In Uncategorized on 03/20/2013 at 17:08

Be very careful how you draft a stipulation with IRS. Raphael Dang-Quang Cung learns that the hard way (and he’s supposedly a lawyer his own self), in 2013 T. C. Memo. 81, filed 3/20/13.

The tax liability arises out of settlement of a lawsuit Raphael DQC brought against a car dealer. The proceeds clearly aren’t exempt; no bodily injury, so Section 104 is out, and Raphael DQC has no case, statute, regulation or anything else to help him out.

So he stipulates with IRS as follows:

“The parties agree that the adjustments set forth in the notice of deficiency dated November 29, 2010 for the taxable year 2008 upon which this case is based are settled as follows:

* * * * * * *

“4. The remaining issues in this case are:

(a) Whether the $15,000 petitioner received is taxable.

(b) Whether petitioner is liable for the I.R.C. § 6662 accuracy-related penalty.

5. All other adjustments are computational.” 2013 T. C. Memo. 81, at p. 7.

Simple, right? $15K on the table, that’s all. Except IRS amends its answer a week before trial to add $2K, that Raphael DQC’s lawyer held back from the settlement proceeds as the lawyer’s fee, and didn’t note on the 1099-MISC he sent Raphael DQC .

Raphael DQC says “we stipulated to $15K, not $17K”.

Judge Wherry:  “We disagree with petitioner. The stipulation of settled issues on its face applies only to the notice of deficiency, and the parties could not have settled more than what respondent determined in the notice. Even if we were to find the stipulation ambiguous, the parties clearly did not intend to settle respondent’s increase to income. Respondent, as evidenced by the outstanding motion for leave to amend the answer, did not so intend. In such a case, the overt act of pursuing that motion indicates a lack of mutual assent, without which there is no contract. In addition, the stipulation of facts includes the following statement: ‘either party may introduce other and further evidence not inconsistent with the facts herein stipulated.’ The lack of a similar statement in the stipulation of settled issues further supports the conclusion that respondent did not intend to foreclose the increased settlement amount. Therefore, respondent was free to assert in the amended answer an increased deficiency pursuant to section 6214(a) and a corresponding increase in the section 6662(a) accuracy-related penalty. We overrule petitioner’s oral objection.” 2013 T. C. Memo. 81, at pp.7-8. (Footnote omitted).

But read the footnote ( Footnote 3 at p. 8).  Raphael DQC admitted in his petition he got the $17K, $15K in cash and the balance kept by his attorney, but claimed he was unaware of this when the answer was filed. This Judge Wherry found hard to swallow.

Judge Wherry concludes Footnote 3: “Diligence at the pleading stage of this litigation or careful drafting of the stipulation might have prevented this issue from arising.” 2013 T. C. Memo. 81, at p. 8, Footnote 3.

Oh yes, Raphael DQC gets a miscellaneous itemized deduction for the $2K.

Takeaway– Remember our friend Tuwanna Jynne Anthony, from my blogpost “Mitigation and Inventory”, 4/20/11. Be ultra-careful when you stipulate to anything with IRS.


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