Respondent issued a notice of deficiency determining that petitioner and his wife
Penalty Addition to tax Year Deficiency sec. 6662(a) sec. 6651 2004 $9,579,083 $1,915,817 -0- 2005 1,953,677 390,735 $823,558 2008 1,205,136 241,027 -0-
Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for the years at issue. Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
Petitioner has filed a motion for summary judgment asking us to rule that respondent is precluded from pursuing the income tax deficiencies for tax years 2004, 2005, and 2008 because he and respondent already entered into a negotiated settlement agreement determining the amounts of tax and penalties he owed for those years as part of his bankruptcy proceeding. Respondent objects, arguing that there was no such settlement nor did the bankruptcy court determine petitioner's total Federal tax liability for any of the subject years. The facts are not disputed; rather we must decide the legal effect of a consent order entered by the bankruptcy court ratifying the parties' settlement in the bankruptcy case of the amount of the Internal Revenue Service's (IRS) priority claim allowed under the plan of reorganization (consent order).
We begin our analysis with a history of petitioner's bankruptcy proceedings. On March 11, 2009, petitioner commenced a chapter 11 bankruptcy case in the U.S. Bankruptcy Court for the Southern District of Alabama (2009 bankruptcy). On or about April 15, 2009, the IRS filed a proof of claim for income tax and penalties from petitioner of $5,986,306. The claim was amended several times to seek different amounts from petitioner for tax years 2004 through 2008. Petitioner objected to the proof of claim because of the penalties asserted by the IRS, arguing that he had "reasonable cause for not paying the taxes on time." A plan of
After confirmation, the IRS conducted discovery in connection with petitioner's objection to penalties. On October 31, 2011, the IRS filed a motion for leave to file an amended proof of claim to assert a claim for tax for 2004 through 2008 of approximately $45 million, alleging that it learned through discovery that petitioner substantially underreported his income in those years. The bankruptcy court denied this motion on December 20, 2011, holding that the IRS was bound by the consent order. The IRS appealed to the U.S. District Court for the Southern District of Alabama, which determined that the bankruptcy court did not abuse its discretion. The IRS then appealed to the U.S. Court of Appeals for the Eleventh Circuit; that appeal ultimately was dismissed by stipulation of the parties.
Later, petitioner filed a motion for attorney's fees under section 7430 for the litigation over the IRS' attempts to amend the proof of claim. In an order dated May 27, 2016, the bankruptcy court denied that motion, holding that the IRS was "substantially justified" in pursuing amendment because of doubt at the time about whether it could pursue its claim for additional taxes in another proceeding.
While the 2009 bankruptcy was pending, respondent issued the notice of deficiency before us. The proceeding was stayed until the conclusion of the 2009 bankruptcy in 2016. Petitioner now has pending a second bankruptcy proceeding (2016 bankruptcy), which he commenced in 2016 before the conclusion of the 2009 bankruptcy. Respondent has filed a claim in that proceeding for tax and penalties for tax years including those before us. On February 7, 2017, the bankruptcy court entered an order in the 2016 bankruptcy lifting the automatic stay to allow this case and cases challenging a notice of deficiency for 2009, docket No. 21946-12 (for petitioner)
Rule 121(b) provides in part that after a motion for summary judgment and an opposing response are filed, "[a] decision shall * * * be rendered if the pleadings * * * and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). The question of whether res judicata or collateral estoppel applies in this case raises no factual disputes; therefore summary adjudication is appropriate.
Petitioner argues that the consent order and the principle of res judicata preclude respondent from collecting any additional tax for 2004 through 2008. Petitioner argues that United States v. Int'l Bldg. Co., 345 U.S. 502, 506 (1953), controls the outcome of this case. In that case the Supreme Court held that a Tax Court decision determining the taxpayer's liability on the basis of a joint stipulation by the parties was res judicata as to the years that had been at issue in the Tax Court case but did not collaterally estop the Government in litigation relating to other tax years. Respondent counters that 11 U.S.C. secs. 1141 and 523 (2018) forbid application of res judicata here by making certain tax claims nondischargeable in bankruptcy.
Res judicata prevents repetitious suits involving the same cause of action and is rooted in "considerations of economy of judicial time and public policy favoring the establishment of certainty in legal relations." Commissioner v. Sunnen, 333 U.S. 591, 597 (1948). Traditionally stated, "when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound `not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.'" Id. (quoting Cromwell v. Cty. of Sac, 94 U.S. 351, 352 (1876)). The elements
However, where the subsequent cause of action or demand is different, the principle of res judicata may be applied "much more narrowly", as collateral estoppel. Commissioner v. Sunnen, 333 U.S. at 597-598. Collateral estoppel precludes litigation of issues in a second cause of action if those issues were actually litigated and necessary to the outcome of the first action. Hambrick v. Commissioner, 118 T.C. at 353 (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979)). Thus, a prior judgment may bind parties, but "only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered." Commissioner v. Sunnen, 333 U.S. at 598 (quoting Cromwell, 94 U.S. at 353). And parties are free to litigate points which were not at issue in the prior action, even if they theoretically could have been raised and decided in the prior action. Id.
For collateral estoppel to bind a party as to an issue, five conditions must be established: (1) the issue in the second suit must be identical in all respects with the one decided in the first suit, (2) there must be a final judgment rendered by a court of competent jurisdiction, (3) the party against whom collateral estoppel is invoked must have been a party (or privy to a party) to the prior judgment, (4) the relevant issue must have been actually litigated and the resolution of the issue must have been essential to the prior decision, and (5) controlling facts and applicable legal rules must remain unchanged from those in the prior litigation. Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), aff'd, 904 F.2d 525 (9th Cir. 1990).
Res judicata and collateral estoppel may apply to proceedings involving Federal taxes. Commissioner v. Sunnen, 333 U.S. at 598-599. Here, the causes of action are not the same; therefore, res judicata does not apply. Specifically, before us is a petition for redetermination of petitioner's total tax liability for the years covered by the notice of deficiency,
We therefore must examine the factors for collateral estoppel. We easily dispense with the first—petitioner was party to the prior litigation as debtor. The harder question is whether the issue of his total tax liability—which is the issue before us in a deficiency proceeding—is identical to the issue decided in the consent order. To answer that question we must consider the authority under which the consent order was entered.
Thus, in a chapter 11 case, a garden-variety creditor recovers on a prepetition claim only by filing a proof of claim and, if necessary, litigating the merits of the claim. But a discharge under chapter 11 does not discharge a debtor who is an individual from any debt excepted from discharge under 11 U.S.C. sec. 523. 11 U.S.C. secs. 1141(d)(2), 523(a)(1)(A). And under 11 U.S.C. sec. 523(a)(1)(A) certain taxes are nondischargeable "whether or not a claim for such tax was filed or allowed".
In United States v. Gurwitch (In re Gurwitch), 794 F.2d 584, 585 (11th Cir. 1986), the U.S. Court of Appeals for the Eleventh Circuit held that the "Bankruptcy Code makes clear under 11 U.S.C. § 1141(d)(2) that the confirmation of a plan of reorganization does not fix tax liabilities made nondischargeable under 11 U.S.C. § 523." See also id. at 585-586 ("Congress has made the choice between collection of revenue and rehabilitation of the debtor by making it extremely difficult for a debtor to avoid payment of taxes under the Bankruptcy Code."). There, even though the IRS filed a proof of claim for only a portion of the income and withholding taxes owing, and the confirmed plan provided for 100% payment of the filed claim, the IRS was not precluded by res judicata from later collecting additional withholding taxes for the same tax year. Id. Similarly, the U.S. Court of Appeals for the Tenth Circuit held that the IRS was not precluded from assessing or collecting additional taxes beyond those provided for in the chapter 11 plan, where the IRS audited the
In DePaolo, the IRS filed an initial proof of claim and, after negotiation with the debtor, jointly executed a stipulation outlining the amount of the allowed claim for several prepetition tax years (including 1986) that would be treated in the chapter 11 plan and filed an amended proof of claim to reflect the stipulated amount. The plan was confirmed without objection by the IRS, but after an audit, the IRS issued a notice of deficiency for additional taxes for 1986. The court rejected the debtor's argument that the events in the bankruptcy proceeding finally determined the debtor's total 1986 tax liability, reasoning:
In a case involving facts very similar to DePaolo, this Court held that the IRS was not estopped from determining deficiencies that could result in liabilities for the same tax year greater than those the IRS claimed in a taxpayer's confirmed chapter 11 bankruptcy plan. Hambrick v. Commissioner, 118 T.C. at 353-354. In Hambrick we held that res judicata did not apply because the bankruptcy court did not enter a final judgment on the merits of the taxpayer's tax liability in the process of confirmation. Id. at 353 ("Without a final judgment on the merits, res judicata cannot apply."). In so holding we noted the lack of a hearing pursuant to 11 U.S.C. sec. 505 (2018) to determine the tax debt because the taxpayer never objected to the proof of claim filed by the IRS. Id. We also held that because the merits of the taxpayer's tax liability were not actually litigated and there was no indication that the plan was confirmed on the basis of the underlying
But we also have recognized the preclusive effect of a bankruptcy court determination, holding that collateral estoppel prevented the IRS from determining Federal tax deficiencies for tax years when a bankruptcy court had previously determined that the taxpayer had no Federal income tax liabilities for those years. McQuade v. Commissioner, 84 T.C. 137, 146 (1985). In McQuade the bankruptcy court held a trial on the tax liabilities for the years at issue and entered findings of fact and conclusions of law determining that the taxpayer had no tax liabilities. Id. at 139-140, 142. We also have held that a judgment entered by a bankruptcy court dismissing a corporate taxpayer's objection to the IRS' income tax claim and allowing the tax claim in full precluded the taxpayer from relitigating the tax liabilities of the same tax years. Fla. Peach Corp. v. Commissioner, 90 T.C. 678 (1988).
Critically, in both McQuade and Fla. Peach Corp. the bankruptcy court was acting pursuant to its authority granted by 11 U.S.C. sec. 505(a)(1), which provides that a bankruptcy court "may determine the amount or legality of any tax, any fine or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction."
Petitioner does not dispute that the taxes at issue are nondischargeable under the Bankruptcy Code; rather he argues that the consent order binds respondent because it was issued pursuant to the bankruptcy court's authority to determine taxes under 11 U.S.C. sec. 505 and therefore fixed petitioner's tax liabilities for the years before the bankruptcy court. In oral argument the parties agreed that the question we must decide is whether the consent order was issued under the bankruptcy court's general authority to decide creditor claims and approve plans of reorganization or its specific authority to determine taxes under 11 U.S.C. sec. 505.
The parties have not cited, nor did we find, any cases that explain the preclusive effect of a bankruptcy court's consent
We now turn to what the consent order before us did and did not do. First, the consent order did not cite 11 U.S.C. sec. 505(a)(1) or otherwise state that it was issued pursuant to the bankruptcy court's authority to determine taxes under that section. Nor did it include any factual recitations of petitioner's income, deductions, and credits, or anywhere state his total Federal tax liability for any year before the court. Rather it was expressly entered to resolve the IRS' objection to confirmation of the proposed plan of reorganization. By its terms, it: (1) fixed the priority tax claim that would be allowed and paid in the plan of reorganization; (2) capped the unsecured general claim for penalties and described how this disputed claim would be treated under the plan of reorganization; (3) set a hearing date for the adjudication of the unsecured general claim; (4) set a deadline for petitioner to comply with tax return reporting requirements for certain
If the consent order had fixed petitioner's total Federal tax liability for the subject tax years, as petitioner asserts, then it would have preclusive effect. See Rufo v. Inmates of Suffolk Cty. Jail, 502 U.S. 367, 378 (1992); see also Paradise v. Prescott, 767 F.2d 1514, 1525 (11th Cir. 1985), aff'd sub nom. United States v. Paradise, 480 U.S. 149 (1987). But unlike McQuade and Fla. Peach Corp., the bankruptcy court in this case was not acting under its authority to determine taxes under 11 U.S.C. sec. 505(a), and there is no indication that the court was inquiring into the merits of petitioner's Federal tax liability for a particular year or making a determination as to total tax for that year. Compare McQuade v. Commissioner, 84 T.C. at 139-140, 142 ("[E]vidence of her tax liability for the years at bar were introduced into evidence in the prior litigation, and the court made a determination of her income tax liabilities."), with Fla. Peach Corp. v. Commissioner, 90 T.C. 678 (determining that the bankruptcy court's judgment under 11 U.S.C. sec. 505 contained findings of fact and conclusions of law about each year's tax liability).
Petitioner argues that Int'l Bldg. Co. controls the outcome of this case. We disagree. In that case the taxpayer and the IRS settled their Tax Court case and that settlement constituted a final determination of the taxpayer's liabilities for the years before the Tax Court. Int'l Bldg. Co., 345 U.S. at 505-506; see also sec. 6214; Krueger v. Commissioner, 48 T.C. 824, 828-830 (1967). By contrast, the bankruptcy court in this case resolved the amount of the IRS' claim to be allowed
Lastly, the parties direct us to two orders entered by the bankruptcy court in the 2009 bankruptcy that examined the effect of the consent order, reaching different conclusions. First, in an order entered July 5, 2012 (2012 bankruptcy court order), the bankruptcy court denied the IRS' attempts to amend its claim to include additional taxes and penalties for the years covered by the consent order. The bankruptcy court stated:
The court also concluded that whether the taxes at issue were dischargeable did not matter:
The bankruptcy court concluded that Int'l Bldg. Co. and In re Matunas applied, not Gurwitch.
In an order entered May 27, 2016 (2016 bankruptcy court order), the court denied petitioner's motion for attorney's fees.
In In re Diaz, 647 F.3d at 1080, the debtor objected to the proof of claim filed by the Florida Department of Revenue (FL DOR) for past-due child support, the FL DOR did not respond to the objection within 30 days, and the bankruptcy court deemed the objection unopposed and ordered the claim reduced to the amount in the debtor's objection. The Court of Appeals held that the FL DOR was not precluded from pursuing nondischargeable child support debts after a chapter 13 bankruptcy discharge order had been issued because discharge does not prevent collection of nondischargeable debts. Id. at 1089-1091. In addition the Court of Appeals held that the doctrines of res judicata and collateral estoppel did not bar the State from litigating the amount of child support debt because the only issue before the bankruptcy court in entering its order was the amount of the child-support debt that would be paid by the bankruptcy estate through the plan, not the total child-support debt. Id.
In Davis, the Court of Appeals applied the same principles as in Diaz and DePaolo to conclude that the FL DOR was not precluded from pursuing a claim for child support even though the bankruptcy court had previously disallowed the claim as untimely because the FL DOR filed its proof of claim after the chapter 11 bankruptcy plan was confirmed. Davis, 481 F. App'x 492-494. The Court of Appeals specifically held:
In the 2016 bankruptcy court order, the bankruptcy court summarized the holdings of these cases as follows:
And because the IRS did not yet know how the Court of Appeals would decide the issue, the bankruptcy court concluded that the IRS' litigation position was substantially justified and denied petitioner's motion for attorney's fees.
Petitioner rejects this later interpretation of the consent order, arguing that it addressed an unrelated issue (attorney's fees) and that neither the bankruptcy court nor the District Court reviewing the bankruptcy court's order could rule on the preclusive effect of the consent order in a later Tax Court proceeding. Of course that logic would apply equally to the 2012 bankruptcy court order, whose
Moreover, we believe that the bankruptcy court's subsequent rejection of the IRS' efforts to amend its claim was consistent with what the consent order did—determine the amount of the IRS' claim to be paid by the bankruptcy estate under the plan of reorganization. Because the consent order determined the amount of the claim in the bankruptcy case, the court concluded that whether the taxes were dischargeable was not relevant in deciding whether amendment should be allowed. However, the nondischargeability of certain tax debts is relevant when the claim treated under the bankruptcy plan does not include the entire prepetition Federal tax debt of the taxpayer and the IRS wishes to pursue the deficiency.
In sum, we agree that respondent was bound by the terms of the consent order; but because the consent order was not a determination of petitioner's Federal tax liability for each tax year at issue, respondent is not precluded from determining deficiencies for unpaid tax debts that are excepted from discharge under the Bankruptcy Code, and we may decide the matter in a deficiency proceeding. We hold that res judicata does not apply because the consent order is not a final judgment on the merits of petitioner's entire Federal tax debt for any given year.
To reflect the foregoing,
An appropriate order will be issued.