Rodney v. Comm'r

Dawson, J. dissenting in part: I respectfully dissent from the holding that Lucille Rodney is not collaterally estopped as to the fraud on the joint Federal income tax returns filed with her husband for the years 1959 through 1962. I disagree with the views expressed in the maj ority opinion and its reliance upon what I consider to be the erroneous rationale and conclusion reached in Moore v. United States, 360 F. 2d 353 (C.A. 4, 1965).

The principles and guidelines for the application of collateral estoppel are contained and delineated in the bellwether opinion of the Supreme Court in Commissioner v. Sunnen, 333 U.S. 591 (1948). 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. Commissioner v. Sunnen, supra at 597 . Once a party or Ms privy has fought out a matter in litigation with the other party, the duel cannot be renewed.

The nitty-gritty of this case is whether the joint returns signed by I-Ienry and Lucille Eodney created a “privity,” statutory or otherwise, between them which will permit a determination that the fraud of the husband binds both of them to the returns so that they are liable for the deficiencies and fraud penalties. 1 I think the required “privity” exists in this case by virtue of section 6013(d) (3) which specifically provides that liability with respect to a joint return is “joint and several.” Persons filing a joint income tax return are treated as a single taxable unit.” Taft v. Helvering, 311 U.S. 195 (1940). There is only one income. A finding of fraud, which in this case is conclusively established by the judgment of conviction in the criminal tax action against Henry Rodney, directly affects the joint returns and directly affects and conclusively binds both Henry and Lucille on those returns. The “single taxable unit” concept must of necessity be so effected because in terms of causes of action each taxable year is a separate cause of action. Commissioner v. Sunnen, supra. What the majority opinion proposes to do is to dimide that “single taxable unit” and to dimide this single cause of action in order to relitigate a prior determination on the fraud issue unfavorable to one party to the joint returns. This means that Henry and Lucille, although jointly and severally liable for the tax and additions to tax on the joint returns, are found to be liable for different amounts since Lucille is held not liaJble for some of the deficiencies and the fraud penalties. Such a result is incongruous and emasculates the joint and several liability provisions of section 6013 (d) (3) 2 with respect to joint returns.

The “privity” between Lucille and Henry Rodney came into existence at the moment they signed the joint returns and elected to avail themselves of the privilege of filing joint returns and enjoyed the tax benefits of minimizing their liability. This “privity” continues and carries over to any litigation, criminal or civil, where the liability created by the joint returns is in controversy. “Privity” is a shorthand way of establishing that an individual is not a “stranger” to an action and is affected by a decision in such action. In United States v. California Bridge Co., 245 U.S. 337, 341 (1917), the Supreme Court said:

The doctrine of estoppel by judgment, or res judicata, as a practical matter, proceeds upon the principle that one person shall not a second time litigate, with the same person or with another so identified in interest with such person that he represents the same legal right, * * * [Emphasis added.]

“Privity” in the sense of “identity of interests” has been broadly applied. See Tait v. Western Md. Ry. Co., 289 U.S. 620 (1933) ; Vestal, “Preclusion/Res Judicata Variables: Parties” 50 Iowa L. Rev. 27 , 59-66 (1964). This Court has long recognized that “privity” between a corporation and its shareholder exists, precluding an individual shareholder from relitigating a question previously determined in an action involving liis corporation. See and compare D. Bruce Forrester, 4 T.C. 907, 918 (1945); American Range Lines, Inc., 17 T.C. 764 , 771 (1951); and Seaboard Commercial Corporation, 28 T.C. 1034, 1047 (1957). And a transferee is “privy” to a transferor. David Krueger, 48 T.C. 824, 830 (1967). Certainly, if a corporation and its shareholders, and a transferee and transferor, are in “privity” because of the nature of their relationships, parties whose tax liability depends upon the single, joint returns filed jointly by them stand in a much closer relationship. A husband and wife who file joint returns have identical interests with respect to their legal rights and obligations on such returns. They have combined their income and deductions in order to receive split-income benefits, and each has promised to accept joint and several liability with respect to tax, including any additions to it. Consequently, “identity of interests” created by joint returns established the “privity” required for application of collateral estoppel.

In addition, there may also he “contractual privity.” The essence of the joint return concept involves two contracts. First, the husband and wife form a bilateral contract when they sign the joint return and agree to be jointly and severally liable for all taxes and additions. The consideration for each party to enter into the contract is that individual taxpayers either separately or as a family unit derive pecuniary benefit from the split-income effect of joint returns. Secondly, each spouse becomes a third party beneficiary of a oontract between the Government and the other spouse establishing joint and several liability in exchange for the split-income benefits. Without such agreement neither spouse could reap the benefits. The tax returns are the subject matter that give rise to “privity” between the husband and wife. When Henry was convicted in the U.'S. District Court of willful tax evasion in filing the joint returns for the years 1959 through 1962, the underlying issue decided was that the returns were fraudulent. Lucille now seeks to question that ultimate finding of fraud as to the returns. According to the doctrine of collateral estoppel, Lucille, as a “privy” to Henry in the criminal action, should be precluded in this subsequent Tax Court proceeding from relitigating the ultimate issue of fraud already decided. The issue of fraud has been determined and fixed. Further litigation of the same issue should be barred. See and compare United States v. Citizens National T. & S. Bank of L. A., 166 F. Supp. 410 , (1958), aff'd. 270 F. 2d 128 (C.A. 9, 1959).

I see no denial of “due process” in this case. When collateral estoppel is properly applicable, there is ho constitutional infirmity. The requirement of “due process” is satisfied. 3 Lucille has already had her “day in court” on the issue of her husband’s fraud. Her interests were adequately represented in the criminal action. Henry defended the fraud issue, and he had every incentive to succeed. In defending the criminal action, he was certainly aware of the fact that a subsequent civil proceeding with respect to the same issue of fraud might arise. ITence it is unreasonable to think that he would “hold back” any evidence in his defense of fraud. Since it is reasonable to assume that he was aware of the statute that made his wife jointly and severally liable for any civil fraud penalties, Henry was defending not only his own interests on the fraud issue in the criminal trial but also those of his wife. It is elementary that Henry was in a much better position in the criminal case than Lucille would be now to contest respondent’s evidence of his fraud, and yet he was unable to raise even a reasonable doubt as to his willfulness in the minds of the jury. To compel respondent now to present the same evidence against the wife would impose a task resulting in administrative inconvenience which would far outweigh the practical possibilities of the wife’s being able to disprove what her husband could not previously disprove. Moreover, under the rule created by the majority here, Lucille would be free to offer any evidence augmenting Henry’s defense in the criminal case. Indeed, there would be nothing to prevent her from offering Henry’s testimony in an attempt to disprove his fraud. If he may now be heard to contest the finding of fraud implicit in the prior criminal conviction, then the District Court’s decision is seriously undermined and the doctrine of collateral estoppel becomes a hollow principle.

The important fact is that there has already been a full and fair opportunity to litigate the fraud issue. And, of course, Lucille has had her “day in court” in this proceeding as to the correctness of the deficiencies. It is my view that Lucille has had her interests protected as to the fraud issue at the expense of her husband’s conviction and it must be said that her “day in court” on that issue has now passed. To hold otherwise .would inject the possibility of contradictory results on the issue of fraud when the husband and wife have elected to file joint returns by which both are bound.

The cases of Jack Douglas, 27 T.C. 306 (1956), Nadine I. Davenport, 48 T.C. 921 (1967), and Marie A. Dolan, 44 T.C. 420 (1965), cited in the majority opinion, are clearly distinguishable. None of those cases involved collateral estoppel. Since collateral estoppel is an affirmative defense, it must be both pleaded and proved. It was not pleaded and proved in the Douglas, Davenport, and Dolan cases. Futhermore, collateral estoppel requires a prior adjudication on the merits of the issue presented. Insofar as collateral estoppel is concerned, a stipulated decision is totally different than a litigated decision. United States v. International Bldg. Co., 345 U.S. 502 (1953). Unlike the situation in Douglas and Davenport, an issue cannot be treated by this Court in one manner for one signer of a joint return and in another manner for the other party to the return where the question is litigated. The concept that a joint return is a “single taxable unit” would clearly preclude such treatment.

The cases of Spanos v. United States, 323 F. 2d 108 (C.A. 4, 1963), and Cirillo v. Commissioner, 314 F. 2d 478 (C.A. 3, 1963), are also distinguishable, as apparently acknowledged in the majority opinion. In those cases the wife was held not liable for the fraud penalties attributable to the husband’s fraudulent failure to file a timely return because such penalties were fully accrued, assessable, and collectible before she had j oined in the accurate Joint return.

Distilled to its simplest terms, what we have here is “privity” created when the joint returns were signed, and collateral estoppel which conclusively established the joint returns as false and fraudulent, thus rendering the proof of fraud by respondent unnecessary as to either the husband or the wife. Since the joint returns are fraudulent, it follows, as a matter of law, that the joint and several liability for both husband and wife is subject to the imposition of the fraud penalties. Likewise, the fraudulent returns permit the tax deficiencies to be assessed at any time. See. 6501 (c) (1).

For the foregoing reasons I would decide this issue for respondent and hold that Lucille Kodney is also liable for the full amount of the deficiencies and additions to tax under section 6653 (b) for the years 1959 through 1962.

Tietjens, Raum, Atkins, Fay, and Simpson, JJ., agree with this dissent. It Is well settled that a wife who is a party to a fraudulent return may be held liable for the fraud penalties assessed on account of her husband’s fraud in preparing the return, notwithstanding that she had no income, did not have any fraudulent intent and did not know the return was fraudulent. See Ginsberg's Estate v. Commissioner, 271 F. 2d 511 (C.A. 5, 1959) ; Kann v. Commissioner, 210 F. 2d 247 (C.A. 3, 1953); Howell v. Commissioner, 175 F. 2d 240 (C.A. 6, 1949) ; Michael Pendola, 50 T.C. 509, 521-522 (1968), and other cases cited therein. This principle is firmly embedded in the law and is not susceptible to being uprooted because of the circumstances present in this case. See secs. 6013 and 6659, 1.B.C. 1954.

An example will Illustrate the violence done to the concept of joint and several liability: H and W are husband and wife. They filed a joint income tax return for 1966. They are divorced in 1967 with H living in New York and W in California. The 1966 return is audited and the Commissioner determines that a casualty loss claimed on the return should be disallowed. A separate joint notice of deficiency is sent to each. W, who has insufficient funds to pay the amount of the deficiency, files a petition in the Tax Court for a redetermination, tries her case, and loses, resulting in a deficiency of $2,000. H, who has money, pays the amount of the asserted deficiency, files a claim for refund, and when it is disallowed sues in the U.S. District Court in New York for the recovery of $2,000. under the majority opinion, H would not be collaterally estopped but could relitigate the casualty loss issue. If H prevailed in the District Court the same issue would be decided differently and H would recover $2,000 on a judgment against the Government. Thus the same issue would be litigated twice, contrary to the doctrine of collateral estoppel, and joint and several liability on the joint returns would be defeated. The injection of an addition to tax for fraud, or fraud resulting from a criminal conviction of one spouse, would not alter the result contained in this example, even though the burden of proving fraud falls on the Government.

It is clear that Congress carefully delineated the consequences of joint and several liability when it considered the filing of a joint return to be a -privilege, and the imposition of joint and several liability upon taxpayers electing to enjoy this privilege a necessary concomitant. See H.Rept. No. 1860, 75th Cong., 3d Sess., pp. 29-30, which states in pertinent part:

"Section 51(b) of the bill expressly provides that the spouses, who exercise the privilege of filing a joint return, are jointly and severally liable for the tax computed upon their aggregate income. It is necessary, for administrative reasons, that any doubt as to the existence of such liability should be set at rest, if the privilege of filing such joint returns is continued. [Emphasis added.]"