Settlement versus litigation: in general
The most fundamental tenet of Tax Division settlement policy is that we
will concede a position that is erroneous, but compromise is justified
only by litigation hazards and collectibility concerns.
The courts are the apex of the controversy resolution structure within
the Internal Revenue Service, which is very much geared to settlement if
at all possible. Thus, settlement is a primary function of the Appeals
Offices, and Appeals settles close to 90% of the cases it considers.
The Tax Division does not settle cases based on nuisance value. For it
to do so would undercut totally the efficacy of the settlement structure
within the Internal Revenue Service. On the other hand, the Division
endeavors to litigate when it is appropriate, to concede when it is
appropriate, and also to compromise (when it is appropriate) on terms
which are just and in the Government's best interests.
From the outset of a case, the question of litigation or settlement
should be considered. Bear in mind that the easiest (but not
necessarily the most advantageous) course of action is to settle the
strongest cases and litigate the weak cases. It is the easiest course of
action because taxpayers' counsel will want to settle their weak cases.
Unfortunately, settlement of a case where the Government is strong and
litigation where it is weak may not contribute to the orderly and rational
development of the tax law. Moreover, it is undoubtedly true that hard
cases make bad law. Accordingly, both in evaluating the litigation and
settlement posture, equities (as well as precedent) must be taken into
account, and, if the case is to be litigated, all equities should be
developed carefully to show that the Government's position is reasonable.
In weighing litigation versus settlement, it is vital to take into
account the case as a whole. Assume, for example, that a case raises a
multitude of issues so that, were taxpayer to prevail on all, its tax
liability would be reduced by a million dollars, but because of §
6511(b)(2) limitations its ultimate recovery is restricted to $100,000. If
the taxpayer agrees that its ultimate recovery is limited to $100,000,
settlement may well be appropriate at or approaching that figure. If the
taxpayer does not agree that § 6511(b)(2) restricts its recovery, then
summary judgment is appropriate to resolve the jurisdictional issue.
The weighing of litigation versus settlement should be a continuing
process, as the Trial Attorney's knowledge increases and there are new
developments which should be taken into account. In this connection, the
Trial Attorney should also consider as the litigation progresses whether
the alternative dispute resolution ("ADR") procedures addressed in Part VI
are appropriate in a particular case.
