Opinion ID: 2344070
Heading Depth: 1
Heading Rank: 8

Heading: Preclusion bars a second action on the same claim for the same tax year

Text: Next, the County argues the preclusion doctrines should not bar its tax collection efforts because the original exemption orders were based on a mistaken understanding of the law, which this court corrected in E.N.T. Associates. For this contention, the County first directs our attention to Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948), and Tait v. Western Md. Ry. Co., 289 U.S. 620, 53 S.Ct. 706, 77 L.Ed. 1405 (1933), as caselaw authority that res judicata should not attach to exemption orders that were entered as a matter of course over several years under a mistaken understanding of the law. But these cases are not applicable. Tait and Sunnen pertain to whether a government entity is bound by a prior adjudication in a different tax year. For example, the taxpayer in Sunnen had entered into a contract gifting certain royalty income to his wife. In 1935, the Tax Court held that the income paid to the wife under that agreement was not taxable to him for the years 1929-1931. But the taxpayer's liability for income paid to his wife under the same agreement arose again during 1937, and the issue then was whether the courts were required to follow the 1935 decision for the 1937 tax year based on the principles of res judicata. The Tax Court held that it was bound by the 1935 decision, but the United States Supreme Court reversed. In doing so, the Court noted that income taxes are levied annually and each tax year creates a new liability and a separate cause of action based on that particular tax year. It then held that a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year.  (Emphasis added.) 333 U.S. at 598, 68 S.Ct. 715. The Court found the prior judgment acted as a collateral estoppel on the matters actually presented and determined in the first lawsuit. 333 U.S. at 598-99, 68 S.Ct. 715; see also Limbach v. Hooven & Allison Co., 466 U.S. 353, 362, 104 S.Ct. 1837, 80 L.Ed.2d 356 (1984) (doctrine of collateral estoppel does not apply because this case does not involve the same tax years); Tait, 289 U.S. at 623-24, 53 S.Ct. 706 (final judgment on the merits is a bar to a subsequent action between the same parties on the same claim or demand, but not if subsequent action involves different tax years). The Sunnen Court concluded its analysis by explaining the policy behind allowing the relitigation of a similar tax issue for a different tax year, stating: [Collateral estoppel] is designed to prevent repetitious lawsuits over matters which have once been decided and which have remained substantially static, factually and legally. It is not meant to create vested rights in decisions that have become obsolete or erroneous with time, thereby causing inequities among taxpayers. 333 U.S. at 599, 68 S.Ct. 715. This authority actually supports the district court's ruling that the County was barred from relitigating the aircrafts' exempt status for the 2000, 2001, and 2002 tax years. Sunnen and Tait involved different tax years, but as noted above the Sunnen Court clearly states that relitigation of the same claim from the same tax year is prohibited. 333 U.S. at 598, 68 S.Ct. 715. And the County's claim that these cases support their attempt to relitigate the property's exempt status in these tax years lacks merit. Similarly, the County directs us to secondary legal authority that also does not support the proposition advocated by the County. It argues that the Restatement (Second) of Judgments, § 28 (1980), which pertains to issue preclusion, allows for the relitigation of a prior judgment for the same tax year when based on a mistake of law. The portion of the Restatement cited by the County states: Although an issue is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, relitigation of the issue in a subsequent action between the parties is not precluded in the following circumstances: . . . . (2) The issue is one of law and . . . a new determination is warranted . . . to take account of an intervening change in the applicable legal context or otherwise to avoid inequitable administration of the laws. Admittedly, it is not entirely clear at first glance from the language of this section whether this provision is meant to include the relitigation of an exemption from a prior tax year. But context provides that clarity. Illustration 3 to the Restatement makes apparent that this section is meant to establish that a party is not precluded from relitigating an issue when there is ongoing conduct and the law governing that conduct changes. Illustration 3 states: A, a state agency, brings an action against B to revoke B's wholesale liquor license on the ground that B has violated the law governing the license by selling only to himself as a retailer. The court grants B's motion to dismiss for failure to state a claim, holding that the conduct charged does not violate the law. In a subsequent action by A against C, a higher court holds that identical conduct by C is ground for the revocation of C's wholesale liquor license. In a second action against B for revocation of B's license, A is not precluded from asserting that since the first dismissal, B has continued, as before, to sell only to himself as a retailer. Restatement (Second) Judgments § 28. Under this section, as supported by the Illustration, a party engaging in ongoing conduct cannot use issue preclusion to immunize itself from a change in the law because the issue was previously litigated. But it does not authorize the reopening of a final judgment in a prior tax year, which is what the County is trying to do. Thus, the County's assertion that it may reopen the tax exemptions granted for the 2000, 2001, and 2002 tax years because this court's E.N.T. Associates decision conflicted with the County's previously held belief regarding eligibility for the exemption lacks merit.