C.B.C. Super Markets, Inc. v. Commissioner

Dawson, J., dissenting in part: I respectfully disagree with the majority opinion on the issues relating to the application of collateral estoppel to Cicio’s wife, Ami, and to his controlled corporation, C.B.C. As in Henry M. Rodney, 53 T.C. 287 (1969), the majority of this Court has once again eroded the very useful doctrine of collateral estoppel in Federal tax cases. And in my view its restrictive attitude toward collateral estoppel in these particular circumstances is legally unsound.

For the reasons fully set out in my dissenting opinion in Henry M. Rodney, supra at 325-329 , I would find Ann Cicio, who filed joint income tax returns with her husband, collaterally estopped on the fraud issue. I will not repeat those reasons in this dissent, but merely incorporate them by this reference.

I must also dissent from what appears to be another application of the “day in court” syndrome which seems to be bothering the majority. It states that “The corporation itself is entitled to be heard on the question” of fraud because it is “an entity separate and distinct from Cicio and its other stockholders,” and because it “was not a party to the criminal proceeding in which Cicio was convicted and did not participate in any way in his defense.” None of these assertions can withstand analysis in the factual setting of this case.

The doctrine of collateral estoppel forecloses relitigation of an issue that has been determined in an earlier case on a different cause of action. Commissioner v. Sunnen, 333 U.S. 591 (1948). For applicability of collateral estoppel, the earlier case must have resulted in a final judgment of a competent tribunal, and the parties in the earlier and later case must be identical or in privity with each other. Commissioner v. Sunnen, supra at 597 . The doctrine of collateral estoppel is designed to prevent repetitious litigation of the same issue by the same parties or their pidvies. Laughlin v. United States, 344 F. 2d 187 (C.A.D.C. 1965). It is predicated on the idea that once a party or his privy has fought out a matter in litigation with the opposing party, the duel cannot be later renewed. E. V. Prentice Machinery Co. v. Associated Plywood Mills, 252 F. 2d 473, 476 (C.A. 9, 1958).

The pivotal question 'here is whether Frank Cicio and C.B.C. were in “privity,” so that the judgment of conviction against Cicio in the U.S. District Court for the Eastern District of New York for filing, or causing to be filed, false and fraudulent corporation income tax returns collaterally estops C.B.C. from relitigating the fraud issue in this proceeding. As I pointed out in Rodney, “privity” is a shorthand way of establishing that an individual or corporate entity 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 principal 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, * ⅞ * [Emphasis supplied.]

“Privity” in the sense of “identity of interests” has been broadly applied. Tait v. Western Md. Ry. Co., 289 U.S. 620 (1933). Recently, “privity” has been extended to include various categories beyond the classical definition. For example, the Restatement of Judgments, sec. 83, defines “privy” as including “those who control an action although not parties to it [nonparticipating parties],” and “those whose interests are represented by a party to an action.” Thus, the term “privity” in itself does not state a reason for either including or excluding a person from the binding effect of a prior judgment, but rather it represents a legal conclusion that the relationship between the one who is a party on the record and the nonparty is sufficiently close to afford application of the principle of preclusion. Cf. Woodley Petroleum Co., et al., 16 B.T.A. 253 (1929); Monolith Portland Midwest Co. v. Riddell, (S.D. Cal. 1962, 21 A.F.T.R. 2d 1525 , 62-2 U.S.T.C. par. 9750). The emphasis should be upon the policy of ending litigation where there has been a fair trial of one’s interests because the doctrine of collateral estoppel is primarily one of public policy and only secondarily of private benefit to the litigants. 1

I acknowledge that, as a general proposition, a judgment rendered against a stockholder or corporate officer of a widely held corporation in an action brought against Mm by an outsider is not binding upon the corporation and does not operate to collaterally estop the corporation. But the authorities are not in agreement as to whether a judgment for or against a stockholder or corporate officer collaterally estops the corporation by virtue of the fact that he has a controlling interest in the corporation and is in complete charge of its financial and business operations. See Annotation, 81 A.L.R. 2d 1323 (1962). Some authorities, including the Court of Appeals for the Second Circuit in American Range Lines v. Commissioner, 200 F. 2d 844 , have held that the judgment against the controlling stockholder or officer does not operate as an estoppel against the corporation. But there is support for the view that a judgment on the merits in favor of the directors of a corporation owning a majority of its shares of stock, and having complete control and actual personal supervision of its affairs and assets, bars an action against the corporation predicated upon the same facts and issue in the earlier suit against the directors. See Annotation, 81 A.L.R. 2d 1326 (1962); Young v. Rohrbough,, 129 N.W. 167 (Neb. 1910). In New York, where C.B.C. did business, a sole owner of a corporation has been held to be in “privity” with the corporation so that a judgment against him is conclusive upon the corporation. See In Re Shea’s Will, 309 N.Y. 605 , 132 N.E. 2d 864 (1956).

It is true that C.B.C. was not formally a party to Cicio’s criminal tax case. But for the doctrine of collateral estoppel to apply, it is enough that Cicio and C.B.C. are in privity. Commissioner v. Sunnen, supra at 597 ; Restatement Judgments, sec. 83 (1942). As examples of privies, the Restatement of Judgments lists the following: Persons who participate but are not parties (sec. 84); persons on whose account 'an action is brought or defended (sec. 85); class actions (sec. 86); persons having future interests (sec. 87); bailors and bailees (sec. 88); successors in interest (secs. 89, 90); persons claiming under survival, revival or death statutes (sec. 92). The characteristics common to all of these privies, and the reasons for collaterally estopping them, are (1) an identity of interest, and (2) the ability of one to adequately represent the other. See Vestal, “Preclusion/Res Judicata Variables: Parties,” 50 Iowa L. Rev. 27 (1964), where it is pointed out that — ■

The first lesson learned in an examination of .the matter of preclusion is the great vitality and growth of this concept. Principles which perhaps stated the law correctly two decades ago no longer can be said to be valid. The hey to preclusion now is not that certain parties hare litigated, hut rather that an issue has been adjudicated. The emphasis is not on a concept of identity of parties in the first and second suits. Rather, the shift has been to the practical situation involved. Has the litigant in suit II been represented in the first suit so that it is reasonable and constitutionally permissible to hold him precluded? * * * [Emphasis added.]

The principle of preclusion, or collateral estoppel, has been expanded by “broadening the definition of ‘privity’ ” and “restricting the requirement of ‘mutuality.’ ” Id. at 44; Semmel, “Collateral Estoppel, Mutuality and Joinder of Parties,” 68 Col. L. Rev. 1457,1458 (1968).

In this case one must look at the practicalities of the situation and the close relationship between Cicio and C.B.C. in determining whether “privity” existed. In my judgment the facts lead inexorably to the conclusion that there was “privity” in these particular circumstances. Although C.B.C. may be “an entity separate and distinct from Cicio” for most taxpaying purposes, it certainly was not separate from him in the filing of false and fraudulent corporation income tax returns. According to the criminal indictment filed on January 28,1965, Cicio in his capacity as “the controlling stockholder, president, manager and responsible officer of C.B.C. Super Markets, Inc.” willfully and knowingly evaded the taxes of C.B.C. by filing or causing to be filed on behalf of the corporation false and' fraudulent income tax returns for the fiscal years ended March 81, 1959, 1960, and 1961. C.B.C. had no mind of its own; it was controlled and operated by Cicio, who owned 69.5 percent of its shares of stock. It is elementary that a corporation can act only through its officers and agents, and Cicio as such was acting on the corporation’s behalf when he knowingly signed and filed returns for it which he knew were false and fraudulent. Cicio was convicted in the District Court of causing C.B.C. to file fraudulent income tax returns. In committing such “fraud” the motives and actions of Cicio and C.B.C. were identical. 2 C.B.C. was certainly no “stranger” to the criminal tax case against Cicio. To conclude as the majority does, that there was no “fraud” most assuredly undermines the correctness of the prior decision of the District Court on that issue.

Since both Cicio and C.B.C. may be penalized for filing fraudulent returns, it was in the interests of both to assert that the returns were not fraudulent. Thus, in the ordinary case, it is natural for the responsible officer and the corporation to defend the other. Since Cicio is the majority shareholder, who dominated the financial and business operations of C.B.C., we may presume that his corporation cooperated fully in building his defense in the criminal tax case. This being so, then C.B.C. has been adequately represented. Cicio was the person who was acting for the corporation in both proceedings, criminal and civil, and because of this the corporation has clearly had its “day in court” on the fraud issue.

It may sometimes happen that a corporation will not assist the majority shareholder in his criminal tax trial. His board of directors may desert him, or he may have sold his shares. In such cases the corporation should have the opportunity to show that it was not adequately represented at the prior trial.

Our opinion in American Range Lines, Inc., 17 T.C. 764 (1951), appears to rest upon a collection of outmoded cases. In Cleveland-McLeod Lumber Co. v. McLeod, 96 Ark. 405 , 131 S.W. 878 (1910), and Philadelphia Auburn-Cord Co. v. Shockcor, 133 Pa. Super. 138 , 2 A. 2d 501 (1938), the courts apparently required complete identity of parties for estoppel. In Spitz v. M. Brooks & Son, Inc., 210 App. Div. 438 , 206 N.Y.S. 313 (1924), estoppel was denied for lack of mutuality. But now in New York “the doctrine of mutuality is a dead letter.” B. R. DeWitt, Inc. v. Hall, 19 N.Y. 2d 141 , 278 N.Y.S. 2d 596 (1967). In Societe Vinicole de Champagne v. Mumm Champagne & I. Co., 10 F. Supp. 289 (S.D.N.Y. 1935), affd. 143 F. 2d 240 (C.A. 2, 1944), the basis of the decision is not explained. I think we should feel free to reexamine the rationale of American Range Lines, Inc., in the light of the facts present in the instant case.

I do not suggest that a corporation and its majority shareholder inevitably share the same interests in the same degree, or that a corporation should always be collaterally estopped by a judgment against its majority shareholder. But in some areas one is merely the “alter ego” of the other where the Federal tax law is concerned. Cf. Barzilay v. United States, 256 F. Supp. 1010 (S.D. Fla. 1966). I regard “fraud” as such an area.

The majority expresses concern that the “income and deduction items falsified in the corporation’s returns may actually represent funds embezzled or otherwise wrongfully withdrawn from the corporation, to the detriment of other shareholders.” Such acts may be illegal, and they may be unknown to and unauthorized by minority shareholders. But if respondent had proved fraud by offering the same evidence which was used at the criminal trial, the corporation could not expect immunity because of the innocence of its minority shareholders. Bender v. Commissioner, 256 F. 2d 771 (C.A. 7, 1958); Irving S. Federbush, 34 T.C. 740 (1960), affirmed per curiam 325 F. 2d 1 (C.A. 2,1960). It seems to me that the remedy of the minority shareholders is an action against Oicio.

Accordingly, I would find on this record the “privity” necessary for invoking collateral estoppel against the corporation whose majority stockholder and president completely dominated and controlled its financial and business affairs and, in such capacity, caused false and fraudulent income tax returns to be filed on behalf of the corporation. The ultimate fact contained in the judgment of conviction in the criminal tax case by the U.S. District Court establishing that the corporation returns were false and fraudulent should, in my opinion, preclude the relitigation of the fraud issue in this proceeding. The Evergreens v. Nunan, 141 F. 2d 927, 928 (C.A. 2, 1944), certiorari denied 323 U.S. 720 .

Tietjens, Raum, Hoyt, Simpson, and Quealy, //., agree with this dissent.