ON APPEAL FROM THE UNITED STATES TAX COURT
Before: SEITZ, Chief Judge, SLOVITER and BECKER, Circuit Judges
This is an appeal by the Commissioner of Internal Revenue from a decision of the Tax Court granting the motion of Carl and Diane Kumpf (taxpayers) for judgment by default. We have jurisdiction over the appeal pursuant to section 7482(a) of the Internal Revenue Code of 1954. We vacate the default judgment and remand to the Tax Court.
On March 29, 1978, the Commissioner issued a deficiency notice to the taxpayers for $6,802.70 in income taxes for the year 1974. This notice was issued based on the Commissioner's position that certain commissions for the sale of life insurance policies reported by a corporation owned by the taxpayer Carl Kumpf should have been reported as income by the taxpayers as individuals. On June 23, 1978 the taxpayers petitioned the Tax Court for a redetermination of the asserted deficiency. The Commissioner filed a timely answer on August 14, 1978. The record is replete with delays on the part of the Commissioner thereafter. The Commissioner has admitted both in the Tax Court and in this court that those delays were unnecessary and unwarranted. He has offered no explanation for the delays. Because these delays were the basis of the Tax Court's entry of default judgment against the Commissioner and because the scenario of events is necessary to an understanding of the legal issue presented by this appeal, we will review those events in detail.
Following the Commissioner's answer to the taxpayers' petition, taxpayers wrote on September 11, 1978 to the attorney whose name appeared on the Commissioner's answer, inquiring whether the attorney was assigned to the case and when the attorney would be ready to discuss the case. No reply was received, and on January 24, 1979 the taxpayers were notified that the case was scheduled for trial on April 30, 1979. Still unaware of who would represent the government, taxpayers wrote to the Regional Counsel for the Internal Revenue Service on February 7, 1979, requesting the name of the Commissioner's attorney.
On April 20, 1979, ten days before the scheduled trial, a conference was held between the attorneys. At that conference no settlement was reached. On the trial date, April 30, 1979, the taxpayers submitted a written settlement offer, and the parties joined in a motion for continuance, affording the Commissioner an opportunity to consider the settlement offer. On May 23, 1979, the Commissioner's attorney informed the taxpayers by telephone that the settlement offer was under review and that an answer could be expected by June 30, 1979. None was sent.
On July 31, 1979, taxpayers received a "request for trial status" from the Tax Court. On August 2, 1979, taxpayers wrote the Commissioner's attorney inquiring when a response to the April 30 settlement offer would be made. They sent another letter on September 26, 1979 posing the same inquiry. The Commissioner rejected the taxpayers' settlement offer by telephone on September 28, 1979, five months after it was made and three months after a decision was promised. In that conversation, the Commissioner informed the taxpayers that a written statement of the Commissioner's position and a proposed stipulation would be provided within one month.
On November 8, 1979, taxpayers received a notice that the case was reset for trial on February 11, 1980. The taxpayers wrote to the Commissioner's attorney on November 15, 1979, inquiring when the proposed stipulation of facts would be submitted. Two and one-half months after this letter and two weeks before the trial date, the Commissioner's attorney forwarded to the taxpayers a motion for continuance. In requesting the taxpayers to join in the motion, the letter stated:
In keeping with that Motion, we have established a deadline of March 31, 1980 for submission to you of pertinent authority and a proposed stipulation.
App. at 33a. In reliance on this promise and the hope that a settlement would eventuate, the taxpayers joined in the motion for a continuance. The materials promised by March 31, 1980, were not forthcoming.
On May 5, 1980, the taxpayers moved for a judgment of default or dismissal against the Commissioner pursuant to Rule 123(a) of the Tax Court Rules of Practice and Procedure.*fn1 That motion was argued to the court on September 22, 1980 on the basis that the Commissioner's delay denied the taxpayers their right to a just, speedy and inexpensive decision as provided for in Tax Court Rule 1(b). App. at 35a-39a. The Commissioner's attorney did not contest or attempt to justify the delay, although he referred to "reorganization" of the office and his own unfamiliarity with Tax Court work notwithstanding his 24 years with the government. App. at 42a. He did tell the court that the Commissioner considered the substantive issue, which involves assignment of anticipatory income, to be an important one. App. at 40a-41a. Both parties presented to the court their summaries of the merits and relevant legal issues. App. at 44a-49a. At no time prior to the September hearing did the Commissioner's attorney provide the material promised by March 31, but he did present the taxpayers with a proposed stipulation of facts at the hearing. The taxpayers responded that the proposed stipulation was unacceptable. The court reviewed the stipulation in open court and noted that it contained an item which would have included a stipulation by the taxpayers that this was an anticipatory assignment of income, which is a legal conclusion, and would have stipulated the taxpayers out of court. App. at 52a-53a.
The Tax Court reserved decision, the judge stating that he would examine the entire record before ruling on the taxpayers' motion. App. at 53a. On October 22, 1980, the court entered an order granting the taxpayers' Motion for Judgment by Default or Dismissal. No findings of fact or opinion were filed, although the order recited that it was "[b]ased upon the entire record in this ...