TaxProf Blog reports that yesterday the US Tax Court issued an astounding opinion finding that the IRS committed a fraud on the court affecting over 1300 cases. (Via Instapundit.) The post doesn’t really make it clear (to me anyway) what was at issue, so I went looking for a news story. Finding none (I guess massive fraud by the IRS isn’t newsworthy), I thought I’d see if I could decipher the opinion itself (pdf link).
Here’s what I gather from reading the opinion: The IRS and Tax Court have developed a “test case” procedure to streamline the litigation of large volumes of cases resulting from tax shelter examinations. How it works is that “a few typical cases are selected and most taxpayers whose cases are not selected execute ‘piggyback agreements’ binding the resolution of their cases to the outcome of the final decision in the test cases.” (Page 15.)
In the examination of one particular tax shelter (named after its inventor, Henry Kersting), the IRS secretly arranged for the test case subjects to settle their cases on terms favorable to the IRS (that is, unfavorable to the taxpayer). From page 22:
In December 1986 [Attorney Kenneth] McWade, with the knowledge and connivance of his supervisor, Honolulu District Counsel William A. Sims (Sims), entered into secret contingent settlement agreements with the Cravenses regarding their test cases and with DeCastro regarding the Thompsons’ test cases. The Thompsons and the Cravenses understood that a condition of these settlements was that they would remain test case petitioners. The Cravenses, who were not represented by counsel, agreed with McWade to a reduction of about 6 percent of the originally determined deficiencies for their taxable years 1979 and 1980. This settlement was less favorable to them than the generally available modified 7-percent reduction settlement offer and did not include the burnout.
There seem to be numerous complications and misconducts on top of this, including an illegal IRS search, but the gist is that the IRS defrauded all the people who trusted them to litigate the test cases honestly. (Incidentally, anyone who didn’t agree to a piggyback agreement had to litigate their case in Maui, which is a very nice place to vacation, but probably an expensive and impractical place for a protracted court battle.)
Finally, note that it took the Tax Court 22 years to hold the IRS accountable for its fraud.
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