Court Opinion

ID: 4486129
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:12.618962+00
Date Added: 2024-06-11T15:02:45.797361
License: Public Domain

OPINION WILLIAMS, Judge: In his statutory notice of deficiency issued November 14, 1986, the Commissioner determined deficiencies in petitioners’ Federal income tax for the taxable years 1978, 1979, and 1980, and additions to tax for fraud against petitioner Robert Zackim as follows: Addition to tax Year Deficiency sec. 6653(b) 1  1978 $3,795 $1,898 1979 6,868 3,434 1980 6,727 3,364 Respondent previously had issued a notice of deficiency on May 27, 1982, for petitioners’ 1979 taxable year, determining a deficiency of $559. After concessions, the two issues remaining for our decision are (1) whether respondent may issue a second notice of deficiency pursuant to section 6212(c)(1) on the ground of fraud where he knew prior to entering into a stipulated decision document in this Court that petitioner Robert Zackim was the subject of a criminal tax fraud investigation, and (2) if so, whether he is precluded from litigating the fraud issue in these circumstances by the doctrine of res judicata. This case was submitted on a stipulated record pursuant to Rule 122, Tax Court Rules of Practice and Procedure. At the time they filed their petition in this case, petitioners resided at Riverdale, New Jersey. Respondent has conceded that petitioner Carole Zackim is an innocent spouse pursuant to section 6013(e). Petitioner Robert Zackim (petitioner) has conceded that he is liable for the deficiencies and additions to tax determined against him for 1978 and 1980. He also has conceded that the underpayment determined for the taxable year 1979 is due to fraud. The parties further have agreed that if respondent prevails on the issue before us, then there is a deficiency in income tax for the taxable year 1979; and an addition to tax for fraud due in the amounts determined in the notice of deficiency. Respondent issued a notice of deficiency for petitioners’ 1979 taxable year on May 27, 1982. Petitioners timely filed a petition in this Court for redetermination of the deficiency on August 24, 1982, docket No. 21444-82. On November 19, 1984, petitioner’s then counsel met with an attorney in respondent’s Office of District Counsel, New York, New York, concerning a criminal referral made by respondent’s Criminal Investigation Division against petitioner for the years 1978, 1979, and 1980. At the time the criminal referral was made, petitioner’s then counsel was provided with the civil deficiency and fraud figures that had led to the criminal referral. Specifically for 1979, respondent’s counsel informed petitioner’s then counsel that petitioner would be hable for an increased deficiency of $6,390 and an addition to tax for fraud of $3,195. On December 5, 1984, respondent formally advised petitioner by letter that his case had been referred to the Department of Justice for prosecution. On October 23, 1985, this Court entered its decision in the case of Robert Zackim and Carole Zackim, docket No. 21444-82, pursuant to agreement of the parties. Petitioners conceded that there was a deficiency in income tax due for their taxable year 1979 in the amount of $559. Prior to the entry of the decision in docket No. 21444-82, in September 1985, petitioners’ then counsel informed respondent’s appehate office that petitioner was under investigation by the Criminal Investigation Division. The appehate office relayed petitioners’ counsel’s statement to the District Counsel attorney responsible for the Tax Court case. Respondent’s Criminal Investigation Division had examined petitioner’s return for the taxable year 1979 and other years, and respondent’s counsel had approved referral of the case to the Department of Justice for prosecution at the time the decision in docket No. 21444-82 was entered. Respondent’s counsel was aware of these actions. Petitioner was indicted on November 27, 1985. The indictment charged petitioner with one count of violating section 7201 and one count of violating section 7206(1) for each of the years 1978, 1979, and 1980. On February 10, 1986, petitioner pled guilty to violating section 7206(1) for each of the years 1978, 1979, and 1980. On November 14, 1986, respondent mailed a notice of deficiency determining deficiencies in petitioners’ 1978 and 1980 Federal income taxes and additions to tax for fraud, and an increased deficiency for 1979 and an addition to tax for fraud. We must decide whether, under the facts described, respondent was prohibited from issuing a second notice of deficiency to petitioners for the taxable year 1979. As a general rule, once respondent has mailed a notice of deficiency and the taxpayer has filed a timely petition with this Court, respondent may not issue another notice of deficiency for that year. Sec. 6212(c)(1). One exception to the general rule, however, permits respondent to issue a second notice of deficiency “in the case of fraud.” Sec. 6212(c)(1). Petitioner argues that the principle of res judicata bars relitigation of any issue relating to the taxable year 1979 that was or could have been raised in the prior proceeding. On this ground, he argues that the statutory notice was invalid. Petitioner argues that because respondent had concluded his fraud investigation and decided to refer the case to the Justice Department for prosecution and thus knew of the fraud investigation before he agreed to settle the Tax Court case at docket No. 21444-82, respondent cannot raise the issue of fraud in a second deficiency notice. Respondent counters that the plain language of section 6212(c)(1) provides only that a second deficiency notice may be issued “in the case of fraud” and imposes no limitations based on when the fraud is discovered. The technical distinction between the two issues in this case, viz, whether the statutory notice is valid, and whether respondent is barred from relitigating the fraud issue under the doctrine of res judicata, is blurred by the substantive effect of our resolution of the application of res judicata. Petitioner focuses on the substantive effect of applying res judicata and argues that the result is an invalid statutory notice. Respondent focuses on his statutory authority to issue a second notice of deficiency and argues that if he can issue a second statutory notice, the Court has jurisdiction, and, therefore, he cannot be precluded from litigating the fraud issue. The doctrine of res judicata is judicial in origin and is intended to prevent repetitious lawsuits involving the same cause of action thus promoting repose of past disputes. Commissioner v. Sunnen, 333 U.S. 591, 597 (1948). In Sunnen, the Supreme Court explained the doctrine of res jhdicata as follows: The rule provides that 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.” Cromwell v. County of Sac, 94 U.S. 351, 352 [(1876)]. The judgment puts an end to the cause of action, which cannot again be brought into litigation between the parties upon any ground whatever, absent fraud or some other factor invalidating the judgment. [333 U.S. at 597. Citations omitted.] Res judicata thus “preclude^] parties from contesting matters that they have had a full or fair opportunity to litigate [and] protects their adversaries from the expense and vexation attending multiple lawsuits, conserves judicial resources, and fosters reliance on judicial action by minimizing the possibility of inconsistent decisions.” Montana v. United States, 440 U.S. 147, 153-154 (1979). (Fn. reh omitted.) There is no question as to the validity or finality of this Court’s decision in respect of petitioners’ 1979 taxable year. There is also no question that respondent could have raised the fraud issue in the proceeding that culminated in the Court’s decision for petitioners’ 1979 taxable year. Section 6212(c)(1) provides for the issuance of a second notice of deficiency “in the case of fraud.” The provision that became section 6212(c)(1) originally was enacted' as section 274(f) of the Revenue Act of 1926, Pub. L. 20, 44 Stat. 56, and has been reenacted several times without significant substantive change. In 1926, the doctrine of res judicata was well entrenched in the law. E.g., Cromwell v, County of Sac, 94 U.S. 351, 352 (1876). There is no indication that Congress, in allowing for a second deficiency notice to be issued, intended generally to override the doctrine of res judicata. The legislative history, although it is not entirely clear, suggests that Congress contemplated the issuance of a second notice of deficiency only if fraud was not discovered until after our predecessor, the Board of Tax Appeals, entered its decision: Under the existing law and the House bill the 5 per cent [sic] and 50 per cent [sic] additions to the tax in case of negligence or fraud are to be assessed and collected in the same manner as if they were a deficiency, i. e., [sic] can only be assessed after the taxpayer has been sent a notice by registered mail. It sometimes occurs that after the deficiency letter has been sent out fraud or negligence is for the first time discovered by the Commissioner. In order to avoid the necessity of sending out a second notice to the taxpayer in such cases and other similar cases, it is provided in section 274(e) that the Board shall have jurisdiction upon the appeal from the original deficiency letter to determine whether any penalty, additional amount, or addition to the tax should be assessed, whether or not the Commissioner has asserted such claim in the deficiency letter or in his pleadings. If the fraud is discovered after the Board’s decision, the Commissioner can send notice thereof, on which the taxpayer can appeal to the Board. [S. Rept. 52, 69th Cong., 1st Sess. 26 (1926), 1939-1 C.B. (Part 2) 332, 353.] This legislative history seems to indicate that Congress had before it the concern of respondent’s administrative capacity to pursue fraud when the issue of fraud could not have been raised in a prior proceeding. The Senate Finance Committee expressly stated that if the fraud is discovered after the notice of deficiency is sent, the Court “shall have jurisdiction * * * whether or not the Commissioner has asserted such claim in the deficiency letter or in his pleadings.” If fraud is discovered prior to the Court’s decision becoming final, the Court has jurisdiction over the fraud issue in that proceeding. If fraud is discovered after the Court’s decision becomes final, the Court would not have had jurisdiction over the fraud issue in the closed proceeding. The only procedure for raising the fraud issue after the decision becomes final is for respondent to issue a second notice of deficiency. If section 6212(c)(1) were not in the Code, then respondent could not litigate an after-discovered fraud issue because he would be precluded from issuing a second notice of deficiency. Looking then to the legislative history of section 274(f) of the Revenue Act of 1926, the predecessor of section 6212(c), we find that Congress did not express any understanding that the statutory phrase at issue — “in the case of fraud”— should apply to any case of fraud. Rather, Congress explained that this language was designed to permit the issuance of a second deficiency notice in cases in which evidence of fraud is discovered after the completion of court proceedings resulting from the first deficiency notice. Congress understood and articulated its understanding that, if the Court had not entered a final decision, upon discovering fraud respondent could file an amended answer raising the fraud issue. Congress further articulated its understanding that if fraud were discovered after the Court had entered its decision, respondent would not have an opportunity to raise the fraud issue unless respondent could issue a second notice of deficiency; only by express statutory provision could Congress give respondent the opportunity to raise fraud. Respondent argues that we should not look to the legislative history because the language of section 6212(c) is clear on its face and imposes no limitation based on when fraud is discovered. We agree that, in general, the plain language of a statute controls. The statutory language of section 6212(c)(1) provides that a second notice of deficiency may be issued “in the case of fraud.” The decisive issue in this case is not, however, whether the statutory notice of deficiency is valid, but whether res judicata bars respondent from relitigating petitioners’ 1979 taxable year. In this case, there is no fraud on the Court or other ground invalidating our prior decision. Respondent had ample opportunity to raise the issue in the prior litigation. The Government did not lack knowledge and had no ground for failing to appreciate the consequences of choosing not to amend respondent’s answer in the earlier litigation. Respondent’s counsel in the prior proceeding was fully aware of respondent’s criminal tax fraud investigation of petitioner for 1978, 1979, and 1980, and of the referral for prosecution to the Department of Justice well before she agreed to settle the Tax Court case for 1979. Respondent could have requested leave to amend his answer to place the additional deficiency and addition to tax for fraud for 1979 in issue. As he typically does, respondent could have requested the Court to stay the civil proceeding pending completion of the criminal investigation and possible trial. Indeed, these are the normal courses of action for respondent in hundreds of Tax Court cases.2 Instead, respondent chose to ignore the criminal fraud investigation. On November 19, 1984, almost 1 year prior to the entry of decision in the prior Tax Court proceeding, respondent’s counsel conferred with petitioner’s counsel to inform him that respondent’s Criminal Investigation Division had recommended a referral to the Department of Justice for prosecution. At the same meeting, petitioner’s counsel was given the amounts determined as unreported income for 1978, 1979, and 1980, and the proposed civil deficiencies in income tax and additions to tax for fraud that resulted from the criminal investigation. On December 5, 1984, respondent’s counsel wrote to petitioner’s counsel to formally advise him of respondent’s referral to the Justice Department. While discussing settlement of the 1979 tax liability determined in the first deficiency notice, petitioner’s counsel specifically mentioned the fraud issue to respondent’s appeals officer and pointed out the pending criminal investigation. After conferring with District Counsel, respondent decided to pursue the settlement for 1979 and eventually signed a stipulated decision. Before that decision became final, petitioner was indicted for income tax evasion and for filing a false or fraudulent return. Respondent argues that he cannot be forced to move to amend his answer in the Tax Court rather than issuing a second notice of deficiency because doing so would subject him to the Court’s discretion, and if the Court chose not to allow the amendment, he would be precluded from raising fraud. Respondent ignores that leave to amend is freely given absent prejudice to the opposing party. See Waterman v. Commissioner, 91 T.C. 344 (1988); Vermouth v. Commissioner, 88 T.C. 1488 (1987). Respondent’s argument is without merit in this case because he turned his back on the extended opportunity he had in the prior litigation to raise the fraud issue. Respondent had almost a year after the criminal referral until he settled petitioners’ Tax Court case for 1979 to raise the additional deficiency and addition to tax for fraud for 1979. Further, the case had been pending in this Court for 3 years when the stipulated decision was entered. Respondent failed to plead the issue when he had the opportunity. We do not believe that section 6212(c) was intended to give respondent a second chance to litigate in these circumstances. Respondent further contends that we cannot impute knowledge of petitioner’s fraud to him at the time he was involved in settlement discussions for the 1979 taxable year. He argues that the decision whether fraud can be shown by clear and convincing evidence is best left to administrative discretion and the Court should not inquire into when the Internal Revenue Service, as an institution, learned of facts sufficient to believe it could establish fraud by clear and convincing evidence. Respondent’s counsel ignores that she represents respondent in his institutional capacity. The knowledge of respondent’s counsel in settling cases on behalf of her client is, therefore, imputed to him. At the time respondent agreed to settle petitioners’ Tax Court case for 1979, the Criminal Investigation Division and respondent’s counsel had determined that fraud could be established by more than clear and convincing evidence, as the referral for criminal prosecution demonstrates. In Breman v. Commissioner, 66 T.C. 61 (1976), we considered respondent’s ability to issue a second notice of deficiency under section 6212(c)(1) in a case in which the doctrine of res judicata did not apply. In that case, the taxpayers argued that we lacked jurisdiction based on a second deficiency notice under the doctrine of res judicata, because a notice of deficiency had been issued previously for the year in issue, and a final decision had been entered. Breman v. Commissioner, 66 T.C. at 66-67. We noted that before we could decide whether res judicata applied, we first had to have jurisdiction to make such a determination. The fraud in Breman was discovered after our first decision had become final, and we concluded that the second notice of deficiency was properly issued. Breman v. Commissioner, 66 T.C. at 69. In this case, as in Breman, we have jurisdiction, but Breman does not, as respondent would have us hold, stand for the proposition that res judicata has no application to any case of fraud. In this case, although the notice is valid, respondent is precluded from litigating, assessing, and collecting the deficiency and addition to tax for 1979 under the doctrine of res judicata. Res judicata is an affirmative defense that is a matter of pleading and proof. Rule 39, Tax Court Rules of Practice and Procedure. In this case, petitioner has pled and proved that res judicata properly applies to bar respondent from relitigating an increased deficiency and an addition to tax for fraud for 1979. As to the years 1978 and 1980, no deficiency notice was previously issued, and the deficiency notice is valid. Petitioner has conceded the deficiencies and additions to tax for those years. Decision will be entered for the respondent as to petitioners’ 1978 and 1980 taxable years and a decision will be entered for the petitioners as to the taxable year 1979. Reviewed by the Court. NlMS, CHABOT, KÓRNER, COHEN, CLAPP, GERBER, Wright, Parr, Wells, Ruwe, Whalen, and Colvin, JJ., agree with the majority opinion.  All section references are to the Internal Revenue Code of 1954 as in effect during the years in issue.   Petitioners in such circumstances normally do not object. If an objection is raised to postponing the case until completion of the criminal proceedings, the Court balances- the “substantial weight” accorded to the public interest in law enforcement against the “right of a civil litigant to a reasonably prompt determination of his civil claims or liabilities.” Campbell v. Eastland, 307 F.2d 478, 487 (5th Cir. 1962); Singleton v. Commissioner, 65 T.C. 1123 (1976).