Tax Court mediation: a case study.

• Author: Saltzman, Michael I.

This past June, I participated in probably the first successful mediation of a Tax Court case under procedures the Chief Counsel published in October [1995..sup.1] Imagine a hotly contested valuation case with valuation experts arrayed on both sides, with the prospect of a week of trial, and the parties unable to reach an agreement, settled in less than two days with the assistance of a mediator. Based on this mediation and others I have participated in, I have some observations that may be helpful when you consider mediation as an alternative dispute resolution (ADR) procedure.

I will quickly come to the point: In more than 30 years of trying tax cases, mediation is the most constructive procedure I have encountered to resolve tax disputes. It is a cost-effective and time-efficient procedure for settling factual issues, such as valuation issues, including those involving transfer pricing. For these reasons, mediation is an ADR procedure that we should not merely know about. Mediation should be seriously considered when factual issues cannot be resolved in the normal course of administrative processing and Tax Court litigation.

Background

Mediation is sometimes confused with arbitration, but it is much different. Mediation is an informal dispute resolution process in which a neutral third person, called the mediator, helps the parties in a lawsuit to reach a mutually agreeable settlement. The mediator meets with the parties both jointly and separately, defines issues, and suggests possible ways of resolving disputes. There is no trial of the case. The mediator renders no decision, and does not dictate the terms of a settlement. The mediation process is confidential. Mediation is entirely voluntary (that is, optional), and a party may withdraw from the process at any time. At the conclusion of a successful mediation, there is a binding result only in the sense that the parties have reached a settlement of the issue, and have confirmed that settlement in an agreement they have signed. In arbitration, on the other hand, although the procedures are more informal than a court trial, evidence is presented in a formal way. There is essentially an out-of-court trial of the case before the arbitrator, rather than the judge. Although the decision whether to arbitrate a case in the Tax Court is voluntary, the arbitrator renders a decision or award that is [binding..sup.2]

Mediation is a way of settling a tax issue when the taxpayer's representatives and the Internal Revenue Service cannot settle the issue on their own. The parties themselves may not be able to reach a settlement because, for example, the taxpayer's representatives and the District Counsel attorneys cannot even discuss settlement in any meaningful way. Perhaps one side and often both sides have become so entrenched in, or so emotionally tied to, a position that settlement is viewed as "unconditional surrender." In a complex tax case, it is not unusual for IRS attorneys to refuse to adopt a single position or theory on an issue, and this moving target' approach makes it difficult to negotiate. Mediation, as the Chief Counsel says, "defuses emotions" by interposing the mediator between the [parties..sup.3] The process itself separates the parties, forces them off positional negotiating stances and focuses them on settlement possibilities. This is why mediation is a way of settling a case with District Counsel when settlement by bilateral negotiations seems impossible. In our case, we were unable to reach a settlement in negotiations both at Appeals and with District Counsel, but with the help of the mediator, we reached a settlement.

IRS Acceptance of Mediation

Last year, Appeals and the Chief Counsel embraced mediation as the new darling of the National Office's dispute resolution procedures. In January 1995, the National Office announced in Announcement 95-2 that Appeals would use mediation on a test basis for a year, and in February a hearing was held to obtain the views of practitioners. In September 1995, the National Office issued final procedures for Appeals mediations, stating that the test period would begin on October 30, [1995..sup.4] In mid-October, the Chief Counsel's procedures accepting mediation in docketed Tax Court cases became [public..sup.5] At this point, only the Justice Department's Tax Division refuses to agree to mediation in refund or other tax cases. Nevertheless, some district courts and circuit courts of appeals have mediation programs, and so mediation sometimes takes place over the Tax Division's objection. Recently, I was involved in an unsuccessful mediation of a tax case with Tax Division attorneys in the district court for the District of Columbia, not because the Justice Department's Tax Division agreed to it, but because the district court ordered [it..sup.6]

Under the test procedures in Appeals, mediation is available in an Appeals office case (1) at the option of the taxpayer and Appeals in order to negotiate their own settlement with the mediator acting as a facilitator; (2) limited to issues in the Coordinated Examination Program (CEP) cases assigned to Appeals Team Chiefs; (3) requested by the taxpayer or Appeals when agreement cannot be reached on an issue after established Appeals settlement discussions are unsuccessful; and (4) must be agreed to by the taxpayer and the Assistant Regional Director of Appeals-Large [Case..sup.7] Announcement 95-86 also includes a model agreement to mediate, a model consent to disclosure of return information for the purposes of the mediation, and a model mediator's report. This mediation agreement is useful for those taking advantage of the mediation procedures either in Appeals or in the Tax Court. In our Tax Court mediation, we used this form agreement as the mediation agreement.

National Office officials said that Appeals expected to be inundated with requests for mediation, but that Appeals would be very selective in deciding which...