973 F.2d 1479 | 9th Cir. | 1992
Lead Opinion
Jay and Joan Carter appeal the entry of summary judgment against them in their tax refund suit challenging the Internal Revenue Service’s disallowance of a deduction for charitable contributions in 1983. We affirm the district court’s denial of the Carters' summary judgment motion, but reverse its grant of the IRS’s summary judgment motion and remand for trial.
BACKGROUND
The Carters founded the Psychal Phy-sionic Universal Life Church (PPULC) in 1975 after being ordained ministers in the Universal Life Church, Inc. of Modesto (ULC). They organized a congregation, affiliated their church with the ULC, and opened a church bank account on which the Carters were the sole signatories. Jay Carter became a full-time minister and does not hold any other employment. In lieu of a salary Jay receives a parsonage allowance, which is not taxable as income when paid to members of the clergy. See 26 U.S.C. § 107. Joan Carter, who is employed, donates to the PPULC fifty percent of her income, the maximum deductible contribution to a qualifying religious organization. The donations are deposited into
Beginning in 1976, the Carters claimed a charitable contribution deduction on their income tax returns for the 50 per cent of Joan’s salary they donated to the PPULC. Their annual donations ranged from approximately $10,000 in 1976 to $21,350 in 1983. Each year the IRS has disallowed the deduction and the Carters have paid the disputed amount. In 1981, the Carters sued the government in federal district court for a tax refund for the years 1976, 1977, and 1978 (Carter I). In 1984, the case went to trial before a jury, and the jury returned a verdict in favor of the Carters. In 1982, the Carters sued in Tax Court for a tax refund for the years 1979, 1980, 1981, and 1982 (Carter II). The Tax Court dismissed the suit after the Carters failed to comply with a discovery order for PPULC bank records.
The Carters then brought the instant suit (Carter III) in federal district court, seeking a refund on their 1983 taxes for the amount of deficiency resulting from the IRS’s disallowance of their 1983 contributions to PPULC and from the addition of a five percent negligence penalty. The district court entered judgment for the government on the parties’ cross-motions for summary judgment. The Carters filed a motion to set aside, alter and/or amend the judgment pursuant to Fed.R.Civ.P. 59(e) and 60(b), along with supplemental declarations concerning the facts of their case. The district court denied the motion. The Carters now timely appeal the judgment and the denial of their motion to set aside, alter and/or amend the judgment.
DISCUSSION
In Carter III the Carters moved for summary judgment, arguing that the Carter I verdict and judgment collaterally estopped the government from relitigating their entitlement to a charitable contribution deduction. The government also moved for summary judgment, arguing that Carter I had no preclusive effect and that the undisputed facts demonstrated that the Carters were not entitled to the deduction. In granting the government’s summary judgment motion, the district court determined that collateral estoppel was unavailable as a matter of law. The court also ruled that the Carters had failed to raise a material dispute concerning their fulfillment of two requirements for the deduction: whether they had made a bona fide gift and whether no PPULC earnings inured to their personal benefit. We agree with the district court that the Carter I judgment does not have collateral estoppel effect. Yet we also conclude that the Carter I judgment, along with the Carters’ affidavit that all of their procedures, types of expenditures and church activities remain unchanged, were sufficient to raise a material dispute as to the Carters’ entitlement to the deduction in 1983.
I. Collateral Estoppel
Under the doctrine of collateral estoppel, once an issue is actually litigated and necessarily determined, that determination is conclusive in subsequent suits alleging different claims between the same parties. See Montana v. United States, 440 U.S. 147, 153-54, 99 S.Ct. 970, 973-74, 59 L.Ed.2d 210 (1979). The availability of collateral estoppel is a mixed question of law and fact in which legal issues predominate, and our review is de novo. Davis & Cox v. Summa Corp., 751 F.2d 1507, 1519 (9th Cir.1985).
Collateral estoppel principles apply in the income tax context to preclude the relitigation, in a proceeding concerning a later tax year, of any matters that were actually presented and determined in a suit concerning an earlier tax year. See Peck v. Commissioner, 904 F.2d 525, 527 (9th Cir.1990). Several limitations apply. First, collateral estoppel is unwarranted if there has been a “significant ‘change in the legal climate.’ ” Id. (citing Montana, 440 U.S. at 161, 99 S.Ct. at 977). Second, the doctrine is inapplicable if the legally controlling facts — those facts essential to the pri-
Since Carter I, a legal development has occurred concerning the tax status of the Universal Life Church, and this development significantly changes the complexion of the basic facts presented to the jury in Carter I. In 1984, the Internal Revenue Service (IRS) revoked the ULC’s tax exempt status as a corporation organized and operated exclusively for religious purposes, for the fiscal years ending April 30, 1978, through April 30, 1981. That revocation has been upheld in the federal courts. See Universal Life Church, Inc. v. United States, 13 Cl.Ct. 567 (1987), aff'd 862 F.2d 321 (Fed.Cir.1988).
In Carter I, the Carters relied substantially on the ULC’s tax exempt status as support for their claimed entitlement to a deduction for a charitable contribution. They argued to the jury, both in their opening and closing statements, that the ULC is a bona fide religion, and that because the Carter’s congregation and the ULC are “one church” the ULC’s tax-exempt status extends to the' PPULC. Thus, contributions the Carters deposited into the PPULC account, they stated, belong to the ULC and the Carters were entitled to a deduction for those monies.
Each of the Carters' eight witnesses, including the Carters themselves, testified at length to the relationship between the ULC and its member congregations, and about the ULC’s tax exempt status. Three of these witnesses were officials of the Universal Life Church. Reverend Kirby Hensley, the founder and president of the ULC, testified that member congregations are one with the ULC and that contributions deposited into the accounts of the member congregations belong to the ULC. Robert Imbeau also testified. Imbeau is a ULC minister and a member of the ULC Board of Directors, whose duties are to oversee and maintain the records of the various ULC congregations. Imbeau testified that because the congregations and the ULC “are one” they need not apply for their own tax exemption. Rebecca Cable, a ULC minister who serves as director of the ULC Ministerial Association and on the ULC Board of Directors and Advisory Board, testified extensively about the religious activities of the ULC. She also testified that contributions placed in congregations’ bank
The Carters argue that the revocation of the ULC’s tax exemption has minor relevance because it was based on a “technicality” and because it does not relate to the 1983 tax year. We disagree. First, the exemption was not revoked on the basis of a technicality. The Claims Court found that the ULC gave tax advice and promoted tax avoidance among its congregations, and that this activity formed “more than an insubstantial part its activity,” thus warranting revocation. Universal Life Church, 13 Cl.Ct. at 583. Evidence concerning these non-religious activities of the ULC was not before the jury in Carter I. Second, the revocation of the ULC’s tax exempt status applied to more than half of the time period at issue in Carter I. Had the fact of the revocation been before the Carter I jury, the verdict may well have been different in light of the Carters’ repeated emphasis on the ULC’s exemption at trial. Because the revocation does not concern the tax year at issue here, does not mean this evidence is irrelevant to determining the Carters’ entitlement to a deduction for 1983. In a new trial the parties may argue to a jury the significance of the revocation. See Parker, 221 F.2d at 606. In sum, we conclude that the new evidence concerning the ULC’s tax status sufficiently changes the complexion of the controlling facts underlying the Carter I verdict so as to overcome the verdict’s preclusive effect.
II. Charitable Contribution Deduction
We review de novo the district court’s grant of the government’s motion for summary judgment, viewing the evidence in the light most favorable to the Carters to determine whether there are any genuine issues of material fact and whether the district court correctly applied the substantive law. See Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989). To establish their entitlement to a deduction for a charitable contribution, the Carters must show (1) they made a gift or contribution (2) to an organization established and operated solely for religious purposes (3) no part of whose net earnings inure to the benefit of any private individual. See 26 U.S.C. § 170(a), (c). They successfully met these requirements in Carter I, where the jury found on interrogatory that: (1) the Carters had made a bona fide gift or contribution to the PPULC; (2) the PPULC was organized and operated exclusively for religious purposes; and (3) no part of the PPULC’s net earnings inured to the benefit of the Carters.
Although we concluded above that the Carter 1 verdict does not have preclusive effect because of new evidentiary facts concerning the ULC’s tax exempt status, the findings it represents do have probative value for purposes of summary judgment. See Koch v. United States, 457 F.2d 230, 235-36 (7th Cir.1972) (prior jury verdict in taxpayer’s favor properly admitted into evidence in trial concerning later tax year as probative evidence concerning character of similar transaction); In re Hartman Material Handling Sys., Inc., 141 B.R. 802 (Bankr.S.D.N.Y.1992) (even though prior adjudication does not have collateral estoppel effect, its “findings should be given substantial deference”); B.F. Sturtevant Co. v. United States, 18 F.Supp. 28, 30 (D.Mass.1937) (although pri- or decision is not technically res judicata, it operates as prima facie evidence in later proceeding), aff'd 99 F.2d 72 (1st Cir.1938). Our analysis is thus whether Carter I is sufficiently probative of the issues presented in Carter III to raise material issues of
A. Contribution or Gift
The district court ruled as a matter of law that the Carters had not met the “contribution” requirement. It found that because the Carters retained sole signatory power over the PPULC account, they had not made a completed gift to the PPULC. The government argued the “sole control” theory in Carter I. The jury nevertheless found on interrogatory that the Carters had made a “bona fide gift or contribution” to PPULC in 1976, 1977, and 1978. Evidence submitted at that trial included evidence that a third trustee participated in annual authorizations of funding for the Carters’ ministry. In an affidavit supporting their summary judgment motion the Carters asserted that, other than the amounts involved, none of the facts concerning their accounting and payment procedures, their donations, and their donative intent had changed from the years at issue in Carter I to the year at issue in Carter III.
We do not agree with the government that the facts or the law have changed sufficiently to warrant discarding the jury’s finding that the Carters’ made a bona fide gift or contribution. The government first argues that the “legal climate” has changed since Carter I, pointing to three recent cases holding that when the charitable donor retains sole signatory power over a contribution the donor is not entitled to a deduction because the gift has not been completed. See, e.g., Burke v. United States, 88-1 U.S. Tax Cas. (CCH) ¶ 9291, 83,784-75, 1988 WL 68048 (D.Conn. 1988); Gookin v. United States, 707 F.Supp. 1156, 1158-59 (N.D.Cal.1988); Davis v. Commissioner, 81 T.C. 806, 816-17 (1983), aff'd, 767 F.2d 931 (9th Cir.1985). None of these cases, however, involves the effect of the presence of an outside trustee or board of directors on the issue of whether sole control has been relinquished sufficiently to result in a completed gift. Moreover, this legal authority does not represent a changed legal climate because the rule was an established one at the time of the Carter I trial. See Pauley v. United States, 459 F.2d 624, 627 & n. 8 (9th Cir.1972) (citing cases). Indeed, Davis was decided a year before the Carter I trial.
The government next points to bank records, not available in Carter I, which show that the Carters were the sole signatories on the PPULC account in 1983.
B. Entity organized and operated for exclusively religious purposes
In Carter I the Carters testified extensively about their religious beliefs and
The Carter I jury approved a parsonage allowance, which included rent or mortgage, taxes, utilities, insurance, repairs, and maintenance. It also approved as church-related church car expenses and restaurant meals for church meetings. The 1983 PPULC expenditures at issue in Carter III are almost exclusively for similar purposes. The remaining types of expenses which were not explicitly involved in Carter I total less than $700,
Nor do we consider the revocation of the ULC’s tax exempt status sufficient to resolve this issue as a matter of law. As we concluded above, it is possible that the Carter I jury relied in part on ULC’s tax exempt status in reaching its verdict, because substantial evidence was introduced about ULC charitable activities and tax exempt status. However, the trial also focused extensively on the Carters’ own religious activities and motivations. The Carters testified about their own beliefs and purposes, and the verdict reflects the jury’s determination that their beliefs are sincere. Moreover, the jury instructions and verdict dealt only with PPULC’s qualification as an exempt organization. Therefore, although the revocation of the ULC’s tax exempt status may have affected the verdict, the jury’s finding that the PPULC is an organization operated solely for religious purposes was sufficiently probative to raise a material dispute and preclude summary judgment for the government on this basis.
C. Personal Inurement
Personal inurement formed a second, alternative basis for the district court’s grant of summary judgment for the government. It found that many of the expenditures reflected in the Carters’ bank records were personal living expenses which inured to the Carters’ personal benefit. The court pointed specifically to expenses not involved in Carter I: a magazine subscription, medical services, and liquor bills. The evidence the Carters submitted regarding these and other expenses consisted of the following statement in their affidavit: “[T]he parsonage allowance [and] church expenses ... remain the same for the year 1983 [as in the years at issue in Carter 7]_ Only the amounts differ.”
To qualify as a charitable contribution, a donation must be given to an organization in which “no part of the net earnings ... inures to the benefit of any private ... individual.” 26 U.S.C. § 170(c)(2)(C) (emphasis added). Assuming without deciding that de minimis personal benefits can disqualify a deduction,
We must first determine which earnings to examine for personal inurement. The Carters argue that because PPULC had no net earnings, i.e., money left after expenses were paid, there could be no personal inurement. This is an overly simplistic interpretation of net earnings; so too is the government’s contention that net earnings equal gross earnings for purposes of the deduction. Courts have defined “net earnings” fairly broadly, Hall v. Commissioner, 729 F.2d 632, 634 (9th Cir.1984), to signify funds used for expenses over and above expenses that are “ordinary and necessary” in the operation of a religious organization. See Founding Church of Scientology v. United States, 188 Ct.Cl. 490, 412 F.2d 1197, 1200-01 (1969), cert. denied, 397 U.S. 1009, 90 S.Ct. 1237, 25 L.Ed.2d 422 (1970). Thus, the dispositive question is whether the expense involved is ordinary and necessary. If it is, its payment to a private individual does not constitute personal inurement. If the expense is not ordinary and necessary, it may or may not constitute personal inurement.
Reasonable salaries are considered “ordinary and necessary expenses” of a tax-exempt organization; however, excessive salaries constitute personal inurement to employees. Founding Church, 412 F.2d at 1200. In Founding Church, for example, the court found personal inurement in salary, commissions, royalties, and unexplained loan repayments and expense reimbursement, because the facts suggested this compensation “was not for full-time service” and was not “properly attributable ... as income.” Id. at 1201. Here, in lieu of a salary, Jay Carter received a parsonage allowance for his undisputed full-time service as a minister. Excessive parsonage allowances may also constitute personal inurement. Hall, 729 F.2d at 634. Jay Carter’s parsonage allowance, however, is not excessive as a matter of law: he was not otherwise employed, and his 1983 allowance totalled just over $15,-000.
Nor do we find that expenditures for a life insurance policy naming PPULC as a beneficiary and medical expenses for the Carters constitute personal inurement as a matter of law. The beneficiary of the insurance policy was the PPULC and not the Carters personally. Moreover, medical insurance is a typical “ordinary and necessary” expense of a tax-exempt employer. Cf. Brian Ruud Int’l v. United States, 733 F.Supp. 396, 400-01 (D.D.C.1989) (church’s payment of medical expenses for minister and family does not constitute personal in-urement).
The Carter I jury found no personal in-urement in the parsonage allowance, as well as other PPULC expenditures such as those connected with the church car, restaurant meals, supplies for in-home religious services, and credit card reimbursements for nonspecific church-related expenses. Moreover, we consider the “new” 1983 expenses — which the government argues demonstrate personal inurement — to be of the same type as expenses for which the Carter / jury found no personal inurement.
Were we free to assume that this case is just like the many cases in which ULC contributions have been disallowed as invalid tax shelters for ULC ministers, we might more readily agree with the district court that the Carters’ deduction should be disallowed as a matter of law. We must examine each case on its individual facts, however. The Carter I verdict, which approved substantially similar activities, expenses, and procedures, represents a credibility determination and a finding of the validity of the Carter’s religious enterprise which should not be discarded lightly. Thus, we conclude that material facts concerning the Carters’ entitlement to a deduction for their 1983 contribution to the PPULC remain disputed. The Carters are entitled to have their claims tried and evaluated by a jury.
III. Negligence Penalty
The district court affirmed the five percent negligence penalty imposed on the Carters for claiming a religious contribution deduction on their 1983 tax return. The version of the Tax Code applicable to the Carters’ 1983 tax return provides for a penalty of five percent of any underpayment of tax where the underpayment “is due to negligence or intentional disregard of rules or regulations (but without intent to defraud).” 26 U.S.C. § 6653(a) (1982). Because we remand for trial on whether the Carters properly claimed the deduction on their 1983 taxes, we reverse the imposition of the penalty. The propriety of the penalty may be reconsidered in light of the facts developed at trial.
IV. Motion to Set Aside, Alter or Amend Judgment
The district court entered judgment for the government in this case on September 10,1990. A copy of the judgment was sent to the Carters’ previous attorney but the Carters’ new attorney did not receive a copy, even though the court was on notice of the substitution. On October 16, 1990, upon learning of the entry of judgment, the Carters’ new attorney filed a motion to set aside, alter and/or amend the judgment pursuant to Fed.R.Civ.P. 59(e) and 60(b). In the motion, the Carters asked the court not only to vacate the judgment for the government, but to enter judgment for the Carters. The district court denied the motion.
Although we reverse the grant of summary judgment for the government herein, the propriety of the district court’s denial of the post-trial motion is nevertheless before us inasmuch as we also affirm the denial of the Carters’ summary judgment motion. We review the district court’s denial of the post-judgment rule 59(e) and 60(b) motion for abuse of discretion. Fiester v. Turner, 783 F.2d 1474, 1475-76 (9th Cir.1986). The court denied the motion to the extent it sought relief under rule 59(e) because of its untimeliness. Because the district court has no discretion to consider a late rule 59(e) motion, there was no abuse of discretion here. See Fed.R.Civ.P. 60(b); Browder v. Director, Dep’t of Corrections, 434 U.S. 257, 261-62 n. 5, 98 S.Ct. 556, 560 n. 5, 54 L.Ed.2d 521 (1978).
V. IRS Harassment in Violation of First and Fourteenth Amendments
The Carters argue that the government’s disallowance of their 1983 religious contributions violated the Constitution because it ignored the Carter I jury determination that PPULC was a bona fide religious organization and that the contributions to it were proper. As we discussed above, the Carter I verdict does not collaterally estop the government from denying the deduction. We recognize that the government’s power to require taxpayers such as the Carters to litigate anew each year their entitlement to deductions for religious contributions is certainly subject to abuse and may in some eases constitute unlawful harassment. It does not rise to such a level here.
VI. Attorney’s Fees and Rule 11 Sanctions
The Carters ask that we award them attorney’s fees under the Equal Access to Justice Act (EAJA) and impose sanctions on the government under Fed. R.Civ.P. 11. Attorney’s fees are available under the EAJA for parties prevailing in actions against the government where the government’s position both in the conduct at issue and in subsequent legal proceedings is not substantially justified. 28 U.S.C. § 2412(d). Because the merits of the Carters’ claim against the government have yet to be determined, they are not considered “prevailing parties” and any EAJA award would be premature at this time.
Rule 11 requires imposition of sanctions if legal papers are filed for an improper purpose “such as to harass or to cause unnecessary delay.” Fed.R.Civ.P. 11. The Carters sued the government, and the papers filed by the government in its defense did not in themselves constitute harassment or cause unnecessary delay. Therefore, Rule 11 sanctions are inappropriate.
CONCLUSION
The district court properly denied the Carters’ summary judgment motion, because collateral estoppel based on the Carter I verdict is unavailable in light of subsequent developments concerning the ULC’s tax exempt status. Even though the Carter I verdict falls short of being preclusive, together with the Carters’ general assertion that their procedures, expenses, and activities have not changed in substantive ways and in the absence of evidence to the contrary, it does operate to raise a material dispute as to the Carters’ entitlement to a charitable contribution deduction for 1983. Thus, we reverse the summary judgment for the government. We affirm in all other respects.
REVERSED and REMANDED.
. In this case we need not decide whether the "separable facts” doctrine announced in Sunnen remains viable in income tax cases. In Sunnen, the Court stated that collateral estoppel will not apply where the facts in the two proceedings are "separable,” that is, when the cases do not "involve the same set of events or documents.” Sunnen, 333 U.S. at 601-02, 68 S.Ct. at 721. Although the Court has repudiated the separable facts doctrine in general, it has also suggested that the doctrine may remain applicable to some extent in the income tax context. United States v. Stauffer Chemical Co., 464 U.S. 165, 172 n. 5, 104 S.Ct. 575, 579 n. 5, 78 L.Ed.2d 388 (1984). See generally Peck, 904 F.2d at 527-28 (discussing continued viability of Sunnen's separable facts doctrine, without deciding question). We read Sunnen and subsequent authority as indicating, however, that changes in facts between taxable years should receive close scrutiny. This reading is based on the policy considerations, first articulated in Sunnen and recently reaffirmed by the Court, which guide the application of collateral estoppel in the tax context. Collateral estoppel must be applied to avoid endowing taxpayers with perpetual, vested rights in a certain tax treatment, based on "decisions that have become obsolete or erroneous with time, thereby causing inequities among taxpayers.” Sunnen, 333 U.S. at 599, 68 S.Ct. at 720; see Limbach v. Hooven & Allison Co., 466 U.S. 353, 363, 104 S.Ct. 1837, 1843, 80 L.Ed.2d 356 (1984) ("Failure to follow Sunnen’s dictates would lead to the very tax inequality that the
. Because we conclude that collateral estoppel was unavailable on this ground, we do not consider whether other grounds exist, such as whether the minor variation in the facts between the years at issue in Carter l and in Carter III constitutes a difference in the controlling facts.
. The Carters argue that this evidence should have been disregarded for summary judgment purposes because these records, as well as the transcript of their joint deposition filed by the government, were not properly authenticated. This is a specious argument, for although the government originally filed this evidence without authentication, it did authenticate it properly in advance of the hearing on summary judgment.
. Medical expenses for the Carters, $395; life insurance with PPULC as beneficiary, $164; magazine subscription, $15; and wine store bills, $108.
. In Gookin, 707 F.Supp. at 1158, the district court interpreted this provision of the Internal Revenue Code to provide that "any inurement, however small the benefit to the individual, is impermissible." We have grave doubts that the
. Making all reasonable inferences in the Carters’ favor, for example, the parsonage allowance approved in Carter I would include rent, moving and storage, plumbing, garbage, utilities, water, insurance, repairs, maintenance,
Concurrence in Part
Concurring in Part and Dissenting in Part:
I concur in the judgment and in almost all aspects of the majority’s opinion. I dissent only from the discussion contained in footnote 5 of the opinion. Although it is not necessary to the court’s decision and is therefore dicta and not binding on either this court or the district courts, the majority goes out of its way to criticize Gookin v. United States, 707 F.Supp. 1156, 1158 (N.D.Cal.1988), which holds that any personal inurement can erase a contribution’s status as charitable for purposes of the tax law.
