Court Opinion

ID: 4486131
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:12.631856+00
Date Added: 2024-06-11T15:02:45.824148
License: Public Domain

SWIFT, J., dissenting: The majority opinion misinterprets section 6212(c)(1), fails to consider recognized exceptions to the rules of res judicata and collateral estoppel, and fails to apply those exceptions to the facts of this case. Section 6212(c)(1) Under the interpretations of section 6212(c)(1) as set forth in the majority and concurring opinions, the effect is the same — respondent is out of court. The majority opinion regards as valid a second notice of deficiency with respect to previously discovered fraud but would bar respondent from pursuing the issues raised in the second notice of deficiency. The concurring opinion regards such a notice of deficiency as invalid ab initio. Respectfully, I suggest that neither of these interpretations is correct. Section 6212(c)(1) should be read together with section 6501(c)(1) and (2) as authorizing a second notice of deficiency based on fraud whenever respondent chooses to issue the second notice, and without any limitation as to when the first notice was issued or when fraud was discovered. This interpretation comports with the plain language of sections 6212(c)(1) and 6501(c)(1) and (2).1 The latter section provides that respondent may make assessments with respect to civil tax fraud at any time. The moment in time respondent discovers or administratively determines fraud and other administrative factors simply are not relevant to respondent’s authority under section 6501(c)(1) and (2) to make at any time assessments based on fraud. The strong public policy against civil tax fraud is the basis for the unlimited statute of limitations on fraud determinations under section 6501(c)(1) and (2). This is the same public policy that supports a parallel reading of section 6212(c)(1), and that should preclude the imposition of bureaucratic limitations on respondent’s authority under section 6212(c)(1) that will result from the majority opinion. The majority imposes vague and indefinite time constraints on when a notice of deficiency determining fraud may be issued. This is inconsistent with the clear thrust of section 6501(c)(1) and (2). I would require specific language in section 6212(c)(1) before I would adopt a time constraint so inconsistent with section 6501(c)(1) and (2). In my opinion, section 6212(c)(1) is intended merely to give respondent the mechanical ability to assess civil tax fraud at any time, as he is authorized to do under section 6501(c)(1) and (2). Where a notice of deficiency already has been issued, section 6212(c)(1) simply provides that the normal rule of section 6212(c) (that only one notice of deficiency can be issued with respect to a particular taxable year) will not apply, and respondent may issue another notice of deficiency to determine civil tax fraud. I do not read the legislative history quoted in the majority opinion (p. 1006, supra) as supporting the majority’s interpretation of section 6212(c)(1). The most that can be concluded from that legislative history is that Congress, in enacting the predecessor provision to section 6212(c)(1), intended to give respondent broad authority to determine fraud at any time — by amendment to the notice of deficiency where respondent initially elects that route and where this Court allows the amendment, or by issuance of a second notice of deficiency where respondent initially elects that route or where this Court refuses to allow respondent to amend the first notice of deficiency in a pending proceeding. In either of these scenarios, section 6212(c)(1) appears to me to have been designed to insure that respondent will be able to raise civil tax fraud. Res Judicata and Collateral Estoppel Where a second notice of deficiency determining fraud has been issued with respect to “after-discovered” fraud, the majority apparently agrees that in addition to the fraud issue that may be determined by respondent in the second notice of deficiency, the original substantive tax adjustments also may be increased. The ability of respondent in this situation to reopen the substantive tax issues that were specifically resolved in the context of the first notice of deficiency clearly violates traditional notions of res judicata and collateral estoppel. If res judicata or collateral estoppel were intended by Congress to be a limiting doctrine on respondent’s authority under section 6212(c)(1), I believe Congress would have limited respondent’s authority in the second notice of deficiency to the previously undetermined fraud addition to táx and would have precluded respondent in the second notice of deficiency from changing the substantive tax adjustments reflected in the first notice of deficiency. That section 6212(c)(1) does not so limit respondent’s second notice of deficiency is a strong indication that res judicata and collateral estoppel were not intended to be a limitation on respondent’s authority to issue notices of deficiency under section 6212(c)(1). Although the rules of res judicata and collateral estoppel are recognized as rules of fundamental and substantial justice, the rules themselves are based on important principles of public policy. See Federated Dept. Stores v. Moitie, 452 U.S. 394 (1981). A still-viable exception to the rules of res judicata and collateral estoppel provides that those rules are not to be applied where to do so would cause a manifest injustice or wrong. 18 Wright & Miller, Federal Practice and Procedure, secs. 4424 and 4426 (1981). 1B Moore’s Federal Practice, par. 0.405[11] (1988). United States v. LaFatch, 565 F.2d 81, 83-84 (6th Cir. 1977), cert. denied 435 U.S. 971 (1978); Moch v. East Baton Rouge Parish School Board, 548 F.2d 594, 597-598 (5th Cir. 1977), cert. denied 434 U.S. 859 (1977); 1 Restatement, Judgments 2d, sec. 28(b)(subsection (2)) (1980). The Third Circuit, to which an appeal in this case would he, has stated that res judicata “should not be applied inflexibly to deny justice.” Smith v. Pittsburgh Gage & Supply Co., 464 F.2d 870, 874 (3d Cir. 1972). The Supreme Court has commented that— Because res judicata may govern grounds and defenses not previously litigated * * * it blockades unexplored paths that may lead to truth. For the sake of repose, res judicata shields the fraud and the cheat as well as the honest person. It therefore is to be invoked only after careful inquiry. * * * [Brown v. Felsen, 442 U.S. 127, 132 (1979).] The Supreme Court concluded in Brown that res judicata should not be applied in a bankruptcy proceeding to bar fraud allegations with respect to a debt obligation even though the debt obligation had been reduced to judgment in an earlier State court proceeding. The public interest exception to the application of res judicata would appear to be particularly appropriate to the facts before us. Petitioner now admits fraud in the filing of his 1979 Federal income tax return. If petitioner knew of his fraud when he filed his tax return (which he has admitted) and if he knows of it now (which he has admitted), petitioner clearly knew of his fraud when he or his lawyer negotiated a $559 settlement of the tax adjustments reflected in respondent’s first notice of deficiency. In my opinion, petitioner’s failure to disclose to respondent or to admit his fraud in the context of that settlement constitutes a perpetuation or further concealment of the fraud relating to petitioner’s 1979 tax return. The public interest exception to res judicata would suggest that res judicata not be applied in this situation. The argument that res judicata not be applied in this case is buttressed further by the recognition that no adjudication occurred of the issues reflected in the first notice of deficiency. Only a settlement or consent judgment was agreed to. As has been stated, “to the extent individual issues or entire judgments rest on admission or consent [i.e., on settlements] * * * a major element of preclusion is missing.” 18 Wright & Miller, Federal Practice and Procedure, sec. 4443, at 381 (1981). Wright & Miller go on to acknowledge that in the settlement context, res judicata and collateral estoppel may still be appropriate but that “the basically contractual nature of consent judgments has led to general agreement that preclusive effects [i.e., res judicata and collateral estoppel] should be measured by the intent of the parties.” Wright & Miller, supra at 384. I find nothing in the majority opinion that would support a finding that either petitioner or respondent intended the settlement of the tax adjustments relating to the first notice of deficiency to constitute a binding and final resolution of the pending fraud investigation relating to petitioner’s 1979 tax return.2  Fraud was not raised as part of the first notice of deficiency. It was not negotiated. It was not adjudged. Petitioner’s counsel was fully apprised that respondent’s fraud investigation was still pending. If petitioner and his lawyer wished the pending fraud issue to be included in the settlement of tax adjustments relating to the first notice of deficiency, they had a responsibility to request that it be expressly included in the settlement, and they should not now be allowed to skirt the issue by way of res judicata or collateral estoppel. Allegations, suspicions, and investigations of civil tax fraud, all of which presumably were contained in respondent’s criminal investigation file pertaining to petitioner’s 1979 tax return, are a “far cry” from admissions or actual knowledge of petitioner’s civil tax fraud. Such material information was in petitioner’s possession at the time of the settlement negotiations but was not disclosed to respondent. The following sentiments expressed in an early Circuit Court opinion are apropos: Taxation is not only practical — it is vital. The obligation of good faith and fair dealing in carrying out its provisions is reciprocal and, as the government should never be overreaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment of material facts. * * * [O’Laughlin v. Helvering, 81 F.2d 269, 270 (D.C. Cir. 1935), quoted in Harbin v. Commissioner, 40 T.C. 373, 377 (1963).] A further situation calling for a flexible application of res judicata is where a particular statutory scheme suggests the splitting of what normally would be regarded as a single cause of action. IB Moore’s Federal Practice, par. 0.405[11] (1988); 1 Restatement, Judgments 2d, sec. 26(d) (1980).3 As explained above, I believe that a correct reading of sections 6212(c)(1) and 6501(c)(1) and (2) indicates that Congress intended to give respondent authority to split off tax deficiencies and additions to tax that are related to fraud from non-fraud-related tax adjustments. Under the statutory scheme before us, two notices of deficiency with respect to 1 year are contemplated. Two petitions in this Court are contemplated. The natural and anticipated consequence of such multiple notices of deficiency and multiple petitions is a multiplication or splitting of what normally would be dealt with only in one lawsuit. Under the statutory scheme before us, res judicata is simply not appropriate. In summary, I would conclude in this case as the Third Circuit did in Hopewell Township Citizens I-95 Committee v. Volpe, 482 F.2d 376, 380 (3d Cir. 1973)-“we do not believe that this case is ‘old hat’ or ‘the same old ballgame.”’I would utilize the flexibility available to courts in applying res judicata and collateral estoppel to allow respondent in this case to proceed with his fraud allegation. This result is suggested by the public interest exception to the application of res judicata and collateral estoppel, and by the settlement or nonadjudicative nature of the disposition by the parties of the tax adjustments reflected in the first notice of deficiency. This result also is suggested by the relevant statutory scheme under which a splitting is contemplated of what normally would be treated as a single cause of action. PARKER, J., agrees with this dissent.  Sec. 6501(c)(1) and (2) provides as follows: SBC. 6501(c). Exceptions.— (1) False return. — In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time. (2) Willful attempt to evade tax — In case of a willful attempt in any manner to defeat or evade tax imposed by this title (other than tax imposed by subtitle A or B), the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.   It is recognized that stipulated judgments and settlements impose limitations primarily on issue preclusion or collateral estoppel, not res judicata. See 18 Wright & Miller, Federal Practice and Procedure, sec. 4443 (1981). In light of the majority’s conclusion,, however, that respondent’s second notice of deficiency is valid and that the, petition filed herein with respect thereto gives rise to a viable action over which we have subject-matter jurisdiction, I believe that the petition filed by petitioner constitutes a new cause of action, that res judicata therefore is not the relevant rule to consider, and that collateral estoppel, not res judicata, is the theory on which the majority opinion is grounded.   Sec. 26(d), 1 Restatement, Judgments 2d (1980), provides as follows: Sec. 26. Exception to the General Rule Concerning Splitting. * Hfi * * * * (d) The judgment in the first action was plainly inconsistent with the fair and equitable implementation of a statutory or constitutional scheme, or it is the sense of the scheme that the plaintiff should be permitted to split his claim;