Tax Court vacates stipulated decisions in tax shelter case.

• Author: Beavers, James

In the latest decision in one of its longest running series of cases, the Tax Court granted the motion of a group of taxpayers to vacate stipulated decisions in their cases that were part of the IRS's Kersting tax shelter project. The court also ordered that the accounts of all Kersting project taxpayers with stipulated decisions be adjusted on terms equivalent to those given by the Ninth Circuit to the Kersting project taxpayers who had not settled their cases. It granted the taxpayers' motion and issued the order because it found that all the Kersting project taxpayers, including those who had settled with the IRS and executed stipulated decisions, had been damaged by the IRS's fraud on the court in the trial of the Kersting project test cases. The court ruled that the IRS had not rectified the harm by disclosing the fraud to the Tax Court and had made low value settlement offers to Kersting project taxpayers after the fraud had been committed.

Background

In response to the large volume of cases generated by tax shelter examinations during the late 1970s and early 1980s, the IRS and the Tax Court developed procedures (test case procedures) intended to expedite tax shelter litigation and to reduce the amount of IRS and judicial resources used to resolve them. Under the test case procedures, when a large number of taxpayers are contesting deficiencies related to the same tax shelter, several representative cases are chosen to be tried, and agreements to be bound by the results of these cases (piggyback agreements) are obtained from as many taxpayers as possible, thus greatly reducing the number of cases that are actually tried.

In the early 1980s, the IRS established the Kersting tax shelter project to investigate taxpayers who had claimed interest deductions from tax shelter programs promoted by Henry F. K. Kersting. The IRS issued deficiency notices disallowing these deductions to taxpayers that it identified as having participated in the programs. In response, Kersting hired an attorney to represent the taxpayers, which led to the filing of a large number of petitions in the Tax Court contesting the deficiency notices. From 1982 to 1988, to reduce the number of taxpayers litigating the deficiency notices, the IRS offered the Kersting project taxpayers a settlement agreement similar to those offered in other tax shelter projects that reduced the taxpayers' deficiency amount by approximately 7%.

The majority of the Kersting project...