Court Opinion

ID: 4472722
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:52.545639+00
Date Added: 2024-06-11T11:51:21.323099
License: Public Domain

Swift, J., concurring in the result only: In an effort to avoid the legal issue the parties in this case have presented to us, the majority opinion implicitly reaffirms our prior opinion in Zackim v. Commissioner, 91 T.C. 1001 (1988). The opinion specifically states that “we can decide this case without overruling Zackim.” Majority op. p. 49. Our prior opinion in Zackim, however, has been soundly reversed by the Court of Appeals for the Third Circuit on the basis of what the Court of Appeals believed to be a clearly erroneous interpretation of the relevant statutory scheme. Zackim v. Commissioner, 887 F.2d 455 (3d Cir. 1989). Further, our recent published opinion in Hemmings v. Commissioner, 104 T.C. 221 (1995), discussed below, is inconsistent with our opinion in Zackim, and makes it even more appropriate that we now address the continuing validity of our opinion in Zackim. Interpretations of Federal tax law are the raison d’etre for the existence of the Tax Court. By ducking the legal issue and the question of statutory interpretation presented to us in this case, the majority opinion helps no one better understand the tax law on this point affecting the rights of taxpayers and the Commissioner in civil and criminal tax administration, and it simply perpetuates the inconsistency that now exists between the Court of Appeals for the Third Circuit’s and the Tax Court’s respective interpretations of the relevant statutory scheme. Because the majority opinion ignores the legal issue and attempts to distinguish the case factually from Zackim, the majority opinion, in my view, should address all of the relevant facts (including the stipulated fact that IRS District Counsel personnel, in February of 1991, knew that petitioners were under criminal tax investigation). In light of all of the facts before us, petitioners argue: (1) That respondent had sufficient knowledge to raise fraud at the time of the February 11, 1991, evidentiary hearing in the first proceeding; (2) that the Tax Court’s opinion in Zackim— properly understood and applied — requires that the question of whether respondent had sufficient knowledge of fraud in the first proceeding (to trigger application of res judicata to respondent’s effort to litigate fraud in the second proceeding) should be measured as of that date (namely, as of February 11, 1991); and (3) that respondent’s failure to raise fraud at that time, combined with entry of a final decision in the first proceeding, trigger application of our opinion in Zackim and res judicata to bar respondent from now litigating fraud in the second proceeding. If we address only the factual distinguishability of this case from Zackim, then petitioners’ above arguments have substantial merit and should not be ignored as they are in the majority opinion. Essentially, petitioners argue that if, as the Tax Court in the first proceeding held, it was too late for respondent in May of 1991 to raise fraud, it could not then become timely for respondent to raise fraud in May of 1992 when respondent issued the second notice of deficiency. In other words, petitioners argue that it would be incongruous and unfair (and a most surprising and incorrect interpretation of our opinion in Zackim) if, after obtaining knowledge of petitioners’ fraud and unduly delaying in raising fraud in the first proceeding, respondent could then cavalierly file in the first proceeding an untimely motion to raise fraud, have it denied as untimely, and then proceed to raise and litigate fraud in the second proceeding on the grounds that Zackim did not apply. I believe the analysis in the majority opinion of the facts relevant to the question of whether this case is distinguishable from Zackim is superficial. If our opinion in Zackim is still good law, I believe it would require an analysis of what respondent knew, as of February 11, 1991, regarding petitioners’ alleged acts of fraud, a conclusion as to whether respondent had enough knowledge at that time to raise fraud, and based thereon a conclusion as to whether respondent, under our opinion in Zackim, is barred from now litigating fraud. I believe that the better approach in this case is to deal with the legal issue presented by the parties’ cross-motions for summary judgment. The Court of Appeals’ reversal, on legal grounds, of our opinion in Zackim deserves a response from the U.S. Tax Court. I would address this legal issue as follows. First, I would state the facts essentially as set forth in the majority opinion, but I would add the following undisputed facts: Prior to the hearing on February 11, 1991, certain attorneys in respondent’s Newark District Counsel’s office knew that petitioners’ 1987 joint Federal income tax return was under criminal tax investigation with respect to unreported income received by petitioners from Natal Contracting and Building Corp. (Natal), a closely held private corporation owned by three stockholders, one of whom was petitioner Eugene Burke. I would then analyze the legal issue presented by the parties as follows. In Zackim v. Commissioner, supra, we held that where the Commissioner enters into a settlement of a case for a particular year at a time when the Commissioner knows of tax fraud relating to the same taxpayer and the same year, the Commissioner’s settlement of the first proceeding precludes the Commissioner in a subsequent proceeding in this Court from asserting the fraud addition to tax and the fraud-related tax adjustments. With regard to the issue of finality of the first proceeding, we applied res judicata to bar the Commissioner from litigating the fraud addition to tax and the fraud-related tax adjustments in the subsequent proceeding. On appeal, the Court of Appeals reversed our opinion in Zackim v. Commissioner, supra, and concluded that both the plain statutory language of section 6212(c)(1) and the legislative history support the contrary result. 887 F.2d at 458-459. With regard to the assertion of claim preclusion or res judi-cata, the Court of Appeals explained that— Both the statutory language and * * * [the] legislative history [of section 6212(c)(1)] are clear. Congress dealt explicitly with the policy of finality, and plainly excepted claims of fraud from that general policy. the fact is that Congress dealt explicitly with what we now commonly refer to as claim preclusion when it enacted section 6212(c), which consciously excludes from claim preclusion government claims for tax fraud. There simply is no warrant for going behind the plain language of section 6212(c) and adding to the language “except in the case of fraud” the unintended language “discovered after the Tax Court decision” * * * [as the Tax Court did in Zackim v. Commissioner]. [Id. at 459.] In light of the reversal by the Court of Appeals I would now reconsider our decision in Zackim v. Commissioner, supra. Resolving a dispute over the meaning óf a statute begins with the language of the statute itself. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989). If the language of a statute is plain, clear, and unambiguous, “‘the sole function of the courts is to enforce it according to its terms.’” Id. at 241 (quoting Caminetti v. United States, 242 U.S. 470, 485 (1917)). Thus, as long as the statutory language is clear and unambiguous, there generally is no need for courts to inquire beyond the plain language of the statute. Absent absurd, unreasonable, or futile results, there is “no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes.” United States v. American Trucking Associations, 310 U.S. 534, 543 (1940). Turning to the language of section 6212(c)(1), that section provides that after the Commissioner has mailed a notice of deficiency and after the taxpayer has filed a petition with this Court, the Commissioner generally may not issue another notice of deficiency for the same year covered by the first notice of deficiency and by the petition. An express statutory exception to this general rule, however, permits the Commissioner to issue a second notice of deficiency to the same taxpayer for the same year “in the case of fraud”. Sec. 6212(c)(1). The language of section 6212(c)(1) provides— SEC. 6212(c). Further Deficiency Letters Restricted.— (1) General rule. — 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, * * * except in the case of fraud * * *. [Emphasis added.] Consistent with the express exception provided in section 6212(c)(1) with regard to the issuance by respondent of a second notice of deficiency raising fraud, section 6501(c)(1) and (2) provides — with regard to the period of limitations on the assessment of civil tax fraud — a parallel, blanket, and absolute exception to the normal 3-year period of limitation that is applicable to the assessment by the Commissioner of tax deficiencies. This latter section provides that the Commissioner may make civil tax assessments based on fraud at any time.1 The moment in time when the Commissioner discovers or administratively determines fraud, and other factors associated with a taxpayer’s non-fraud-related tax adjustments for a year, are simply not relevant to the Commissioner’s authority under section 6501(c)(1) and (2) to make assessments based on fraud. On reconsideration of the plain statutory language and with the benefit of the Court of Appeals for the Third Circuit’s opinion, I believe our prior opinion in Zackim v. Commissioner, supra, was incorrect as a matter of law, and I would therefore overrule it. I believe that, section 6212(c)(1) and section 6501(c)(1) and (2) should be read together as authorizing a second notice of deficiency based on fraud whenever the Commissioner chooses to raise fraud, and no limitations should be imposed by the Court relating to when the first notice of deficiency was issued or wheñ fraud was discovered. The strong public policy against civil tax fraud is the basis for the unlimited period of limitations on fraud determinations under section 6501(c)(1) and (2). See Badaracco v. Commissioner, 464 U.S. 386, 399-400 (1984). This is the same public policy that supports a parallel reading of section 6212(c)(1) and that precludes the imposition of judicial limitations on the Commissioner’s authority under section 6212(c)(1). To the extent reference to legislative history on this issue is appropriate, such history underlying the predecessor provision to section 6212(c)(1)2 indicates that Congress intended to give the Commissioner broad authority to determine fraud at any time — by a motion to amend the Commissioner’s answer where the Commissioner initially elects that route and where this Court allows the amendment under section 6214(a) and Rule 41, or by issuance of a second notice of deficiency where the Commissioner elects that route. In each scenario, section 6212(c)(1) was designed to ensure that the Commissioner will be able to raise civil tax fraud against a taxpayer.3  After reconsidering our decision in Zackim v. Commissioner, supra, and with the benefit of the Court of Appeals for the Third Circuit’s decision, I would conclude that, regardless of when the Commissioner discovers or administratively determines fraud, the judicial doctrines of claim preclusion or res judicata do not apply where no claim of fraud was made by the Commissioner and litigated in the first Tax Court proceeding resulting from the first notice of deficiency and where the Commissioner issues a second notice of deficiency determining the fraud addition to tax. I note further that claim preclusion or res judicata applies only if the claim or cause of action in a prior proceeding is the same as the claim or cause of action in the subsequent proceeding. See Commissioner v. Sunnen, 333 U.S. 591, 597 (1948). The relationship between a determination of fraud and a determination of a tax deficiency in which fraud is not raised is too attenuated to invoke claim preclusion or res judicata. See Zackim v. Commissioner, 887 F.2d at 459. In effect, the Commissioner has been given authority to split off fraud additions to tax (and the fraud-related tax adjustments) from non-fraud-related tax adjustments and to treat the fraud additions to tax and the fraud-related tax adjustments as determinations and as claims separate and distinct from the non-fraud-related tax adjustments. Under this statutory scheme, the application of claim preclusion or res judicata simply is not appropriate where fraud was not raised and litigated in the first proceeding. We recognized the above principle in our recently published opinion in Hemmings v. Commissioner, 104 T.C. 221 (1995). In Hemmings, we held that the Commissioner’s notice of deficiency with respect to the same taxpayer and same year that already had been the subject of a tax refund suit was not barred by either res judicata or claim preclusion because of, among other things, the specific statutory authority given to the Commissioner under section 7422(e) to issue a notice of deficiency during pendency of a refund suit for the same year. Such a notice of deficiency was recognized in Hemmings as giving rise to a claim or cause of action separate and distinct from the claim or cause of action involved in the refund suit and making application of res judicata or claim preclusion simply inappropriate. I would conclude that under the plain language of section 6212(c)(1), the legislative history, and the consistent application of the various fraud-related provisions of the Internal Revenue Code, where fraud has not already been litigated, the Commissioner may issue a second notice of deficiency determining the fraud addition to tax at any time. Alternatively, petitioners argue that merely because the Court in the first proceeding denied respondent’s motion to amend answer and because respondent failed to appeal the Court’s denial of respondent’s motion to amend, respondent is now precluded from raising and litigating the fraud addition to tax. In support of their alternative argument, petitioners cite Marin v. HEW, Health Care Fin. Agency, 769 F.2d 590 (9th Cir. 1985); Nilsen v. City of Moss Point, 701 F.2d 556 (5th Cir. 1983); Poe v. John Deere Co., 695 F.2d 1103 (8th Cir. 1982); Bagby v. Harris, 650 F.2d 836 (6th Cir. 1981); and Webb v. U.S. Lines Co., 186 F. Supp. 597 (S.D.N.Y. 1960). Petitioners make this argument separate and apart from their argument that under Zackim v. Commissioner, supra, respondent is precluded from now litigating fraud and the fraud-related tax adjustments. In each of the above cases, however, the court denied motions to amend pleadings where the motions to amend attempted to renew, reargue, or expand the theory of the substantive claims already before the court. Res judicata was applicable in the above cases to bar a second action raising the same underlying substantive claims that were before the court in the first action. The court’s denial of the motion to amend the pleadings in the first action merely rendered the decision in the first action final. It was the fact that the substantive claims at issue and disposed of in the first action were the same as the claims raised in the second action that gave rise to res judicata and barred litigation of the same claims in the second action. Respondent’s determination herein of fraud constitutes an entirely new claim, different and distinct from the non-fraud-related deficiency asserted by respondent and litigated in the first proceeding. In the first proceeding, the merits of respondent’s fraud determination were not raised and were not litigated. The cases cited by petitioners are also inap-posite because, as we have concluded herein, section 6212(c)(1) provides a statutory exception to the application of claim preclusion or res judicata principles where the fraud addition to tax was not raised and litigated in the first proceeding. For the above reasons, I would grant respondent’s motion for summary judgment, and I would deny petitioners’ cross-motion for summary judgment. Wright, Parr, Wells, Laro, Foley, and Vasquez, JJ., agree with this concurring opinion.   Sec. 6501(c)(1) and (2) provides as follows: SEC. 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. [Emphasis added.]    See Revenue Act of 1926, ch. 27, sec. 274(f), 44 Stat. 56.    The Senate report explaining sec. 274(f) of the Revenue Act of 1926 stated as follows: Finality is the end sought to be attained by these provisions of the bill, and the committee is convinced that to allow the reopening of the question of the tax for the year involved either by the taxpayer or by the Commissioner (save in the sole case of fraud) would be highly undesirable. ***** 4 * 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, 351, 353; emphasis added.]