The U.S. Tax Court is unique in many ways. It has its own rules and the rules do not always comport with the rules that apply in other Federal courts. One example is that a party cannot just “non-suit” a case in tax court.
A non-suit is the process of simply dismissing an action that a plaintiff brings by filing a notice of non-suit into the court record. For most courts, this is an easy way to get out of a case if the facts do not pan out or there is some unexpected issue that has arisen.
This does not work in the tax court as the tax court renders a decision in every case. So if the taxpayer believes they do not have a valid case or if they simply cannot afford to maintain litigation at that time, they cannot simply non-suit and walk away. The court will enter a decision in the case and, in cases like these, the decision is usually unfavorable for the taxpayer.
This raises questions about how and when the taxpayer should be able to re-litigate closed tax court cases. The traditional judicial doctrines of res judicata and collateral estoppel don’t always fit. The recent United States v. Gordon, No. 21-6121 (6th Cir. 2022) case provides an opportunity to consider this issue. The case addresses an appeal involving an abandoned U.S. Tax Court case and the ability to dispute the tax court’s decision in another forum.
Facts & Procedural History
The taxpayer was found guilty of understating his federal income tax for the 2003-2005 tax years. After his sentence and presumably after he was released from prison, the IRS issued a Notice of Deficiency for these years. The Notice of Deficiency asserted fraud penalties.
The taxpayer filed a petition in the U.S. Tax Court to challenge the penalties. Just before trial, the parties filed a Stipulation of Settled Issues with the Court. The stipulation stated that it reflected the parties’ agreement as to all adjustments to the Notice of Deficiency. This included an agreement that the taxpayer owed the fraud penalties.
The IRS then recomputed the amount of the penalties and asked the taxpayer to agree to the amount. The taxpayer did not respond, so the IRS filed a motion to ask the court to decide the amount was correct given the stipulations. The court did just that.
About two years later, the IRS brought suit against the taxpayer in U.S. District court. In this suit, the IRS sought to reduce the U.S. Tax Court’s order to judgment under Section 7403. This was a tax collection lawsuit.
The IRS eventually moved for summary judgment, arguing that the taxpayer was precluded from relitigating matters decided in the U.S. Tax Court’s order. The district court agreed and entered judgment in favor of the IRS. This case is an appeal of the district court’s judgment.
The Tax Court Stipulation Process & Computations
The Stipulation of Settled Issues is the standard document used in tax court cases to agree to the issues. It is different from the Stipulation of Facts, which admits to facts and records. The Stipulation of Settled issues is intended to memorize the parties’ agreement to some or all of the issues in tax court cases.
This stipulation practice is unique to the U.S. Tax Court. It is set out in the U.S. Tax Court’s Rules.
Tax Court Rule 91(a) says that parties “are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact.”
The rules go on to say that stipulations are conclusive. But the court has said in prior cases that he has the power to review and approve situations.
The U.S. Tax Court also has a unique process for computing the amount due after the liability has been established. Rule 155 says that if the parties cannot agree on the amount of the penalties, they are to submit their own computations and the court will decide which is correct.
Federal Issue Preclusion
The appeals court decided the issue based on the preclusion of issues doctrine. This doctrine is more commonly referred to as collateral estoppel.
The doctrine stands for the concept that a party cannot raise the same issue in one court case when the same issue was previously decided in a prior court case.
The Fifth Circuit has set out factors that are to be considered in deciding whether issue preclusion applies:
- The issue under consideration in a subsequent action must be identical to the issue litigated in a prior action.
- The issue must have been fully and vigorously litigated in the prior action.
- The issue must have been necessary to support the judgment in the prior case.
- There must be no special circumstance that would render preclusion inappropriate or unfair.
See United States. v. Shanbaum, 10 F.3d 305 (5th Cir. 1994).
Considering Issue Preclusion
In the present case, the appeals court didn’t address the factors in its opinion. The court’s analysis is short:
The doctrine’s requirements are plainly met here: Gordon himself petitioned the Tax Court to determine the amounts of his penalties for tax years 2003-05; the Tax Court actually determined those amounts, pursuant to the terms of a stipulation that Gordon himself signed; and Gordon had ample opportunity to contest those amounts before the Tax Court entered its Order and Decision. Gordon is therefore barred from challenging those amounts now.
The appeals court’s analysis did not explain whether stipulating or agreeing to the liability for a tax penalty is the same as stipulating to the amount of the tax penalty, whether the stipulation (and then disappearance of the taxpayer) in the U.S. Tax Court proceeding counts as being “fully and vigorously” litigating the matter, or whether the calculations for the penalty were even in the record to support such a judgment.
On the last point, the question of being unfair, the appeals court’s opinion says that the court raised issue preclusion on its own for the first time during the appeal. The parties did not raise the issue and the government did not plead the issue. The government did not even raise the issue in its motion that was before the court. This could lead one to argue that deciding the case based on this issue raised by the court was unfair.
Issue Preclusion for a Defense
It isn’t clear whether the policy for issue preclusion is warranted in this situation.
Issue preclusion should bar a party from bringing a subsequent court case based on an issue that a court has already decided in a prior case. This type of litigation wastes the court’s time and should not be allowed. It is less clear whether issue preclusion should bar a taxpayer from raising an issue as a defense in a suit brought against them.
That is what we have in this case. The case that is being appealed is a collection suit brought by the IRS. The IRS sued the taxpayer. The taxpayer raised the defense challenging the amount of the liability in this collection’s case brought by the government. Setting aside the questions about the stipulation that may not have set out the amount of the penalties, there is a question as to whether issue preclusion should bar the taxpayer from being able to raise an issue to defend himself.
The Lucky Brand Dungarees case cited by the appeals court notes this issue. The opinion, in that case, says that “…this Court [the U.S. Supreme Court] has never explicitly recognized ‘defense preclusion’ as a standalone category of res judicata, unmoored from the two guideposts of issue preclusion and claim preclusion.” The court stopped there in Lucky Brand as it concluded that the concept did not apply given the facts in that case. This could set this case up for appeal should the taxpayer decide to appeal.
Along those lines, one might note that issue preclusion itself is a defense. It is a defense to a challenge raised by the other side. Allowing one party to bring suit and then raise the defense of issue preclusion in their own case that they brought to bar a defense the other side raises, raises competing policies. On the one hand, there is a policy of saving the court’s time and on the other is the right for parties to defend themselves.
Those who file a petition in the U.S. Tax Court should know that the court is going to issue a decision in the case. A non-suit is not really possible.
If, after a tax court case has been started, the goal is to later litigate the matter in another court, the taxpayer may need to try to remove the proceeding to the other court. This may even allow the taxpayer to file a non-suit in the other court once it has jurisdiction over the case.
If this is not possible, the taxpayer may need to try to build a record to show that the factors supporting res judicata and issue preclusion have not been met. This may offer some possibility that the case may be pursued or, as in this case, defended, at a later point in time.