- 65 -
of Appeals held that “fraud on the court” occurs regardless of
whether the opposing party is prejudiced. Id.29
The Court of Appeals further stated:
We have the inherent power to vacate the judgment
of the Tax Court, fashion an appropriate remedy, and
sanction a party or its lawyers for willful abuse of
the judicial process, particularly when the party or
its lawyers have intentionally practiced a fraud upon
the Court. * * *
* * * The taxpayers should not be forced to endure
another trial and the IRS should be sanctioned for this
extreme misconduct.
Conversely, we will not enter judgment eradicating
all tax liability of these taxpayers. Such an extreme
sanction, while within the court’s power, is not
warranted under these facts. * * *
Id. at 1047 (citations omitted). The Court of Appeals instead
reversed the decisions of this Court in the test cases and
directed this Court to “enter judgment in favor of Appellants and
all other taxpayers properly before this Court on terms
equivalent to those provided in the settlement agreement with
Thompson and the IRS.” Id. It left “to the Tax Court’s
discretion the fashioning of such judgments which, to the extent
possible and practicable, should put these taxpayers in the same
position as provided for in the Thompson settlement.” Id. n.11.
29The Court of Appeals acknowledged the contrary holding of
the Court of Appeals for the Seventh Circuit in Drobny v.
Commissioner, 113 F.3d 670 (7th Cir. 1997), affg. T.C. Memo.
1995-209. In Drobny, the Seventh Circuit held that proof of
fraud on the court requires a showing that the alleged misconduct
actually affected the outcome of the case to the taxpayer’s
detriment. Id. at 678-679.
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