JEFFERSON SMURFIT CORPORATION, (U.S.) AND SUBSIDIARIES, PLAINTIFF—APPELLEE v. UNITED STATES OF AMERICA, DEFENDANT—APPELLANTJEFFERSON SMURFIT CORPORATION, (U.S.) AND SUBSIDIARIES, PLAINTIFF—APPELLEE v. UNITED STATES OF AMERICA, DEFENDANT—APPELLANT
Jеfferson Smurfit Corporation (Smurfit) brought this refund action against the United States claiming that a deficiency assessment by the Internal Revenue Service (IRS) for tax year 1989 was barred by res judicata. In its 1989 tax returns Smurfit had claimed net operating losses which it sought to carry back to its 1987 tax year in order to obtain a refund for that year. During its examination of Smurfit’s 1989 returns, the IRS discovered that the amount which Smurfit sought to carry back had been miscalculated and issued reports notifying Smurfit of the resulting deficiency. Smurfit did not contest that the amount it had carried back for its 1989 losses and credits had been miscalculated. It paid the assessed amount and now seeks a refund, arguing that a final decision of the Tax Court for its 1987 tax year bars the deficiency assessment. Both pаrties moved for summary judgment in the district court. Smurfit’s motion was
I.
A corporate reorganization caused Smurfit to file two tax returns for 1989. It claimed $5,812,300 in foreign tax credits in the first return and $68,255,200 net operating losses in the second. Smurfit also filed an IRS Form 1139 (Corporate Application for Tentative Refund) under 26 U.S.C. § 6411, seeking to carry back the $68,255,200 loss and the $5,812,300 in credits to its 1987 tax year in order to prоduce a refund for that year. The day after Smurfit filed its Form 1139, the IRS began to examine its 1987 and 1988 tax filings. In the course of the examination, the IRS employed economists to determine whether the foreign tax credits had been calculated correctly.
Smurfit filed a Tax Court petition in 1993 to resolve its tax liabilities for 1987 and 1988, and in January 1999 the IRS and Smurfit agreed to a stipulated settlemеnt. On January 22, 1999, the Tax Court issued its brief decision based on the stipulation of the parties which simply ordered: “That there is no deficiency, or overpayment, in income tax for 1987; and that there is a deficiency in income tax for 1988 in the amount of $1,878,529.00.” The Tax Court decision became final on April 22, 1999.
Before the Tax Court filed its decision applying to the 1987 tax year, the IRS issued Nоtices of Proposed Adjustments disputing the calculations of Smurfit’s car-riedback losses and credits. Sometime after Smurfit had filed its petition in the Tax Court relating to its 1987 and 1988 tax years, the same IRS examiner who had studied its liabilities for those years began examining its 1989 returns. The examiner discovered errors in Smurfit’s calculation of its claimed foreign tax credits and net operating lоsses prior to entry of the Tax Court judgment. Two examination reports relating to the 1989 tax years were released by the IRS on April 21, 1999, several months after the Tax Court’s decision on Smurfit’s 1987 and 1988 tax returns and one day before it became final. Another examination report for 1989 issued on May 6, 1999. The IRS reports stated that Smurfit had miscalculated its 1989 net operating losses and tax сredits and that it owed an additional $4,137,036 plus interest for the 1987 tax year.
Smurfit paid the asserted deficiency in June 1999, and filed an administrative claim with the IRS for a refund of the $4,137,036 it had paid plus interest. It claimed that the Tax Court’s decision on its 1987 and 1988 tax years precluded the IRS from seeking a deficiency payment for 1987 based on Smurfit’s miscalculations of its net operating losses for 1989. Aftеr the IRS failed to act on the administrative claim within six months, Smurfit filed this refund action in the district court.
Both parties moved for summary judgment. Smurfit did not argue that it had correctly calculated its 1989 tax credits or operating losses, but rather that res judi-cata barred the IRS from seeking deficiencies for its 1987 tax year. The government responded that the Internal Revenue Code allows it tо assess deficiency payments for miscalculated net operating losses intended by a taxpayer to be carried back to an earlier tax year, regardless of whether the Tax Court has issued a decision for that year. In addition the government asserted a claim for equitable re-coupment if Smurfit were to prevail in the district court, a claim which Smurfit did not contest. The Tax Court had determined that Smurfit owed a deficiency payment for tax year 1988, but the recalculations by the IRS showed that Smurfit would be due a tax benefit for that year if it were not barred by the final judgment
II.
The United States appeals, arguing that the district court erred by granting summary judgment to Smurfit because Congress has provided that the IRS may examine and assess deficiencies resulting from errors in carriedback net operating loss cases even after the Tax Court has issued a final decision for the carryback year. Smurfit contends, however, that under
Commissioner v. Sunnen,
Prior judgments can bar future litigation under two independent common law doctrines — issue preclusion and claim preclusion.
Klipsch, Inc. v. WWR Technology, Inc.,
Claim preclusion is a common law doctrine which can be overridden by statute.
See Iowa Network Services v. Qwest Corp.,
Under the tax code, the IRS is ordinarily required to assert a deficiency in a return by issuing the taxpayer a notice of deficiency. 26 U.S.C. § 6212(a). After receiving such a notice, the taxpayer can either pay the deficiency or file a petition in the Tax Court disputing that it owes the amount sought. 26 U.S.C. § 6213. The taxpayer is not required to pay the tax until the decision of the Tax Court has become final. 26 U.S.C. § 6213(a). Taxpayers are unable to file a petition in the Tax Court unless they receive a notice of deficiency for a particular tax year,
Midland Mortgage Co. v. Commissioner,
Although the IRS is generally barred from determining additional deficiencies for a tax year for which the taxpayer has filed a petition in the Tax Court, 26 U.S.C. § 6212(c)(1), Congress has created exceptions to enable the assessment of
If the Secretary has mailed to the taxpayer a notice of deficiency ... and the taxpayer files a petition with the Tax Court ... the Secretary shall have no right to determine any additional deficiency of income tax for the same taxable year ... with respect to any act (or failure to act) to which such petition relates, except in the case of fraud, and except as provided in section 6214(a) (relating to assertion of greater deficiencies before the Tax Court), in section 6213(b)(1) (relating to mathematical or clerical errors), in section 6851 or 6852 (relating to termination assessments), or in section 6861(c) (relating to the making of jeopardy assessments).
26 U.S.C. § 6212(c)(1) (emphasis added).
Section 6212(c)(1) thus both permits additional notices of deficiency and lists thе limited circumstances where they are allowed, explicitly including mathematical or clerical errors “as provided in ... section 6213(b)(1).” 26 U.S.C. § 6212(c)(1). The referenced provision for mathematical and clerical errors (§ 6213(b)(1)) in turn states that a notice of assessment for such errors shall not be considered a notice of deficiency permitting a Tax Court pеtition. 26 U.S.C. § 6213(b)(1). A related section of the statute addresses “tentative carryback or refund adjustments”. 26 U.S.C. § 6213(b)(3). If it is determined that there has been an error in the carryback amount, the excess amount the taxpayer received because of the error may be assessed “as a deficiency as if it were due to a mathematical or clerical error aрpearing on the return.” Id. An assessment resulting from errors in a § 6411 carryback application is treated “as if it were due to a mathematical or clerical error appearing on the return,” 26 U.S.C. § 6213(b)(3), and it is thereby excluded from the prohibition against successive notices of deficiency. 26 U.S.C. § 6212(c)(1).
Assessments based on § 6411 applications for tentative refunds due to carried-back corporate losses are treated differently from ordinary returns. When a taxpayer submits a tentative § 6411 application to carry back losses, the IRS is to make a “limited examination” and act on it within 90 days. 26 U.S.C. § 6411(b). After this 90 day period, however, the IRS can reexamine the claimed carryback losses and assess deficiencies based on аn error in the amount carried back if the statute of limitations for the year in which the losses were incurred has not expired, 26 U.S.C. § 6501(k) and (h), and without regard to whether the IRS has previously issued a notice of deficiency for the carryback year. 26 U.S.C. §§ 6213(b)(1) and (3). Congress also expressly permits taxpayers to file § 6411 tentative applications to carryback losses to а year for which the Tax Court has already entered a final decision. 26 U.S.C. § 6511(d)(2)(A).
Neither party has cited any precedent from this court interpreting the code sections relevant to the question whether Congress intended for an intervening final judgment by the Tax Court for the carry-back year to bar the IRS from assessing a deficiency discovered during its examination of the yeаr in which the losses were incurred. Both parties do address
Zackim v. Commissioner,
In
Zackim,
the Third Circuit focused on 26 U.S.C. § 6212(e)(1) in determining whether Congress intended Tax Court decisions to bar additional assessments based
In providing for exceptions to the rule against successive assessments after a Tax Court petition has been filed, Congress did not differentiate between assessments based on fraud and those based on erroneous § 6411 applications. The rule against successive notices of deficiency applies “except in the case of fraud, and except as provided ... 6218(b)(1) (relating to mathematical or clerical errors).” 26 U.S.C. § 6212(c)(1) (emphasis added). Section 6213(b)(1) instructs that an assessment based on a mathematical or clerical error “shall not be considеred as a notice of deficiency” and shall be excluded from the prohibition against successive deficiencies. Congress treated an assessment arising from a § 6411 application “as if it were due to a mathematical or clerical error” under § 6213(b)(1), excluding both from the rule against successive deficiencies. 26 U.S.C. § 6213(b)(3). Like assessments based on fraud, Congress intended to exclude assessments based on erroneous § 6411 applications from the general policy of finality, Zackim, 887 at 458-459, and intended for the IRS to assess such deficiencies even after the IRS has issued a final decision for the carryback year so long as they were not litigated before the Tax Court.
Consideration of the relevant statutory sections governing corporate applications for tentative refunds supports the conclusion that Congress did not intend for a final Tax Court decision for the carryback year to bar the IRS from assessing a deficiency based on an erroneously carried back amount. Taxpayers are specifically permitted to apply for “tentative” refunds under 26 U.S.C. § 6411, the seсtion under which Smurfit filed its application. The word “tentative” is one of common understanding and is defined as something “made, done, [or] proposed ... experimentally or provisionally” or something “not definite or final”. Webster’s New World Dictionary (3d College ed.1988). Moreover, the IRS is permitted to assess deficiencies based on erroneous § 6411 applications even after the statute of limitations has expired for the carryback year, 26 U.S.C. §§ 6501(h) and (k), and taxpayers are expressly permitted to carry back losses in § 6411 applications to years for which the Tax Court has entered a final decision. 26 U.S.C. § 6511(d)(2)(A) and (B). By treating tentative applications for refunds under § 6411 like fraud and excepting them from the prohibition against successive notices and as separate from the carryback year in all other respects, Congress indicated that it intended to permit the IRS to assess deficiencies resulting from erroneous or miscalculated carried-back amounts even after a final Tax Court decision for the carryback year.
Smurfit concedes that
Zackim
was correctly decided but argues that its holding should be limited to the fraud exception. It -notes that Congress did not precede fraud by the words “as provided in” which introduce the other exceptions in § 6212(c)(1) and that fraud is always exempted from res judicata effects on judg
Smurfit also relies on
Bradley v. United States,
We recognize in Tax Court proceedings that “[e]aeh year is the origin of a new liability and of a separate cause of actiоn,” and res judicata binds parties “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.”
Commissioner v. Sunnen,
Claim preclusion only bars a party from asserting “a claim or defense in a later proceeding that should have been raised in an earlier proceeding,”
McKenzie Engineering Co.,
For these reasons we reverse the judgment and remand the case to the district court for further proceedings consistent with this opinion.