stipulation noted that two of the substantive issues had been resolved and that the remaining issues involve primarily substantiation of business expenses and itemized deductions, additions to tax, and penalties. However, the petitioners did raise new issues requesting additional deductions not originally claimed.

In December 2019, the parties filed a stipulation of facts.  The stipulation of facts repeated the parties’ agreement in the stipulation of settled issues, set forth in detail the time and manner of the determination of the IRC § 6662 penalty for each year, and agreed that the IRS had satisfied IRC § 6751(b)(1) for each penalty determined in the statutory notices.

Stipulations

Tax Court Rule 91(e) provides that a stipulation is, to the extent of its terms, a conclusive admission by the parties to the stipulation, except when the court permits a party to weasel its way out, or the parties mutually agree to said weaseling. The Tax Court will not allow either party to qualify, change, or contradict (weasel out of) a stipulation, unless “justice” so requires. A stipulation and the admissions contained in the stipulation are binding on the present, pending case only. Stipulations cannot be used against any of the parties thereto in any other case or proceeding.

Stipulations of settlement are usually enforced when a request to withdraw them is made close to trial. See Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320, 334-335 (1997) (stipulated settlements upheld absent a showing non-consent, fraud, mistake, etc.), aff’d, 208 F.3d 205 (3d Cir. 2000); Stamm Int’l Corp. v. Commissioner, 90 T.C. 315, 321-322 (1988) (harder to vacate a stipulated settlement on the eve of trial). In the present case, the Tax Court found that both stipulations were detailed, comprehensive, and unambiguous. The stipulations demonstrated “that much had been accomplished during the years of examination before the notices of deficiency were sent and during the years of negotiations between the filing of the petitions and the time of trial.”

The Tax Court (on posttrial brief) asked the petitioners to explain “why justice now requires modifying the stipulation, and what evidence, if any, they would offer in support of their position.”  The petitioners offered neither explanation nor evidence sufficient to convince the Tax Court to allow them to weasel out of the stipulations.

(T.C. Memo. 2021-55) Bailey v. Commissioner

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