Opinion ID: 658130
Heading Depth: 1
Heading Rank: 2

Heading: The Preclusive Effect of the Prior Tax Court Decisions

Text: 17 We first address the government's contention that res judicata barred Mrs. Shanbaum from raising the innocent spouse defense. The doctrine of res judicata, read in the broad sense of the term, embraces two distinct preclusion concepts: claim preclusion (often termed res judicata) and issue preclusion (often referred to as collateral estoppel). Migra v. Warren City School Dist. Bd. of Education, 465 U.S. 75, 77 n. 1, 104 S.Ct. 892, 894 n. 1, 79 L.Ed.2d 56 (1984). Unfortunately, the terminology used in this area of the law often breeds confusion. This confusion is reflected in the government's contentions in the pre-trial order. In that document, the government asserted that collateral estoppel--not res judicata--prevented Mrs. Shanbaum from asserting the innocent spouse defense. We will thus pause to outline the contours of claim and issue preclusion.
18 Claim preclusion, or pure res judicata, is the venerable legal canon that insures the finality of judgments and thereby conserves judicial resources and protects litigants from multiple lawsuits. Medina v. I.N.S., 993 F.2d 499, 503 (5th Cir.1993). Claim preclusion is appropriate only if four conditions are satisfied. First, the parties in a later action must be identical to (or at least be in privity with) the parties in a prior action. Second, the judgment in the prior action must have been rendered by a court of competent jurisdiction. Third, the prior action must have concluded with a final judgment on the merits. Fourth, the same claim or cause of action must be involved in both suits. Eubanks v. Federal Deposit Ins. Corp., 977 F.2d 166, 169 (5th Cir.1992). If these conditions are satisfied, claim preclusion prohibits either party from raising any claim or defense in the later action that was or could have been raised in support of or in opposition to the cause of action asserted in the prior action. In re Howe, 913 F.2d 1138, 1144 (5th Cir.1990). 2 19 One motivating principle behind claim preclusion is waiver. If a party does not raise a claim or a defense in the prior action, that party thereby waives its right to raise that claim or defense in the subsequent action. As we have previously put it: [T]he effect of a judgment extends to the litigation of all issues relevant to the same claim between the same parties, whether or not raised at trial. Kaspar Wire Works, Inc. v. Leco Engineering & Mach. Inc., 575 F.2d 530, 535 (5th Cir.1978); see also Allen v. McCurry, 449 U.S. 90, 94, 101 S.Ct. 411, 414, 66 L.Ed.2d 308 (1980) (holding that claim preclusion applies to claims that were or could have been raised in a prior action that involved the parties or their privies when the prior action had been resolved by a final judgment on the merits.). 20 Issue preclusion, or collateral estoppel, in contrast, promotes the interests of judicial economy by treating specific issues of fact or law that are validly and necessarily determined between two parties as final and conclusive. Issue preclusion is appropriate only if the following four conditions are met. First, the issue under consideration in a subsequent action must be identical to the issue litigated in a prior action. Second, the issue must have been fully and vigorously litigated in the prior action. Third, the issue must have been necessary to support the judgment in the prior case. Fourth, there must be no special circumstance that would render preclusion inappropriate or unfair. Universal American Barge Corp. v. J-Chem, Inc., 946 F.2d 1131, 1136 (5th Cir.1991) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326-32, 99 S.Ct. 645, 649, 58 L.Ed.2d 552 (1979)). If these conditions are satisfied, issue preclusion prohibits a party from seeking another determination of the litigated issue in the subsequent action. 3 21 The differences between claim preclusion and issue preclusion are significant. Waiver is not a motivating principle behind issue preclusion. Instead, courts reason that if another court has already furnished a trustworthy determination of a given issue of fact or law, a party that has already litigated that issue should not be allowed to attack that determination in a second action. Moreover, under issue preclusion, unlike claim preclusion, the subject matter of the later suit need not have any relationship to the subject matter of the prior suit. Having sketched the relevant legal background, we now return to the events as they developed in this case.
22 The government contends that doctrine of res judicata barred Mrs. Shanbaum from asserting the innocent spouse defense at trial in the district court below. However, res judicata is an affirmative defense that can be waived. Smaczniak v. Commissioner, 998 F.2d 238, 242 (5th Cir.1993). And Mrs. Shanbaum asserts that the government failed to assert this defense in a timely manner. 23 Unfortunately, neither party can be said to have clearly or effectively raised the issues that form the heart of this dispute. First, the innocent spouse defense is an affirmative defense to the government's claim. Mrs. Shanbaum bore the burden of proof on each element of this defense at trial. Bokum v. Commissioner, 992 F.2d 1132, 1134 (11th Cir.1993). Thus, according to Federal Rule of Civil Procedure 8(c), Mrs. Shanbaum should have pleaded this issue in her original answer or amended her answer pursuant to Rule 15(a) in order to raise this defense. However, Mrs. Shanbaum did not take either of these steps. Indeed, she failed to raise the innocent spouse defense until she submitted to the district court her portion of the proposed pretrial order. Nevertheless, since the district court approved of and filed the pretrial order and since Rule 16(e) provides that the pretrial order controls the subsequent course of action, unless modified by a subsequent order, the presentation of the innocent spouse defense in the approved-of pretrial order was sufficient to bring that issue before the district court. Syrie v. Knoll Int'l, 748 F.2d 304, 308 (5th Cir.1984). 24 Of course, since Mrs. Shanbaum did not raise the innocent spouse defense in her answer, the government had no reason or opportunity to raise in its formal pleadings any affirmative defense of its own to Mrs. Shanbaum's defense, even a defense such as res judicata which Rule 8(c) requires to be pleaded. 4 However, once Mrs. Shanbaum raised the innocent spouse defense in her submissions to the pretrial order, the government had the opportunity and the obligation to raise the proper defense--res judicata--in its portion of the pretrial order. 25 However, the government failed to raise res judicata in this order. Instead, the government stated that Mrs. Shanbaum was collaterally estopped from asserting the innocent spouse defense as a defense to her income tax liability for certain years involved in the case. In a separate section of the pretrial order, the government listed as a Contested Issue of Law whether Mrs. Shanbaum may assert the 'innocent spouse' [defense] as a defense to the taxes assessed against her. However, the government failed to articulate the theory upon which this assertion was based. Thus, at first blush, the government seems to have failed to comply with Rule 8(c) and waived res judicata as a defense to Mrs. Shanbaum's innocent spouse defense. 26 Nevertheless, the fact that the government did not formally raise res judicata in the pretrial order does not end the inquiry. We have previously explained that  '[w]here the matter is raised in the trial court in a manner that does not result in unfair surprise, ... technical failure to comply precisely with Rule 8(c) is not fatal.'  Lucas v. United States, 807 F.2d 414, 417 (5th Cir.1986) (quoting Allied Chemical Corp. v. Mackay, 695 F.2d 854, 855-56 (5th Cir.1983)). Thus, if a party that asserts an affirmative defense (such as res judicata) fails to raise that defense in an operative pleading, that party does not necessarily waive the defense. Instead, if the party asserting the defense  'raised the issue at a pragmatically sufficient time, and [the party opposing the defense] was not prejudiced in its ability to respond,'  id. at 418, a court may hold that the defense was not waived. In Lucas, for example, we held that a purely legal matter (a statutory cap on the amount of damages that a medical malpractice plaintiff could recover) that was raised for the first time at trial, was raised at a pragmatically sufficient time. 27 In the present case, we conclude that the government gave sufficient notice of its intention to raise res judicata, also a legal matter, as a defense. In its trial brief, filed the same day as the pretrial order and served on Mrs. Shanbaum before the trial began, the government correctly argued that res judicata barred Mrs. Shanbaum from re-litigating the Tax Court decisions that determined her income tax and transferee liability. Since the defense of res judicata was brought to the attention of Mrs. Shanbaum and the district court on the same day that the pretrial order was filed, res judicata was raised on the same day that Mrs. Shanbaum raised her innocent spouse defense. Res judicata was thus raised at a pragmatically sufficient time. Moreover, both the government and Mrs. Shanbaum addressed the applicability of res judicata in post-trial briefs. Mrs. Shanbaum thus had an adequate opportunity to respond to the government's assertion of res judicata. Therefore, under the facts of this case, the government did not waive its res judicata defense by failing to raise the issue in its pleadings or in the pretrial order. 28 Moreover, we conclude that res judicata was tried with the implied consent of the parties. See Fed.R.Civ.P. 15(b). Whether an issue has been tried with the implied consent of the parties depends upon whether the parties recognized that the unpleaded issue entered the case at trial, whether the evidence that supports the unpleaded issue was introduced at trial without objection, and whether a finding of trial by consent prejudiced the opposing party's opportunity to respond. Haught v. Maceluch, 681 F.2d 291, 305-306 (5th Cir.1982); Jimenez v. The Tuna Vessel Granada, 652 F.2d 415, 421 (5th Cir.1981). Whether the parties recognized that the unpleaded issue entered the case at trial often depends on whether the evidence that supports the unpleaded issue is also relevant to another issue in the case. If the evidence that supports the unpleaded issue is also relevant to another issue in the case, the introduction of this evidence  'may not be used to show consent to trial of a new issue absent a clear indication that the party who introduced the evidence was attempting to raise a new issue.'  Haught, 681 F.2d at 305 (quoting International Harvester Credit Corp. v. East Coast Truck, 547 F.2d 888, 890 (5th Cir.1977)). As Professors Wright, Miller, and Kane have observed, the reasoning behind this rule is sound, for if evidence is introduced to support basic issues that have already been pleaded, the opposing party may not be conscious of its relevance to issues not raised by the pleadings unless that fact is made clear. 6A Charles A. Wright et al., Federal Practice and Procedure: Civil 2d Sec. 1493, at 32-35 (1990). 29 In this case, we believe that the factors which militate in favor of finding that res judicata was tried by consent are present. First, the government clearly indicated that it was relying on res judicata as a defense to the innocent spouse defense. See Haught, 681 F.2d at 305. Although Mrs. Shanbaum asserts that the evidence introduced to prove res judicata--the Tax Court decisions--led her to believe that the government was pursuing its pleaded collateral estoppel defense, the government's trial brief plainly brought res judicata to the attention of Mrs. Shanbaum before trial. Thus, Mrs. Shanbaum must have recognized that res judicata entered the case at trial. Second, Mrs. Shanbaum did not object to the introduction of the Tax Court decisions. Finally, Mrs. Shanbaum was not prejudiced in her ability to respond to the government's res judicata defense. There was no need for Mrs. Shanbaum to conduct additional discovery to defend against res judicata; all of the relevant factual and legal details were before the court at trial. Moreover, Mrs. Shanbaum filed a post-trial brief in which she addressed the government's assertion of res judicata. Thus, Mrs. Shanbaum not only had an adequate opportunity to respond, she did respond. 30 Mrs. Shanbaum's contention that the government waived res judicata simply because it mistakenly pleaded collateral estoppel in the pretrial order is unavailing. We do not adjudicate by labels. We adjudicate cases on the facts and law as they fit and support each other in the trial as the case progresses. In this case, the facts and law support the government's position that res judicata was adequately raised and in fact tried in the district court. The government is entitled to the benefit of res judicata. 31
32 We now examine the merits of the government's argument that claim preclusion prohibited Mrs. Shanbaum from asserting the innocent spouse defense in this action. As we discussed above, claim preclusion is appropriate only if four conditions are satisfied: the parties must be identical; the judgment in the prior action must have been rendered by a court of competent jurisdiction; the prior action must have concluded with a final judgment on the merits; and the same claim or cause of action must be involved in both suits. We conclude that all of these conditions have been met. 33 First, the parties in this case and in the proceedings before the Tax Court are, obviously, identical. Mrs. Shanbaum was a named party and was represented by counsel in all of the Tax Court proceedings. Second, the Tax Court is a court of competent jurisdiction for the determination of a taxpayer's income tax and transferee liability. Third, Mrs. Shanbaum's Tax Court proceedings concluded with final judgments on the merits. Simply because the Tax Court decisions were reached by agreement does not mean that Mrs. Shanbaum's income tax and transferee liabilities were not resolved by final judgments on the merits for the purposes of res judicata. An agreed judgment is entitled to full res judicata effect. United States v. International Building Co., 345 U.S. 502, 505-06, 73 S.Ct. 807, 809, 97 L.Ed. 1182 (1953); Jones v. Texas Tech Univ., 656 F.2d 1137, 1144 (5th Cir.1981); Kaspar Wire Works, 575 F.2d at 538-39. Finally, the causes of action that formed the basis this suit and the proceedings in the Tax Court are identical. We have stated that one's total income tax liability for each taxable year constitutes a single, unified cause of action, regardless of the variety of contested issues and points that may bear on the final computation. Finley v. United States, 612 F.2d 166, 170 (5th Cir.1980). Thus, if 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. Commissioner v. Sunnen, 333 U.S. 591, 598, 68 S.Ct. 715, 719, 92 L.Ed. 898 (1948). 34 Since all of the conditions of claim preclusion have been satisfied, that doctrine applies in this suit. Having once had the opportunity to assert defenses to her tax liability, res judicata barred Mrs. Shanbaum from asserting in the district court the innocent spouse defense to her tax liability. Id.; Smaczniak, 998 F.2d at 242.