CHARLES K. BRELAND, JR., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21940-12.
UNITED STATES TAX COURT
Filed March 28, 2019.
152 T.C. No. 9
In P‘s chapter 11 bankruptcy proceeding, upon the agreement of P and the IRS, the bankruptcy court entered a consent order resolving the IRS’ objection to the plan of reorganization that settled the amount of the IRS’ priority claim and set out procedures for resolving the IRS’ unsecured general claim (consent order). After the plan of reorganization was confirmed, the IRS moved for leave to amend its proof of claim because it determined that P might owe additional prepetition taxes. That motion was denied by the bankruptcy court. Later, but while the bankruptcy case was still pending, R issued a notice of deficiency for certain of the years covered by the consent order and the plan of reorganization, and P petitioned for redetermination. P has moved for summary judgment that the consent order bars R from pursuing any additional deficiency for the tax years covered in the consent order.
Held: A bankruptcy court order that does not determine a taxpayer‘s total Federal tax liability for a given tax year, but only resolves the amount of the IRS’ claim to be paid by the bankruptcy estate pursuant to the plan of reorganization, does not preclude a subsequent notice of deficiency (or resulting tax proceeding) for nondischargeable taxes from the same tax year.
Held, further, because the bankruptcy court did not determine P‘s total Federal tax liability for any of the subject tax years, res judicata and collateral estoppel do not bar R from pursuing additional deficiencies for the subject tax years.
John H. Adams, for petitioner.
Edwin B. Cleverdon, for respondent.
OPINION
PUGH, Judge: Respondent issued a notice of deficiency determining that petitioner and his wife1 owed the following:
| | Deficiency | Penalty | Addition to tax |
|---|---|---|---|
| 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).
Background
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
Upon review of the record and agreement of the debtor, Charles K. Breland, Jr., and the claimant, United States of America, in settlement and compromise of the United States’ Protective Objection to the Amended Plan of Reorganization of Ohana Cabo2 (Doc. 449), it is hereby ORDERED, ADJUDGED and DECREED that:
1. The Internal Revenue Service (“IRS“) shall withdraw its amended proof of claim (Claim No. 5-5) filed on December 6, 2010 and reinstate its amended proof of claim (Claim No. 5-4) filed on October 4, 2010 (“IRS claim“).
2. The IRS claim totals $2,020,697.01 and consists of unsecured priority tax claims totaling $671,318.55 (“IRS priority tax claims“), and unsecured general claims totaling $1,349,378.46 (“IRS unsecured general claims“).
3. The IRS priority tax claims of $671,318.55 shall be allowed in full and paid in accordance with the terms of §§ 2.2 and 5.2 of the Confirmed Ohana Cabo LLC‘s Chapter 11 Plan of Reorganization As Amended (“Plan“). See Docs. 462 and 462-1.
4. The debtor shall preserve his existing objection to the IRS unsecured general claims pursuant to § 6.1 of the Plan, and said claims shall be deemed disputed within the meaning of § 3.2.2 of the Plan until resolution of such disputed claims through either settlement or adjudication to a Final Order (as defined in § 1.18 of the Plan). To the extent that such disputed claims become Allowed (as defined in § 1.4 of the Plan), payment of said Allowed claims shall be made in accordance with §§ 3.2.2 and 6.2 of the Plan.
5. Hearing on the debtor‘s objection to the IRS unsecured general claims shall be set for Tuesday, February 8, 2011 at 8:30 a.m.
6. The debtor, individually and in his capacity as Post-Confirmation Estate Representative (as defined in § 1.34 of the Plan), shall be obligated to comply with the necessary tax return reporting requirements for the debtor and the estate for the tax years 2004 through 2009 by no later than Wednesday, February 16, 2011.
7. The Plan shall be modified to read, as follows:
Plan Default Relating to Taxes. Upon any default under the Plan relating to the non-payment of any Administrative Expense, Priority Tax
Claims or Unsecured Claim, the administrative collection powers and the rights of the United States shall be reinstated as they existed prior to the filing of the bankruptcy petition, including, but not limited to, the assessment of taxes, the filing of Notice of Federal Tax Lien and the powers of levy, seizure, and sale under Title 26 of the United States Code. See Plan, at § 11.9 (formerly, § 11.8 (prior to amendment)).
8. The United States’ Protective Objection to the Amended Plan of Reorganization of Ohana Cabo (Doc. 449) shall be withdrawn with prejudice.
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
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)
Discussion
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
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
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
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:
While principles of res judicata apply generally to bankruptcy proceedings, the plain language of * * * [
11 U.S.C. secs. 1141 and523 ] forbid the application of those principles to the facts of this case. By expressly providing that the described taxes are not discharged “whether or not a claim for such taxes was filed or allowed,”11 U.S.C. § 523(a)(1)(A) (emphasis added), Congress has determined that the IRS may make a claim for taxes for a particular year in a bankruptcy proceeding, accept the judgment of the bankruptcy court, then audit and make additional claims for that same year, even though such conduct may seem inequitable or impair the debtor‘s fresh start.
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
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.
Critically, in both McQuade and Fla. Peach Corp. the bankruptcy court was acting pursuant to its authority granted by
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
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
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
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
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:
In this case, the Court finds that the Consent Order, and not the confirmed plan, is the controlling document as to the extent of the Debtor‘s tax obligation to the IRS. The Consent Order contains a clear statement of the total IRS claim amount and divides that amount into priority and general unsecured values. Its terms were negotiated by the Debtor and the IRS and approved by this Court. The Consent Order settled a confirmation dispute and the IRS had notice. Moreover, by its terms, the Consent Order appears binding and complete. No specific limitation on the Consent Order‘s effect is indicated in its terms. The IRS did not reserve the right to assert additional claims. Indeed, the Consent Order did not reserve any rights to the IRS, only to the Debtor. The purpose of the Consent Order is unclear if it was not meant to bind the IRS to its terms.
The court also concluded that whether the taxes at issue were dischargeable did not matter:
The dischargeability of the tax debts pursuant to * * * [
11 U.S.C. sec. 523 ] would only be relevant if the confirmed plan, and not the Consent Order, operated as a determination of the debtor‘s tax liability. As such, the issue is not whether the tax debts are nondischargeable. The issueis whether the Consent Order‘s treatment, characterization, and limitation of the tax debt owed by the Debtor controls. This Court finds that it does. The IRS is bound by the terms of the Consent Order which sets out the amount and character of the tax debt at issue.
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.4 The court concluded that at the time the IRS pursued the litigation to amend its claim it was justified in thinking that res judicata might attach to nondischargeable prepetition tax debt regardless of the consent order because the IRS had discovered the liability before petitioner‘s objection to the IRS’ claim had been adjudicated. Two cases were pending before the U.S. Court of Appeals for the Eleventh Circuit around the time the IRS sought leave to amend its claim in the 2009 bankruptcy: Fla. Dep‘t of Revenue v. Diaz (In re Diaz), 647 F.3d 1073 (11th Cir. 2011), and Fla. Dep‘t of Revenue v. Davis (In re Davis), 481 F. App‘x 492 (11th Cir. 2012).
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. at 1090-1092 (explaining that the bankruptcy court‘s order sustaining the claim objection and reducing the allowed claim was not an adjudication of the total amount of the debt). In so holding the Court of Appeals stated that the rationale in Gurwitch and DePaolo--cases dealing with nondischargeable taxes--applied with equal force in the context of child-support obligations. 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:
The scope of the bankruptcy court‘s review of the issue of liability for non-dischargeable obligations is limited to liability in the context of a bankruptcy plan. As such, the bankruptcy court may disallow a claim during the proceeding, but neither the discharge injunction nor principles of preclusion bar the * * * [FL DOR] or another child support creditor from pursuing the debt post-bankruptcy.
Id. at 495 (citation omitted).
In the 2016 bankruptcy court order, the bankruptcy court summarized the holdings of these cases as follows:
[T]he IRS is entitled to collect the full amount of any statutorily nondischargeable tax debt owed by a debtor regardless of whether the debtor and the IRS consent to a lesser amount during a debtor‘s bankruptcy case, or whether the IRS even files a claim in a debtor‘s bankruptcy case. Thus, if a debtor‘s tax debt is statutorily nondischargeable under § 523, then the IRS is entitled to collect the full amount of that debt regardless of how it is treated in a debtor‘s bankruptcy case.
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.5 Relatedly, we hold that collateral
To reflect the foregoing,
An appropriate order will be issued.
Notes
In Kaiser Aerospace & Elecs. Corp. v. Teledyne Indus., Inc. (In re Piper Aircraft Corp.), 244 F.3d 1289, 1297-1299 (11th Cir. 2001), the Court of Appeals observed that the facts giving rise to a bankruptcy proceeding involve the financial collapse of the debtor and that the chapter 11 confirmation process is primarily an inquiry into the viability of the proposed plan of reorganization and the disposition of the assets of the bankruptcy estate. Here, the facts underlying the deficiency proceeding--petitioner‘s tax items for each year--were not raised or litigated in the confirmation process. The consent order expressly left petitioner‘s objection to the IRS’ claim pending and set forth a process for dispute resolution. And as we will explain, because the IRS held nondischargeable debts and the bankruptcy court never examined or decided petitioner‘s tax liability for any of the subject years, the bankruptcy proceeding, more broadly, was limited to resolving the amount of tax that would be paid by the bankruptcy estate under the plan of reorganization. And as we explain below, we also hold that, as in Hambrick v. Commissioner, 118 T.C. 348 (2002), there was no final judgment on the merits as to petitioner‘s tax liability.