This is an appeal of a federal income tax refund suit filed by the Estate of George Batchelor (“Estate”).
I. Background
George Batchelor passed away in July 2002. Prior to his death, he owned all of the stock in International Air Leases, Inc. (“IAL”), an aviation business which bought, sold, repaired, serviced, and leased aircraft and aircraft parts. On February 10, 1999, Batchelor sold his IAL stock to International Air Leases of Puerto Rico, Inc. (“IALPR”), for approximately $502 million.
In February 2002, IAL was placed into involuntary bankruptcy. The IRS determined that IAL was liable for approximately $100 million in unpaid taxes, largely as a result of its attempt to use a tax shelter scheme after the stock sale, and issued a notice of deficiency for that amount. Although there was never any' suggestion that Batchelor was involved in the scheme, the government nevertheless sought to collect IAL’s corporate income tax obligation directly from Batchelor under a transferee liability theory.
In December 2004, the government sued the Estate based on its determination that Batchelor had underreported his capital gains in conjunction with the IAL sale on his 1999 and 2000 personal income tax returns. This suit is referred to as “Batchelor III” In that suit, the government argued, as it did in Batchelor I, that Batchelor had undervalued the Option Assets by $23.5 million, resulting in a tax deficiency of approximately $6.7 million. The Estate subsequently paid the tax, and the government then dismissed the case without prejudice while acknowledging the Estate’s right to sue for a refund.
Count III of the Estate’s Complaint concerns settlement payments the Estate made in connection with four civil lawsuits. In 2002, both IAL and IALPR sued the Estate, seeking to set aside the sale of Batchelor’s stock as a fraudulent transfer. In addition, the Estate inherited two suits commenced prior to that sale, each stemming from Batchelor’s involvement with Rich International Airways (“Rich”). The Estate eventually settled all four lawsuits, and made settlement payments totaling $41 million in July 2004.
During the district court proceedings, the Estate filed a motion for summary judgment with respect to Count I on the basis of res judicata, arguing that both Batchelor I and its refund claim in Count I of this case involve the same cause of action. The government filed a cross-motion for summary judgment on Count III, arguing that the Estate should be precluded from taking both an income tax deduction and an estate tax deduction for the settlement payments. The district court granted both motions. With respect to the Estate’s motion on Count I, the court found that res judicata barred the government’s claim because the instant case and Batchelor I “arise out of the very same transaction” and because in both cases the government sought to establish that the value of the Option Assets transferred to Batchelor in 1999 had a higher value than
II. Standards of Review
The district court’s application of res judicata presents a question of law which we review de novo. In re Piper Aircraft Corp.,
III. Analysis
First, we address the district court’s application of res judicata to Counts I and II. Second, we address the Estate’s attempt to claim an income tax deduction for the settlement payments at issue in Count III.
A. Res Judicata
The district court determined that the government was precluded from defending against the Estate’s claim that it had accurately reported the value of the Option Assets when calculating Batchelor’s 1999 and 2000 income tax obligations. According to the district court, res judicata applies because both this suit and Batchelor I “arise out of the very same transaction” and “the government here is attempting to establish the exact same thing it sought to prove in Batchelor I: that the value of the option assets transferred to Batchelor in 1999 had a higher value than Batchelor and IALPR agreed upon.” The district court also found that Batchelor’s 1999 and 2000 income tax obligations could have been raised and decided in Batchelor I, such that those claims may not be raised here.
The government makes two primary arguments on appeal. First, it argues that res judicata does not apply because the personal income tax claims against Batchelor in this case and the transferee liability claim against IAL in Batchelor I are not the same cause of action. Second, the government argues that, even if the claims are part of the same cause of action, it could not have asserted the instant claims in Batchelor I
The primary dispute on appeal is whether the Estate’s refund claims in Counts I and II are part of the same cause of action as the transferee liability claim in Batchelor I. The party asserting res judi-cata bears the burden of showing that the later-filed suit is barred. In re Piper Aircraft,
When determining whether the causes of action are the same for purposes of res judicata, we consider “whether the primary right and duty are the same in each case.” Ragsdale,
Applying these principles, we conclude that res judicata does not preclude the government from contesting the Estate’s refund claims. First, the instant case and Batchelor I do not share the same nucleus of operative fact. The Estate’s refund claims in Counts I and II pertain to Batchelor’s personal income tax liabilities for 1999 and 2000. Relevant to that determination are all facts that might impact Batchelor’s income tax liability for those particular years, including whether he should have treated a portion of the income he received from the IAL stock sale as interest on the Note rather than as capital gain, a fact unrelated to Batchelor’s potential liability for IAL’s tax obligations as transferee. In contrast, the government’s claims in Batchelor I involve IAL’s corporate income tax liability. Facts impacting that issue include IAL’s alleged use of a tax shelter scheme (in which Batchelor played no role), and IAL’s solvency before and after the transfer, neither of which impact the computation of Batchelor’s own income tax obligations. Given the different tax liabilities at issue, the cases are factually distinct.
The Estate argues unconvincingly that both Batchelor I and the instant suit involve the same fundamental issue regarding the value of the Option Assets and the impact that valuation might have on its eventual tax liabilities, such that the cases share the same nucleus of operative fact. The Estate’s focus is too narrow. Although it is true that both suits involve a common factual issue, i.e., the value of the Option Assets, this is often the case in tax law, where an individual transaction may have multiple tax consequences. See Towe v. Comm’r,
We reach the same outcome under the rights and duties test. Here, we find it significant that the instant ease involves Batchelor’s individual income tax liability under the statutory provisions governing personal income tax obligations, including 26 U.S.C. §§ 1, 6012, 6072, whereas Batchelor I was based on the corporate income tax liability imposed on IAL under statutes pertaining to that particular tax, including 26 U.S.C. § 11. Thus, the two suits involve distinct tax obligations with a different set of rights and duties.
Although the decision in this case is grounded in Eleventh Circuit res judicata principles, our determination of whether Batchelor I and the instant suit involve the same “cause of action” is guided as well by cases applying res judicata in the tax context. The federal income tax is based on a system of annual accounting, rather than transactional accounting. See 26 U.S.C. § 441. For this reason, the United States Supreme Court in Comm’r v. Sunnen,
It makes sense that res judicata would not apply to suits involving different tax years because the applicable laws and facts pertaining to distinct tax years are ever-changing. See Sunnen,
Relevant to the instant suit, courts applying the principles of Sunnen have determined that res judicata does not apply to suits involving different types of tax liability, even when the suits involve the same underlying transaction, and, at least in some respects, the same tax year. Frank Sawyer Trust of May 1992 v. Comm’r,
Although both suits in Frank Sawyer implicated the sale of the corporate assets, the Tax Court found that res judicata did not bar the transferee liability action because the “cause of action” in each case was not the same. See id. at 76 & 72. According to the court, “[t]he deficiency cases [against the trust] dealt with the trust’s gain on the sale of its stock,” and had the government prevailed the trust would have been required to pay more tax on the sale of its stock. Id. at 76. The trust, however, would not have been required to pay the corporations’ unpaid tax liabilities at issue in the transferee action, which arose from the corporations’ attempts to artificially generate capital losses to offset their capital gains. Id. The court emphasized that in the first suit against the trust, the government had not attempted to collect the corporations’ unpaid corporate tax. Accordingly, “[a]l-though the deficiency cases [against the trust for its own tax liabilities] and the instant action [against the trust as transferee] arise out of similar facts, there [wa]s no identity between the causes of action,” and therefore res judicata did not apply. Id. at 78 (emphasis added).
The Tax Court applied this same reasoning nearly twenty years earlier in Towe v. Comm’r,
Frank Sawyer Trust and Towe are distinguishable from those cases where res judicata has been applied in transferee liability suits involving a dispute as to only one tax liability, including, for example, United States v. Davenport,
This Court considered a factually similar case in Baptiste and reached the same result. In that case, three brothers each received $50,000 as beneficiaries to their father’s life insurance policy upon his death. Baptiste,
As with Frank Sawyer Trust and Towe, and unlike Davenport and Baptiste, Counts I and II of the instant suit involve different tax liabilities and different underlying taxpayers than the claims at issue in Batchelor I. Therefore, the claims are not part of the same cause of action, even though they each involve the same underlying transaction.
Count III of the Estate’s Complaint concerns the $41 million in payments the Estate made in 2004 to settle various lawsuits against Batchelor. In 2003, the Estate deducted the payments from Batchelor’s gross estate as claims against the estate pursuant to 26 U.S.C. § 2053(a)(3). The parties agree that this deduction was proper, and Batchelor’s estate tax liability was not at issue before the district court. However, after taking the estate tax deduction, the Estate also claimed an $8.3 million credit on its 2005 income tax return for the settlement payments. The IRS denied the claim, and the Estate then filed the instant suit seeking a refund for the perceived overpayment pursuant to 26 U.S.C. § 1341. The district court rejected the Estate’s claim, finding that 26 U.S.C. § 642(g) barred the Estate from claiming both an estate tax deduction under § 2053 and an income tax deduction for the same payment. We agree, and therefore affirm the district court’s ruling.
The Estate’s position is straightforward. According to the Estate, 26 U.S.C. § 1341 entitles it to a return of the taxes Batche-lor paid on the $41 million in IAL stock proceeds the Estate subsequently returned to IAL, IALPR, and the Rich plaintiffs as settlement payments. The Estate argues it is not seeking a tax windfall, but rather, because the $41 million at issue was originally reported as capital gain, by effectively returning that income, it should now be permitted a corresponding deduction or credit effectively consisting of a capital loss, and it insists § 1341 was designed to accomplish precisely that result.
Section 1341 accounts for the fact that discrete financial transactions sometimes implicate multiple tax years. In the ordinary case, deductions on a particular item of income are taken during the same year the income is earned and reported. See Mooney Aircraft, Inc. v. United States,
Congress later enacted 26 U.S.C. § 1341 to provide a statutory solution to the problem presented in cases like Lewis and to account for the tax disparities that may exist when a taxpayer claims a deduction in one year for an item of income received in an earlier year that the taxpayer was obliged to return. See United States v. Shelly Oil Co.,
For § 1341 to apply, the taxpayer must show the following:
(1) an item was included in gross income for a prior taxable year (or years) because it appeared [at the time the income was received] that the taxpayer had an unrestricted right to such item;
(2) a deduction is allowable for the [current] taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and
(3) the amount of such deduction exceeds $3,000.
26 U.S.C. § 1341(a). In addition to these statutory requirements, a taxpayer must demonstrate a “substantive nexus between the right to the income at the time of receipt and the subsequent circumstances necessitating a refund.” Steffen,
When § 1341 applies, the taxpayer is required to pay the lesser of two computed tax payments in the year of repayment. See 26 U.S.C. § 1341(a) (“the tax imposed by this chapter for the taxable year shall be the lesser of’ the two computations) (emphasis added). Under the statute’s first method of calculation, set forth in subsection (a)(4), the taxpayer simply computes the taxes owed in the year of repayment by deducting the restoration payment from his income in that year. 26 U.S.C. § 1341(a)(4). The second calculation method set forth in subsection (a)(5) is more complex, and results in a credit based on the taxes that would have been saved in the original year of receipt had the income never been received in that year.
In Fla. Progress, this Court decided, based on the language of the statute and its corresponding regulations, that § 1341 does not, by itself, create an independent tax deduction and instead applies “only if another code section would provide a deduction for the item in the current year.”
To determine whether “another code section would provide a deduction for the item in the current year,” Fla. Progress,
Amounts allowable under section 2058 or 2054 as a deduction in computing the taxable estate of a decedent shall not be allowed as a deduction' ... in computing the taxable income of the estate or of any other person, unless there is filed ... a statement that the amounts have not been allowed as deductions under section 2053 or 2054 and a waiver of the right to have such amounts allowed at any time as deductions under section 2053 or 2054.
26 U.S.C. § 642(g). Section 642 contains an exception, however, for “income in respect of decedents.” See id. (“subsection [g] shall not apply with respect to deductions allowed under part II (relating to income in respect of decedents)”). Thus, a double deduction is permitted for “taxes, interest, business expenses, and other items accrued at the date of a decedent’s death” that fall within § 2053(a)(3) as claims against the estate, as long as they are also allowable under § 691(b). See 26 C.F.R. § 1.642(g)-2. Section 691(b), in turn, provides that a decedent’s estate may claim both deductions if the expense falls within one of six statutes: sections 162, 163, 164, 212, 611, or 27.
The Estate argues on appeal, as it did in the district court, that sections 162 and 212 provide the basis for permitting the “double deduction” of the settlement payments at issue because the payments arise out of Batchelor’s business.activities in selling his IAL assets, and thus are ordinary and necessary business expenses.
The Estate also attempts to satisfy § 691(b). by invoking § 212, which, in pertinent part, permits a deduction to “an individual” for “ordinary and necessary expenses paid or incurred during the taxable' year ... for the production or collection of income.” 26 U.S.C. § 212(1). In this Circuit, however, “ § 162(a) and 212 are ... considered in pari materia; ” thus, “the restrictions and qualifications applicable to the deductibility of trade or business expenses [under § 162] are also applicable to expenses covered by section 212.” Sorrell v. Comm’r,
In an attempt to circumvent the statutes, the Estate insists it should be allowed a double deduction because otherwise the government "will receive a windfall from the income taxes Batchelor paid on the $41 million at issue'. In effect, the Estate urges us to fashion an equitable result; however, doing so would require us to either disregard § 642(g), or to construe § 691(b) as though it also included § 1341 as an exception, neither of which we can do. The double deduction the Estate seeks is plainly prohibited by 26 U.S.C. § 642(g), see Estate of Luehrmann v. Comm’r,
Finally, the Estate points to three authorities as grounds for invoking § 1341 without reference to either 642(g) or 691(b): Revenue Ruling 77-322, which permits “[a]n estate [to] utilize ... section 1341 ... in computing its tax when it restores an item that was previously included in income by the decedent under a claim of right;” Estate of Good v. United States,
Aside from the fact that these authorities are not binding, see Redwing Carriers, Inc. v. Tomlinson,
Accordingly, we reverse the district court’s judgment in favor of the Estate on Counts I and II and affirm the judgment in favor of the government on Count III.
AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
Notes
. The Complaint was filed by Plaintiffs Anne-Batchelor-Robjohns, Daniel J. Perraresi, and Father Patrick O’Neill, as co-personal representatives of the Estate of George E. Batche-lor. The Court refers to Plaintiffs collectively as "the Estate.”
. Batchelor's cost basis in his stock was $35,000. Thus, nearly the entire sales price represented long-term capital gain.
. The government claims, and the district court found, that Batchelor received $131.2 million of the $150 million Note in 1999 and $24.7 million in 2000. Although the total amount Batchelor received exceeds the $150 million face value of the Note, $5.8 million of the amount received in 2000 represented interest on the Note, which Batchelor reported as ordinary income.
. It was later stipulated that Batchelor should have reported part of the 1999 income (about $6.5 million) from payments on the Note as interest income.
.Under 26 U.S.C. § 6901, the government may collect a tax liability that a taxpayer cannot pay from a transferee who has received assets from the taxpayer. Here, the government sought to collect IAL's unpaid corporate income tax from Batchelor, and subsequently from his Estate, pursuant to 28 U.S.C. § 3304(b)(1)(B), which provides that certain transfers for less than fair market value will be considered fraudulent as to a debt to the United States.
. To protect its interest in the probate estate, the government filed suit in Batchelor III before the IRS had issued a Notice of Deficiency to Batchelor or his Estate for Batchelor's 1999 and 2000 income tax returns. After the IRS issued a Notice of Deficiency on April 29, 2005, the Estate chose to pay the tax and sue for a refund.
. In 2002, the Estate settled with the Rich plaintiffs for $2 million and $25 million. The Estate settled with IALPR for $12 million in 2003, and with IAL for $1 million in 2004.
. Count I of the Estate’s Complaint concerns Batchelor’s 1999 income tax return. Count II focuses on Batchelor’s 2000 income taxes, and involves a proposed increase in Batche-lor’s capital gains by approximately $5.8 million. On July 21, 2005, the Estate paid the additional tax allegedly owed on the proposed increase ($584,637), along with interest, and subsequently initiated the instant refund suit. The government later conceded that Batche-lor had in fact reported the $5.8 million at issue and that no additional tax was owed for 2000, but claimed the Estate was not entitled to a refund because the government should be permitted to offset Batchelor’s 1999 tax deficiency by the excess amounts paid for 2000. In its Order dated November 13, 2013, the district court found that the IRS had erroneously determined that Batchelor failed to report the $5.8 million at issue, and that the challenges the government made to this refund claim, including its attempt to offset its proposed recalculation of Batchelor’s 1999 taxes, were barred by res judicata. Our opinion addresses only the district court's application of res judicata.
. On April 29, 2005, the IRS issued a Notice of Deficiency to the Estate for Batchelor's 1999 and 2000 income taxes, which was within the extended statute of limitations on assessment applicable in this case. This is significant because the Tax Code's provisions relating to the assessment of deficiencies do not permit the government to bring suit to collect a tax deficiency until a Notice of Deficiency has been issued and the requisite 90-day period during which the taxpayer may file a petition in Tax Court has passed. See 26 U.S.C. § 6213(a).
. In a related argument, the Estate insists that the tax implications of specific completed transactions should be litigated only once. The Estate's argument, however, rests on principles of issue preclusion rather than claim preclusion, and would be more persuasive had the value of the Option Assets actually been decided in Batchelor I. See Pleming v. Universal-Rundle Corp.,
. Although the government sought to collect the unpaid tax directly from Batchelor in Batchelor I, his potential liability as transferee does not change the nature of the corporate tax liability at issue in Batchelor I.
. In Ray, we found that an employee's breach of contract claim arising from his termination was barred by res judicata due to an earlier suit alleging improper termination in violation of the employee's civil rights because in both suits "the primary right at issue was [plaintiff's] right of continued employment” and the breach of contract claim was substantively identical to the earlier civil rights claims. Ray,
. All decisions of the former Fifth Circuit issued before October 1, 1981, are binding precedent in this circuit. See Bonner v. City of Prichard,
. In White, we rejected the res judicata defense because "[although the primary right and duty in both statutes ... is identical in that they require [certain bank] disclosures, the nature and extent of those disclosures and the remedies afforded for nondisclosure are distinct” under the governing statutes, such that the “violations or wrongs” sued for under each statute were different. White,
. Sunnen explained,
[I]f a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year. But if the later proceeding is concerned with a similar ... claim relating to a different tax year, the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit.
. The government was unable to collect against the corporations because they were insolvent at the time the additional taxes were assessed. Frank Sawyer Trust,
.Title 26 of the United States Code section § 6324(b) provides an avenue by which the government may pursue a gift tax liability directly from the donee, who may be held personally liable for the unpaid gift tax. The statute provides, "If the [gift] tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift.” 26 U.S.C. § 6324(b). See also Davenport,
. Although Baptiste appears to be ba§ed on issue preclusion, it is still a useful comparison.
. The parties dispute whether the two cases involve the same tax year. We need not resolve that issue, however, based on our determination that the underlying tax liabilities are distinct.
. The Estate calculated a refund of $8,322,466 under § 1341.
. Justice Douglas dissented, noting that the decision might allow the government to exact tax on money that was not income to the taxpayer. See Lewis,
. Under 26 U.S.C. § 1341(a)(5), the taxpayer 'first computes his original, prior year tax with the restoration income included (as it was originally calculated in the year of receipt), then recomputes his tax for the prior year as if the item had not been included. The taxpayer then compares the two resulting tax obligations to determine the amount by which his tax would have been reduced had he not originally received the restored income. In the final step, the taxpayer reduces his current year's tax obligation by the amount his tax liability would have been reduced in the year of receipt under the re-computation.
. In finding that § 1341 does not itself create an independent tax deduction, the Court reasoned:
Subsection (a) of § 1341 provides that "if" three requirements are met, "then " the taxpayer is entitled to preferential treatment under [§ 1341]. 26 U.S.C. § 1341(a) (emphasis added). One of those requirements is that "a deduction” be “allowable for the taxable year because it was established after the close of such prior taxable year ... that the taxpayer did not have an unrestrict- . ed right to such item....” 26 U.S.C. § 1341(a)(2). The provision itself does not indicate whether a deduction should be allowable. That answer must be found in another provision of the code.... The regulations interpreting this provision confirm this conclusion.
Fla. Progress,
. Section 691(b) provides, in pertinent part: The amount of any deduction specified in section 162, 163, 164, 212, or 611 ... or credit specified in section 27 ..., in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed ... in the taxable year when paid ... to the estate of the decedent.
. 26 U.S.C. § 162(a) provides, “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” 26 U.S.C. § 212 similarly provides, "In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year ... (1) for the production or collection of income.” Although the provisions are similar, unlike § 162(a), § 212 lacks a “trade or business” requirement. See Estate of Yaeger,
.The Estate concedes that if IAL was rendered insolvent by the stock sale and Batchelor received excess consideration, he was liable to return it to IAL or its creditors, including the plaintiffs in the four unrelated suits against Batchelor. Thus, we find that the amounts paid in settlement of those suits are sufficiently linked to the initial income so as to trigger Kimbell.
. The parties dispute whether Batchelor’s liability accrued before his death. Having determined that the Estate's proffered income tax deduction is not allowable under section 691(b), we need not address this argument.