Appendix — Cassidy v. Commissioner of Internal Revenue, 111 S. Ct. 48 (1990) (No. 89-1734)

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JOSEPH F. SPANIOL, JR,

CLERK

Petition For

Writ of

Certiorari

The United

TABLE OF CONTENTS

APPELLANT-—PETITIONER APPENDIX

PETITION FOR WRIT OF CERTIORARI

Opinion: In Re Cassidy, 892 F.2d

637 (7th Cir. 1990) Filed:

January 4, 1990 ceecescceeveeeel

Judgment and Opinion: U.S.

District Court

Central District of Illinois

T.V. Cassidy v. CIR, Number 88-

1108 Entered and Filed: December

20, 1988 PTEETEUCEETLELTLTLTY SS 27

Order and Decision: United

States Tax Court, T.V. Cassidy

v. CIR, Number 18125-80 Entered:

April 4, |, errr errr »

Opinion: T.V. Cassidy v. CIR,

814 F.2d 477 (7th Cir. 1987)

Filed: March 18, 1987 .......84

Order U.S. 7th Court of Appeals

Dated: February 5, 1990

Denying Appellant-Petitioner's

FRAP 40 and 7th Circuit Rule 40

Petition for Rehearing

cwawenedeeeseee es beeebeveseo ter

Appellant's Brief, In Re

Cassidy, 892 F.2d 637 (7th Cir.

1990) [No. 89-1121].........109

Appendix Table of Contents Page 1

10.

11.

12.

Appendix to Appellant's Brief,

In Re Cassidy, 892 F.2d 637 (7th

Cir. 1990) [No. 89-1121]

Dee eeeebeeeeeseecocescoesveosonee tt

Supplemental Appendix to

Appellant's Brief, In Re

Cassidy, 892 F.2d 637 (7th Cir.

1990) Ho. B9=1121 J oc oe c00 00198

Order of March 30, 1989, 7th

Cir. allowing Supplemental

Appendix to Appellant's Brief,

In Re Cassidy, 892 F.2d 637 (7th

Cir. 1990) [No. 89-1121]

ee cccccccccccccccccccccccesealO

Appellant's supplemental

citations of 9/20/89, In Re

Cassidy, 892 F.2d 637

(7th Cir. 1990) [No. 89-1121]

[eee eee ho eee eeecesecoececootta

Appellant's supplemental

citations of 12/08/89, In Re

Cassidy, 892 F.2d 637

(7th Cir. 1990) [No. 89-1121]

err ee ce Trea TTe Tere Sk

Appellee's Brief, In Re Cassidy,

892 F.2d 637 (7th Cir. 1990)

[No. 89-1121]

Pages 1, 5, 6, 7, 9, 10, 13,

oo Se Se? anaes 7”

Appendix Table of Contents Page 2

13.

14.

15.

Appellee's supplemental citation

of 11/27/89, In Re Cassidy, 892

F.2d 637 (7th Cir. 1990) [No.

89-1121] citing: In Re Burns,

887 F.2d 1514 (11th Cir. 1989)

Opinion filed: November 13, 1989

YTTITITTITIC CV TTT TTT.

Appellant's Reply Brief, In Re

Cassidy, 892 F.2d 637 (7th Cir.)

[No. ent 124 tosecteadeceasuouee

Appellant's FRAP 40 and 7th

Circuit Rule 40 Petition for

Rehearing, In Re Cassidy, 892

F.2d 637 (7th Cir. 1990) [No.

OP 11 Fi deo ccccsccccestineseseanll!

Appendix Table of Contents Page 3

In the

United States Court of Appeals

For the Seventh Circuit

No. 89-1121

IN THE MATTER OF:

THOMAS V. CASSIDY, Debtor-

Appellant.

Appeal from the United States District

Court for the Central District of

Illinois, Peoria Division.

No. 88 C 1108-Michael M. Mihm, Judge

ARGUED OCTOBER 3, 1989 -

DECIDED JANUARY 4, 1990

Before Flaum, Manion and Kanne, Circuit

Judges.

FLAUM, Circuit Judge. The Commissioner

of Internal Revenue charged that

attorney Thomas V. Cassidy had filed

fraudulent tax returns for the years

1974 and 1975. A notice of deficiency

was sent in June 1980. Cassidy

challenged the deficiencies in the

United States Tax Court, but before the

case came to trial a bankruptcy

petition was filed against Cassidy in

the Central District of Illinois. The

Tax Court proceedings were

automatically stayed. 11 U.S.C.

Section 362(a). Cassidy was discharged

from all dischargeable debts on March

13, 1984. 11 U.S.C. Section 727. The

bankruptcy court issued an order on

April 13 lifting the stay to allow the

Tax Court proceeding to go forward. 11

U.S.C. Section 362(d).

Cassidy was uncooperative in the Tax

Court proceeding. He refused to

respond to discovery requests, failed

to meet deadlines, and generally

delayed the proceedings. When the

Commissioner sent a Request to Admit

under Tax Court Rule 90 (equivalent of

Fed. R. Civ P. 36), Cassidy did not

respond within thirty days as required

by the Rule. The matters asserted in

the Request were therefore deemed

admitted. Among the facts admitted by

Cassidy's silence was the following:

"Petitioner [Cassidy] fraudulently and

with intent to evade taxes omitted from

his income tax returns for the taxable

years ended August 31, 1974 and August

31, 1975, a substantial portion of his

gross income." Cassidy v.

Commissioner, 51 T.C.M. (CCH) 784 791

(1986). Although Cassidy did not

respond to the Request to Admit, he did

file a motion for dismissal or summary

sehr

judgment based on his bankruptcy

discharge.

The Tax Court denied Cassidy's

motion, stating:

We summarily denied petitioner's

motion because petitioner's

contention is on its face

inconsistent with the explanatory

memorandum attached to petitioner's

Discharge of Debtor order and the

April 13, 1984 order issued by the

same bankruptcy judge lifting the

automatic stay to permit this case to

go forward in the Tax Court.

Moreover, the redetermination of an

income tax deficiency has "nothing to

do with collection of the tax nor any

similarity to an action for

collection of a debt * * *." Swanson

v. Commissioner, 65 T.C. 1180, 1184

(1976). Accordingly, if there is any

question as to the collectability of

any income tax deficiencies, which we

doubt, that question is beyond the

jurisdiction of this Court. Graham

v. Commissioner, 75 T.C. 389, 399

(1980).

Cassidy v. Commissioner, 51 T.C.M.

(CCH) at 786 n.3.

At trial in the Tax Court, Cassidy

tried to avoid the consequences of his

failure to respond to the Request to

Admit by claiming that he had not

received the Request until less than 30

days before the case was called for

trial and that the facts should

therefore not be deemed admitted. The

Tax Court held an evidentiary hearing

on that claim, and found that Cassidy

"fabricated [his] testimony in an

effort to avoid the consequences of

[his] continued deliberate disregard

for his responsibilities in connection

with the case." 51 T.C.M. at 789. The

facts involved were deemed admitted

under Rule 90(c).

On the strength of those facts

considered admitted, the Tax Court held

that there was a deficiency as stated

by the Commissioner, and that the tax

returns were fraudulent, occasioning

"additions to tax" under 26 U.S.C.

Section 6653(b) as a penalty.

Cassidy appealed to this Court. He

challenged the Tax Court's ruling

concerning the Request to Admit and

also argued that the entire debt was

discharged in bankruptcy. In Cassidy

v. Commissioner, 814 F.2d 477 (7th Cir.

1987) (Cassidy I), we affirmed the

judgment of the Tax Court and ruled as

follows (1) the tax debt was not

dischargeable in bankruptcy; (2) the

fraud penalties connected with the

taxes were not dischargeable; (3) the

finding that Cassidy had over 30 days

to answer the Request to Admit was not

clearly erroneous; and (4) the facts

deemed admitted supported the penalty

for fraud.

Cassidy then returned to the

bankruptcy court with a Complaint to

Determine Dischargeability under

Bankruptcy Rule 4007. In response to

the Commissioner's argument that the

Seventh Circuit had already dealt with

the question, Cassidy contended that

the Tax Court had no jurisdiction to

consider dischargeability, and

therefore the Seventh Circuit's

comments were pure dicta with no

preclusive effect. The bankruptcy

judge granted the Commissioner's motion

to dismiss on the res judicata effect

of Cassidy I, stating that he would not

second-guess the Court of Appeals.

On appeal to the district court,

Cassidy advanced the same arguments.

He was partially successful; instead of

holding that Cassidy was barred by this

court's view of dischargeability under

res judicata, the district court held

that Cassidy was barred under

collateral estoppel by the Tax Court's

factual finding of fraud, which

dictated a finding of

nondischargeability under 11 U.S.C.

Section 523(a)(1)(C).

In this Court, Cassidy raises the

same contentions. He also argues that

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this Court erred in holding that the

penalty portion of the debt was

nondischargeable in Cassidy I.

DISCUSSION

The district court took what appears

to be the most reasonable approach to

the resolution of this case: the court

can rely on the factual finding of the

Tax Court that Cassidy acted

fraudulently when he filed his returns,

which collaterally estops any contrary

contentions. That finding supports the

conclusion that the debt was not

dischargeable under 11 U.S.C. Section

523(a)(1)(C). This makes sense except

for one matter not addressed by the

parties or the district court: Tax

Court Rule 90(f) states that

[a]ny admission made by a party under

this Rule is for the purpose of the

pending action only and is not an

admission by him for any other

purpose, nor may it be used against

him in any other proceeding.

According to the rule, the admissions

from the Tax Court proceeding cannot be

used in the bankruptcy proceeding. It

follows that the judgment of the Tax

Court on that factual issue, which is

based solely on the admissions, cannot

be a bar in this later proceeding.|

If this action is barred by the

earlier litigation, it must be on the

strength of this Court's opinion in

Cassidy I. But for a ruling to have a

preclusive effect, it must be necessary

to the decision. See Rheinberger v.

Security Life Ins. Co. of America, 146

F.2d 680 (7th Cir. 1944); Koshatka v.

Philadelphia Newspapers, Inc., 762 F.2d

329, 337 (3d Cir. 1985); Anthan v.

Professional Air Traffic Controllers

Org., 672 F.2d 706, 710 (8th Cir.

1982). United States v. Crawley, 837

F.2d 291 (7th Cir. 1988), defines dicta

as that portion of an opinion not

entitled to the full weight usually

given judicial decisions, including any

portion not necessary to the outcome of

the case. The portion of Cassidy I

which concerned the dischargeability of

the debt was, unfortunately, dicta.

The Court of Appeals exists to review

judgments, and consideration of issues

outside the scope of the judgment below

must necessarily be dicta, as they

cannot possibly be grounds either for

approval or disapproval of the lower

court's judgment. The Tax Court had no

jurisdiction to consider whether

Cassidy's tax debt was dischargeable in

bankruptcy. Graham v. CIR, 75 T.C. 389.

(1980). Bankruptcy cannot therefore

have been grounds for either affirmance

or reversal of the Tax Court's order

and the Cassidy I court's discussion of

it cannot have been necessary to its

decision. It follows, then, that

collateral estoppel and res judicata

are technically inapplicable to this

case.

Nevertheless, we hold that Cassidy is

barred from relitigating the

dischargeability of his tax debts.

When he appeared before this Court in

Cassidy I, he successfully argued that

this court should address the

dischargeability question. Now that he

is unhappy with the final result, he

has shifted his ground and argues that

the Cassidy I court should have ignored

his plea to consider dischargeability.

Judicial estoppel is a doctrine

intended to prevent the perversion of

the judicial process. Edwards v. Aetna

Life Ins. Co., 690 F.2d 595, 599 (6th

Cir. 1982). It is to be applied where

"intentional self-contradiction is

being used as a means of obtaining

unfair advantage in a forum designed

for suitors seeking justice," Scarano

v. Central R. Co., 203 F.2d 510, 513

(3d Cir. 1953), to prevent litigants

from "playing fast and loose with the

courts." Id. "Where a party assumes a

certain position in a legal proceeding,

and succeeds in maintaining that

position, he may not thereafter, simply

because his interests have changed,

assume a contrary position." Davis v.

Wakelee, 156 U.S. 680, 689, (1895).

The doctrine of estoppel is intended to

protect the courts rather than the

litigants,2 so it follows that a court,

even an appellate court, may raise the

estoppel on its own motion in an

appropriate case. Allen v. Zurich Ins.

Co., 667 F.2d 1162, 1168 n.5 (4th Cir.

1982).

"The circumstances under which

judicial estoppel may appropriately be

invoked are probably not reducible o

any formulation of principle," Allen

667 F.2d at 1166, but may be used where

collateral estoppel and equitable

estoppel fail to protect the interests

the rule is intended to serve. Id.

Although this court has never applied

the doctrine, we have identified

certain limitations on its application.

In Himel v. Continental Ill. Nat'l

Bank, 596 F.2d 205, 210-11 (7th Cir.

1979), we held that the estoppel may be

applied only where a clearly

inconsistent position is taken. In

that case we held that the plaintiff's

position in a 1961 lawsuit asking that

a trust instrument be modified to allow

the trustee more flexibility in

investing the trust corpus was not

clearly inconsistent with its position

in a 1972 lawsuit charging the trustee

with mismanagement of the trust.

Another limitation was identified in

Eagle Foundation v. Dole, 813 F.2d 798,

810 (7th Cir. 1987), where we required

that the party to be estopped have

convinced the court to accept its

position in the earlier litigation. A

party is not bound to a position it

unsuccessfully maintained.

In the present case, both of these

conditions are satisfied. Cassidy

unequivocally urged the Cassidy I court

to consider the defense of discharge.

His present position is that it was

error for the court to give him what he

then wanted. Even though Cassidy did

not prevail on the anneal as a whole,

he did prevail on the subsidiary

question of what issues were to be

decided by the court. See Edwards v.

Aetna Life Ins; Co., 690 F.2d 595, 599

n.5 (5th Cir. 1982) (party need not

finally prevail to be estopped from

changing a successful position on a

preliminary matter). Cassidy's

maneuverings were clearly intended to

delay the inevitable day of reckoning,

and in maneuvering he is trying to

whipsaw this court. That is exactly

the evil that the doctrine of judicial

estoppel was meant to avoid.

It has been said that judicial

estoppel applies only to positions on

questions of fact. See e.g. United

States . Siegel, 472 F. Supp. 440, 442

n.-4 (N.D. Ill. 1979); Comment,

Precluding Inconsistent Statements: The

Doctrine of Judicial Estoppel, 80 NW.

U.L. Rev. 1244, 1262 (1986). We

disagree. We note first that it may be

advisable not to prescribe too many

rules for the application of a doctrine

designed to protect the integrity of

the courts. See Allen, 667 F.2d at

1166 (doctrine probably not reducible

to a formula). This is true for the

same reasons that the courts are

cautious in attempting to exactly

define fraud--the fear that

unscrupulous persons may use strictures

on use of the doctrine to subvert the

purposes of the rule. We also observe

a trend away from strict limitation of

the doctrine to positions on matters of

fact. In Pariot Cinemas, Inc. v.

General Cinema Corp., 834 F.2d 208, 214

(1st Cir. 1987), the court noticed and

continued a practice of holding parties

to their representations that they

would not pursue a legal claim. The

court said, "On reflection,

representations such as were made here,

that a party will abandon a clain,

present a stronger argument than do the

classic cases for application of the

doctrine." (emphasis on original).

Similarly, in this case we think that

the change of position on the legal

question is every bit as harmful to the

administration of justice as a change

on an issue of fact. See also United

States v. Starrett City Associates, 605

F. Supp. 262, 264 (E.D.N.Y. 1985)

(doctrine applies to assertions of law

or fact).

We emphasize that it is not the court

that is bound by Cassidy's actions, but

only Cassidy himself. Estoppel does

not eliminate a claim or defense, but

only prohibits a particular party from

asserting it. Estoppel is an equitable

concept, and its application is

therefore within the court's sound

discretion. See Motorola, Inc. v. CBS,

Inc., 672 F. Supp. 1033 (N.D. Ill.

1986). It should not be used where it

would work an injustice, such as where

the former position was the product of

inadvertence or mistake, Hamilton v.

Zimmerman, 37 Tenn. (5 Sneed) 39, 48

(1857); Johnson Serv. Co. v.

TransAmerica Ins. Co., 485 F.2d 164,

175 (5th Cir. 1973) ("the rule looks

toward cold manipulation and not an

unthinking or confused blunder"); or

where there is only an appearance of

inconsistency between the two positions

but both may be reconciled. Illinois

Dept. of Trans. v. Coe, 112 Ill. App.

3d 506, 445 N.E.2d 506 (1983). In this

case, we would work an injustice were

we to fail to estop Cassidy. Cassidy

has been delaying matters in the courts

over his 1974 and 1975 tax liability

since 1980. He has consistently acted

to delay the proceedings and to

obstruct the final resolution of his

liability. He has found it expedient

to change a position which he

successfully maintained in this court,

but this court is under no obligation,

either legal or moral, to allow itself

to be used in this manner. The parties

in Cassidy I fully briefed and argued

the issue of dischargeability, and the

court gave it full consideration. It

would be unjust to require the

Commissioner to relitigate a question

that was originally raised by Cassidy

himself, or to allow Cassidy a second

full-scale adjudication of an issue

that the court has already resolved

against hin.

AFFIRMED.

A true Copy:

Teste:

Clerk of the United States Court

of Appeals for the Seventh

Circuit

Footnotes to Previous Document

IThe case law on the question of whether a

judgment based on an admission, as opposed to

the admission itself, can be used in a later

proceeding is relatively sparse. On

consideration of the question, we hold that a

judgment based solely on admissions made under

Tax Court Rule 90 (or Fed. R. Civ. P. 36)

cannot be used to estop relitigation of a

factual question in a later proceeding.

None of the cases under Tax Court Rule 90(f)

or Fed. R. Civ. P. 36(b) consider this issue

directly. One could analogize deemed

admissions to a default judgment on an issue

of fact, but default judgments do not have

collateral estoppel effect. Matter of

Gottheiner, 703 F.2d 1136, 1140 (9th Cir.

1983); 1B Moore's Federal Practice, Paragraph

0.444[2]; but see Matter of Wilson, 72 B.R.

956 (Bkr. M.D. Fla. 1987) (Default judgment in

creditor's securities fraud suit collaterally

estopped debtor from denying fraud in action

to exempt debt from bankruptcy discharge).

One could consider a Rule 90 admission a

special type of stipulation, but judgments

based on stipulated facts have no collateral

estoppel effect as to the matters stipulated,

especially stipulations in tax cases. United

States v. International Building Co., 345 U.S.

502, 506 (1953), Moore's Federal Practice

Paragraph 0.444[4].

1 eontinued

One might also analogize to a consent

judgment on the factual issue. In Klingman v.

Levinson, 831 F.2d 1292 (7th Cir. 1987), a

consent judgment in a state court suit

admitting fraud estopped the debtor from

contesting the factual underpinnings of a

later bankruptcy action to exempt the debt

from discharge. The consent decree from the

state case specifically recited that "in any

subsequent proceeding all of the allegations

of the Complaint and findings of this Court

may be taken as true and correct without

further proof." This court held that the

“actually litigated" requirement for

collateral estoppel would not bar use of the

consent decree where the parties obvicusly

contemplated such use. In the present case,

it is arguable that Cassidy had to know that a

decision on dischargeability would be made

sooner or later. He also knew that the

matters deemed admitted in the Tax Court were

exactly what the bankruptcy court would have

to find to hold the debt nondischargeable.

But Tax Court Rule 90(f) by its terms

precludes a determination that Cassidy should

have expected the admission to be usable in

any other forum. Absent such an expectation,

the "actually litigated" requirement for

application of the doctrine of collateral

estoppel cannot be satisfied.

In view of the policy behind the rule

authorizing admissions, which is to encourage

admissions so as to narrow the scope of the

issues for trial and simplify proof on the

remaining issues, Advisory Committee Notes to

1970 Amendment of Fed. R. Civ. P. 36, we

believe that it would be harmful to give

preclusive effect to a judgment based solely

on an admission.

2 For this reason prejudice to the opponent

from the change of position is not a necessary

element of judicial estoppel, thus contrasting

judicial estoppel from the more familiar

equitable estoppel. Konstantinidis v. Chen,

F.2d 933 (D.C. Cir. 1980).

United States District Court

Center District of Illinois

THOMAS V. CASSIDY,

Debtor, Plaintiff-Appellant,

COMMISSIONER OF INTERNAL REVENUE,

Defendant-Appellee.

JUDGMENT IN A CIVIL CASE

CASE NUMBER: 88-1108

___ dury Verdict. This action came

before the Court for a trial by jury.

The issues have been tried and the jury

has rendered its verdict.

_X Decision by Court. This action

came to trial or hearing before the

Court. The issues have been tried or

heard and a decision has been rendered.

IT IS ORDERED AND ADJUDGED that the

ruling of the Bankruptcy Court appéaled

from is hereby Affirmed, pursuant to

Order entered this date.

December 20, 1988 John M. Waters

DATE Clerk

(By) Deputy Clerk

Leonard D. Brown

a a———e

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF ILLINOIS

In re )

THOMAS V. CASSIDY, )

Plaintiff-Appellant, Case No. 88-1108

v. )

COMMISSIONER OF )

INTERNAL REVENUE, )

Defendant-Appellee. )

ORDER

The issue for resolution on this

bankruptcy appeal is whether or not a

judgment in prior tax court assessment

proceedings requires the application of

the doctrine of res judicata in

bankruptcy discharge proceedings. The

bankruptcy court found that the answer

to that question is "yes," and applied

the ruling of the tax court is finding

. that Appellant's tax liabilities and

penalties were non-dischargeable.

Appellant now appeals that ruling

pursuant to Rule 8001(a) of the

Bankruptcy Rules. While this Court

does not believe that res judicata is

the relevant preclusion doctrine in

this case, this Court finds that

collateral estoppel is relevant. In

applying the latter doctrine to the

facts of this case, this Court believes

that the decision of the bankruptcy

court must be AFFIRMED.

FACTS

On June 24, 1980, Defendant-Appellee,

Commissioner of Internal Revenue

(hereinafter referred to as

"Appellee"), sent Plaintiff-Appellant,

Thomas V. Cassidy (hereinafter referred

to as "Appellant"), a notice of

deficiency in federal income taxes for

the fiscal years ending August 31, 1974

and August 31, 1975. The tax

deficiencies were in the amounts of

$12,865 and $22,028, respectively. The

Commissioner also claimed that all or

part of the underpayment was due to

fraud and, pursuant to Section 6653(b)

of the Internal Revenue Code, assessed

civil fraud penalties of $11,774 for

1974 and $11,014 for 1975. Appellant

then filed a petition with the United

States Tax Court for a redetermination

of his income tax liability.

Before the tax court proceedings came

to trial, a petition for bankruptcy

under Chapter 7, 11 U.S.C. Section 701

et seq., was filed against Appellant on

February 14, 1983. A Discharge of

Debtor order was entered by the United

States Bankruptcy Court for the Central

District of Illinois on March 13, 1984.

One month after discharge, the

bankruptey court entered an order

lifting the automatic stay previously

in effect so that the tax court

proceedings could continue.

In the tax court proceedings,

Appellant mailed Appellee a Request for

Admissions of Fact on June 12, 1984.

Appellant did not respond within the

requisite time period, so Appellee

moved for summary judgment based upon

the matters deemed to be admitted. The

tax court found that the deemed

admissions of fact in Appellee's

request to admit supported the

deficiencies determined by the

Appellee, and granted the Motion for

Summary Judgment.

Appellant appealed the tax court's

ruling to the United States Court of

Appeals for the Seventh Circuit.

Appellant contested the tax court's

finding of an income tax deficiency and

its imposition of fraud penalties. The

Court of Appeals affirmed the tax court

decision. Cassidy v. Commissioner of

Internal Revenue, 814 F.2d 477 (7th

Cir. 1987).

Appellant filed a Complaint to

Determine Dischargeability of Debt in

the United States Bankruptcy Court for

the Central District of Illinois on

November 17, 1987. Appellee, invoking

the doctrine of res judicata, filed a

Motion to Dismiss the Complaint on the

basis that the issue of

dischargeability had already been

determined in the tax court proceedings

and subsequent review by the Seventh

Circuit Court of Appeals. On February

2, 1988, the bankruptcy court entered

an order allowing the Motion to —

Dismiss. This appeal followed.

Res Judicata

In his appeal, Appellant argues that

the order of the tax court has no

preclusive effect in the bankruptcy

court discharge proceeding. Appellant

notes that, in order for the doctrine

of res judicata to apply, there must

be:

1. Identity of the thing being sued

upon;

2. Identity of the cause of action;

3. Identity of persons and parties;

and

4. Identity of the ability of a party

to sue or be sued.

In re Goodman, 25 Bankr. 932, 938

(Bankr. N.D. Ill. 1982). According to

Appellant, tere is no identity of the

cause of action in the bankruptcy

proceedings and the tax court

proceedings. Appellant claims that the

tax court merely assessed the

deficiencies, or established the

liability, against Appellant, while the

bankruptcy proceeding was an action to

determine whether the deficiencies or

liability assessed was dischargeable.

Appellant also claims that, because

it was Congress' intent to have the

bankruptcy court adjudicate the

dischargeability of a debt, res

judicata has no application to a

proceeding such as this,

notwithstanding the nature of the tax

court proceeding. In support of this

argument, Appellant cites the case of

In re Goodman, 25 Bankr. 932 (Bankr.

N.D. Ill. 1982). Goodman, in turn

relied upon the United States Supreme

Court case of Brown v. Felson, 442 U.S.

127 (1979). The Goodman court noted

that, in Brown, the Supreme Court

held that res judicata did not apply

{in discharge proceedings] and that

"the bankruptcy court is not confined

to a review of the judgment and

record in the prior state court

proceeding when considering the

dischargeability of respondent's

debt." Id. at 139-39, 99 S.Ct. at

2212-13. The court reasoned that

Congress intended for the bankruptcy

court to resolve dischargeability

issues and that by limiting the

application of res judicata , the

“

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ieee

bankruptcy court would be able to

weigh all the evidence and accurately

determine whether the debtor did in

fact commit deceit, fraud, or

malicious conversion. Id. at 138, 99

S.Ct. at 2212.

Goodman, 25 Bankr. at 938-39.

As noted by the Goodman court, while

Brown involved Section 17 of the prior

Bankruptcy Act, Brown's rationale has

been applied to dischargeability

proceedings under Section 523 of the

Bankruptcy Code. Id., citing, In re

Dohm, 19 Bankr. 132 (Bankr. N.D. Ill.

1981); In re Spector, 22 Bankr. 226

(Bankr. N.D. N.Y. 1982); In re Supple,

14 Bankr. 898 (Bankr. D. Conn. 1981).

On the authority of Goodman and Brown,

Appellant charges that the bankruptcy

court's dismissal of his complaint to

Vin

mat %

determine dischargeability of a debt by

application of the res judicata

principle was error.

The Court believes that Appellant's

arguments miss the mark, and finds that

the decision of the bankruptcy court

must be affirmed. Even though the

bankruptcy court did not base its

ruling on the principle of collateral

estoppel, affirmance is in order based

upon application of collateral estoppel

principles to the facts of this case.

While Appellant summarily dismisses

the application of res judicata

principies to bankruptcy

dischargeability proceedings on the

authority of Brown and Goodman, a

closer reading of those cases shows

that Brown and Goodman are

distinguishable from this case. The

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Brown Court found that questions of

deceit, fraud, and malicious conduct

are the types of questions that

Congress intended that a bankruptcy

court would resolve, Brown, 442 U.S. at

138, thus indicating that res judicata

suould not be applied here. But the

Brown Court's explanation of its ruling

indicates that its refusal to apply res

judicata in that case does not preclude

the application of the doctrine in the

case at bar.

In Brown, unlike the case at hand,

questions of deceit, fraud, and

malicious conversion were squarely in

issue for the first time in the

bankruptcy court. Id. That fact was

important in the Brown Court. In

addition, the Brown Court emphasized

that the party who sought to prevent

Pee

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the application of the res judicata

doctrine was attempting to meet the new

defense of bankruptcy which the debtor

had interposed between the Brown

petitioner and the sum that was

determined to be due to him. Id. at

133.

Here, the question of fraud is not

being raised for the first time in the

bankruptcy court. Rather, the issue of

fraud has been conclusively determined

by the tax court. Therefore, the need

that the Brown Court saw for the

bankruptcy court to weigh all of the

evidence on the question of fraud is

absent. Also, unlike Brown, the issue

of bankruptcy was extant at the time

that the tax court rendered its

Gecision finding Appellant's conduct to

be fraudulent.

Although Appellant's bankruptcy was

"interposed" between the initiation of

the tax court proceedings and the final

judgment by the tax court, it was not

"interposed" in the sense that that

word was used by the Brown Court.

Here, Appellant claimed in the tax

court that his liability had been

discharged in bankruptcy, but the tax

court rejected that argument. 59

T.C.M. 784, 787 (CCH) (T.C. 1985). The

tax court noted, in footnote 3 of its

opinion:

On November 13, 1984, petitioner

filed petitioner's motion to dismiss

with prejudice and motion for summary

judgment. Petitioner's motion was

based on his contention that his tax

liability was discharged in

bankruptcy. We summarily deny

petitioner's motion because |

petitioner's contention is on its

face inconsistent with the

explanatory memorandum attached to

petitioner's Discharge of Debtor

order in the April 13, 1984, order

issued by the same bankruptcy judge

lifting the automatic stay to permit

this case to go forward in the Tax

Court. Moreover, the redetermination

of an income tax deficiency has

"nothing to do with collection of the

tax nor any similarity to an action

for collection of a debt. * * *,"

Swanson v. Commissioner, [Dec.

33,742]. 65 T.C. 1180, 1184 (1976).

Accordingly, if there is an question

as to the sollectebility of any

income tax deficiencies, which we

doubt, that question is beyond the

jurisdiction of this Court. Graham

v. Commissioner, [Dec. 37,460], 75

T.C. 389, 399 (1980).

Id. at 786 n.3. It is clear from this

passage that the question of

dischargeability was, in fact, "raised"

in the tax court by Appellant himself.

The tax court, however, properly

recognized that the question of

dischargeability was beyond its

jurisdiction, and focused its inquiry

on the question of fraud.

Evidently, Appellant wasn't satisfied

with the tax court's ruling on the

dischargeability issue, so he raised it

again before the Court of Appeals. The

Court of Appeals also rejected

Appellant's argument. In doing so, the

Court of Appeals stated:

The taxpayer correctly recognizes

that a discharge granted under

Section 727 of the Bankruptcy Code

generally "discharges the debtor from

all debts that arose before the date

of the order for relief." 11 U.S.C.

Section 727(b). However Section 523

of the same Code contains numerous

exceptions to this general rule.

Subsection 523(a)(1)(C) excepts tax

payments "with respect to which the

debtor made a fraudulent return or

willfully attempted in any manner to

evade or defeat such tax." Because

the taxpayer's deficiencies here

resulted from fraud, subsection

523(a)(1)(C) renders then non-

dischargeable. As the legislative

history of this section makes clear,

the "date of the taxable year with

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regard to which the fraud occurred is

immaterial." S.Rep. No. 989, 95th

Cong., 2d Sess. 78, reprinted in 1978

U.S. Code Cong. & Admin. News 5787,

5864. Moreover, subsection

523(a)(7)(A) mandates that fraud

penalties are non-dischargeable if

the underlying tax with respect to

which the penalty was imposed is also

non-dischargeable. S.Rep. No. 989,

at 79, U.S. Code Cong. & Admin. News

1976, p. 5864. Because the

taxpayer's deficiencies are non-

dischargeable, his tax penalties are

Similarly non-dischargeable. Thus we

find the taxpayer's contention that

his deficiencies and penalties were

discharged to be without merit.

Cassidy v. Commissioner of Internal

Revenue, 814 F.2d 477, 481 (7th Cir.

1987).

Goodman is likewise distinguishable.

There, the bankruptcy court found that

a California default judgment should

not be given preclusive effect in a

bankruptcy dischargeability proceeding.

Goodman, 25 Bankr. at 939. Because the

Goodman judgment was obtained by

default, there was never an actual

determination by a court of proper

jurisdiction that the debtor was guilty

of fraud. Here, in contrast, it was

Appellant's own failure to respond to

Appellee's request for admission of

fact which led to the tax court's

finding of fraud pursuant to Rule 90(c)

of the Tax Court Rules of Practice and

Procedure.

This Court finds, however, that the

bankruptcy court confused the doctrines

of res judicata and collateral

estoppel. The first two requirements

for applicability of res judicata, that

is, identity of the thing being sued

upon and identity of the cause of

action, are absent. Yet, as described

below, all of the elements of

collateral estoppel are present.

Collateral Estoppel

The elements of collateral estoppel

are:

1. The issue sought to be precluded

must be the same issue as that involved

in the prior action;

2. There is a final judgment on the

nerits;

3. The party against whom the

doctrine is asserted was a party or in

privity with a party to the prior suit;

4. The party against whom collateral

estoppel is asserted had a full and

fair opportunity to litigate the issue

in question in the prior action; and

5. The determination must have been

essential to the final judgment.

Drum v. Nasuti, 648 F.Supp. 888, 898

(E.D. Pa. 1986).

Appellant also contends that none of

the elements of collateral estoppel

existed in this case, so that that

doctrine does not bar its proceeding in

the bankruptcy court, either.

Specifically, Appellant claims that the

issue sought to be precluded in the

bankruptcy court dischargeability

proceeding were not the same issues as

were involved in the tax court

proceedings. Appellant argues that,

although the tax court already

adjudicated the issue of fraud, it did

not adjudicate the amount of the

deficiencies related to the fraud. It

is Appellant's position that, if only a

portion of the tax deficiencies, he

claims, would be discharged.

Appellant also claims that the issue

of fraud was never actually litigated

in the tax court proceeding. He makes

this claim because the issue of fraud

was, in essence, determined by default

in the tax court, because he did not

respond to Appellee's Motion for

Summary Judgment in that court.

Therefore, the second element of the

collateral estoppel test is not

satisfied.

Appellant next argues that, assuming

that the first and second elements of

collateral estoppel are satisfied, any

issues relating to fraud decided by the

tax court is not the type of valid

judgment to be recognized by the

bankruptcy court in a discharge

proceeding. Appellant so claims

because, in order to be a valid

judgment for purposes of applying res

judicata or collateral estoppel, the

prior adjudication must be from a court

of competent jurisdiction. See, Local

1006 v. Wurf, 558 F.Supp. 230 (N.D.

Ill. 1982), aff'd, 746 F.2d 1483 (7th

Cir. 1984). Because the tax court did

not have subject matter jurisdiction to

determine issues of dischargeability,

Appellant claims that any such

determination by the tax court is

invalid.

Finally, Appellant claims that the

Court of Appeals' discussion relating

to discharge was not essential to its

decision. Appellant argues that the

tax court's determination simply

establishes a liability notwithstanding

any issues relating to discharge in

bankruptcy. Therefore, to the extent

that the court of appeals referred to

the issue of dischargeability in its

opinion, that discussion is merely

dictum. Consequently, although the

discussion of the Court of Appeals

concerning dischargeability commands

respect, it is not, Appellant argues,

an issue that was essential to the

Court of Appeals' decision. Absent

that element, Appellant claims that it

is not a "prior adjudication"

sufficient to invoke the doctrine of

collateral estoppel in the bankruptcy

court's discharge proceeding.

It is interesting that Appellant now

claims that the tax court and the Court

of Appeals had no jurisdiction to

consider the dischargeability question

when it was Appellant himself who

raised those questions before the

respective courts. As stated earlier,

the tax court refused to be so baited

by Appellant, and did not pass upon the

actual dischargeability question. The

Court of Appeals, however, specifically

found that Appellant's debts were non-

dischargeable. In doing so, the Court

of Appeals relied upon the tax court's

finding that Appellant made a

fraudulent return with respect to those

taxes. The Appellant Court did not

rely upon any "determination" by the

tax court that the debt was non-

dischargeable, for, as stated above,

the tax court made no such finding.

Rather, the tax court merely made a

ruling which was clearly within its

jurisdiction: that Appellant made

fraudulent returns and willfully

attempted to evade or defeat income

taxes. Moreover, in contrast to

Appellant's contentions, the tax court

entered judgment against Appellant for

a specific amount. The final sentence

of the tax court order states as

follows;

Accordingly, respcadent's motion for

Summary judgment is granted as to the

deficiencies and additions to tax for

fraud in the amounts stated.

aise al i ee eel es Se ee

51 T.C.M. at 792 (CCH) (emphasis

added). Thus, Appellant's argument

that the bankruptcy court still must

determine which amounts of his tax

liability are based upon fraud is

without merit.

Although Appellant claims that the

decision in the prior tax court

proceeding was obtained by default and,

given the nature of a judgment by

default, the issue relating to fraud

and dischargeability were "actually

litigated,' this Court disagrees. The

issue of fraud was raised and Appellee

presented arguments on it. Appellant

had a full and fair opportunity to

respond, but did not do so. The only

sense in which the fraud question was

not "litigated" in the tax court is in

the sense that Appellant failed to

present his position on the summary

judgment issue to the tax court. Were

the Court to permit Appellant to attack

the question of fraud in the bankruptcy

court, the Court would be allowing a

party who has failed to respond as

required by the Tax Court rules to

ignore the judgment entered against

him. This Court does not believe that

such was the intent of the courts in

Brown or Goodman.

Appellant's main problem seems to be

his focus upon the question of

dischargeability, rather than the

question of fraud. There is no

question that the tax court determined

that Appellant was guilty of fraud, and

found that his tax liability and

penaltics were in the amounts

specified. Given that determination,

non-dischargeability automatically

follows pursuant to Section

523(a)(2)(A) of the Bankruptcy Code.

Here, the real issue sought to be

precluded is the question of whether or

not Appellant's tax return was

fraudulent, and not whether or not his

tax debt is dischargeable. Using that

focus, it is clear that the question of

fraud was the same as that involved in

the tax court proceeding, there was a

final judgment on the merits, Appellant

is the same party as was involved in

the tax court suit, Appellant had a

full and fair opportunity to litigate

the fraud issue (although he did not

take advantage of that opportunity),

and the determination of fraud was

essential to that judgment.

Consequently, all of the elements of

collateral estoppel are satisfied.

Because Appellant is collaterally

estopped from relitigating the fraud

issue, Section 523(a)(2)(A) of the

Bankruptcy Code precludes a

redetermination by the bankruptcy court

as to whether or not Appellant's return

was fraudulent. It follows, then, that

because the bankruptcy court is bound

by the determination of fraud, the

bankruptcy court must, pursuant to

Section 523(a)(2)(A), find that those

debts are non-dischargeable. For this

reason, although this Court believes

that the bankruptcy court applied the

wrong title to the preclusion doctrine

that it was applying, the result

reached by the bankruptcy court is

AFFIRMED.

It is so ordered this 20th day of

December, 1988.

Michael M. Mihm

United States District

Judge

UNITED STATES TAX COURT

WASHINGTON, D.C. 2021

THOMAS V. CASSIDY)

Petitioner, )

Vv. ) Docket No. 18125-80

COMMISSIONER OF )

INTERNAL REVENUE, )

Respondent. )

ORDER AND DECISION

On August 22, 1984, respondent filed

a motion for summary judgment. On

November 13, 1984, petitioner filed a

motion to enlarge time for response to

request for admissions and reply to

interrogatories and alternative motion

to withdraw or modify deemed

admissions. Pursuant to the

determination of this Court, as set

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forth in its Opinion filed and served

April 3, 1986, it is

ORDERED that respondent's motion for

Summary judgment is granted. It is

further

ORDERED that petitioner's above-

referenced motion to enlarge time for

response to request for admissions and

reply to interrogatories and

alternative motion to withdraw or

modify deemed admissions is denied. It

is further

ORDERED and DECIDED that there are

deficiencies in income taxes due from

petitioner for the taxable years ended

August 31, 1974, and August 31, 1975,

in the amounts of $12,865 and $22,028

respectively; and

That there are additions to tax due

from petitioner for the taxable years

ended August 31, 1974, and August 31,

1975, under the provisions of I.R.C.

Sec. 6653(b) in the amounts of $11,774

and $11,014, respectively.

Arthur L. Nims, III

Judge

Entered: Apr 4, 1986

In the

United States Court of Appeals

For the Seventh Court

No. 86-2302

THOMAS V. CASSIDY,

Petitioner-Appellant,

Vv.

COMMISSIONER OF INTERNAL REVENUE,

Respondent—Appellee.

Appeal from the United States Tax

Court.

No. 18125-80-Arthur L. Nims, III,

Judge.

Before Cudahy, and Ripple, Circuit

Judges, and Will, Senior District

Judge.

Ripple, Circuit Judge. In this case,

appellant-taxpayer Thomas V. Cassidy

appeals from the order and decision of

the United States Tax Court granting

summary judgment for the Commissioner

with respect to income tax deficiencies

and fraud penalties. For the reasons

set forth in this opinion, we affirn

the judgment of the tax court.

Facts

On June 24, 1980, the Commissioner of

Internal Revenue sent the appellant a

notice of deficiency in federal income

taxes for the fiscal years ending

August 31, 1974 and August 31, 1975.

These deficiencies were in the amounts

of $12,865 and $22,028 respectively.

They resulted from an adjustment by the

Commissioner of the taxpayer's income

tax returns by including within his

taxable income previously unreported

legal fees and by disallowing various

deductions. The Commissioner also

{

found that all or part of the

underpayment of tax was due to fraud.

Therefore, pursuant to section 6653(b)

of the Internal Revenue Code, the

Commissioner assessed against the

taxpayer civil fraud penalties of

$11,774 for 1974 and $11,014 for 1975.

R.2 at 5-6.

On September 25, 1980, the taxpayer

filed a petition with the United States

Tax Court for redetermination of his

income tax liability. A trial date was

set for March 22, 1982. Upon call of

the case for trial, his counsel moved

for permission to withdraw and for a

continuance. While granting these

motions, the court admonished that

there would be no additional

continuances. In preparation for

trial, the Commissioner, on April 27,

a a

1982, sent the taxpayer an informal

discovery request asking that he

stipulate to all undisputed material

facts in accordance with Tax Court Rule

of Practice and Procedure 91(a) and

submit documents in support of his

position. The taxpayer failed to

provide any of the requested

information. Consequently, the

Commissioner initiated formal discovery

proceedings against the taxpayer and,

on December 7, 1982, served the

taxpayer with a request for the

production of documents together with

interrogatories. The Commissioner's

subpoena duces tecum was similarly

ignored.

On November 14, 1983, the court

issued a notice setting the case for

trial on January 30, 1984. On January

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3, 1984, the taxpayer notified the tax

court that he was the subject of an

involuntary petition for bankruptcy

under chapter 7. 11 U.S.C. Sections 71

et seq. This involuntary petition had

been filed on February 14, 1983--

almost, a year before the taxpayer

notified the tax court of its pendency.

Because of the pendency of the

bankruptcy action, the tax court

automatically stayed its proceedings.

On March 13, 1984, the taxpayer

received a discharge from the

bankruptcy court releasing him from all

dischargeable debts. One month later,

on the petition of the government, the

bankruptcy court lifted its automatic

stay "in order to permit the Tax Court

proceeding between the parties now

pending to proceed forward." R.17, Ex.

A. The tax court then set the case for

trial at the first regularly scheduled

Chicago, Illinois trail session during

the 1984 fall term. In preparation for

that litigation, the Commissioner, on

June 12, 1984, mailed to the taxpayer a

request for admissions together with