Lesson From The Tax Court: Failure To Understand Issue Preclusion May Trigger Sanctions

Some people just cannot take no for an answer.  That is one of the reasons §6673 permits the Tax Court to impose a penalty of up to $25,000 on taxpayers who stubbornly present either frivolous or groundless arguments.

It is sometimes difficult, however, to distinguish a “no” from a “not now.”  Karson C. Kaebel v. Commissioner, T.C. Memo. 2021-109 (Sept. 9, 2021) (Judge Halpern), teaches a good lesson about issue preclusion, which is the important legal doctrine that tells us when “no” means “no.”  The taxpayer there asked the Tax Court to make the IRS take back a certification it had sent to the State Department.  But the reasons the taxpayer offered had already been rejected by both the Tax Court and the Court of Appeals in prior cases brought by the taxpayer about different subjects.  Judge Halpern explains why those no’s were really and truly no’s.  He also considers imposing §6673 penalties for the taxpayer’s intransigence.  So this will be a good lesson to learn, if for no other reason than to avoid penalties!   Details below the fold.

To understand issue preclusion, one must distinguish it from claim preclusion.

Law: Claim Preclusion
This doctrine—sometimes imprecisely called res judicata—prevents someone who has sued and lost from suing again on the same claim.  In the formal words of the Restatement (Second) of Judgments: “the claim is extinguished and the judgment bars a subsequent action of that claim.” §17(1).  Sadly, I could not find a free link for you to the Restatement.  It appears that the publisher of the Restatement—the mysterious and mighty American Law Institute—seems not to believe in making its work available gratis.  I would love to be wrong—so if you have a free link, please put it in the comments—but I think the ALI's work is all behind various paywalls.  That strikes me as strange position for a non-profit to take.  Just sayin’....

You can think of claim preclusion as a one-bite-at-the-apple rule.  What is gnarly about the doctrine is that no one really knows what the apple looks like.  The concept of “claim” is amorphous.  The Restatement makes a brave try: “the claim extinguished includes all rights of the plaintiff to remedies against the defendant with respect to all or any part of the transaction, or series of connected transactions, out of which the action arose.”  Id. §24.

Examples in Tax Law.  A claim for refund gives us a simple example for how claim preclusion works in tax law.  Remember that each tax year stands alone.  §441(a); United States v. Lewis, 340 U.S. 590 (1951).  So let’s say that a taxpayer believes they overpaid their income taxes for 2020 and (after filing the necessary administrative claim) they file a suit for refund.  The taxpayer loses. That loss now precludes the taxpayer from bringing a second lawsuit seeking a refund of income taxes for the same year, even if the taxpayer later realized they had omitted a really good argument for why they had in fact overpaid their taxes for that year!  That’s claim preclusion.  One bite at the apple.

Claim preclusion, however, requires a prior decision on the merits.  Thus, when the Tax Court dismisses a case for want of jurisdiction—say because the taxpayer files their petition too late—the dismissal does not preclude the taxpayer from paying the tax, then filing a claim (and later suit) for refund.  That decision to dismiss for want of jurisdiction is not a decision on the merits.

This happens all the time.  See e.g. Fares v. Commissioner, T.C. Docket 8685-20 (Order Issued Sept. 10, 2021) (Judge Foley), blogged over at Taishoff Law.  There, after dismissing the petition as untimely, Judge Foley notes “although petitioners may not prosecute this case in the Tax Court...[a]nother remedy available to petitioners, if feasible, is to pay the determined amounts, then file a claim for refund with the IRS. If the claim is denied or not acted on for six months, petitioners may file a suit for refund in the appropriate Federal district court or the U.S. Court of Federal Claims.” 

The dismissal for lack of jurisdiction was not a “no.”  It was just a “not now.”  No claim preclusion will apply.

Law: Issue Preclusion
This legal doctrine—sometimes imprecisely called collateral estoppel—prevents someone from re-litigating a specific issue that they previously lost in a prior case, regardless of whether that prior suit involved the same or a different claim.  Here again is how the Restatement (Second) of Judgments explains the rule: “When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” §27

The leading case on issue preclusion in tax law is still Commissioner v. Sunnen, 333 U.S. 591 (1948).  There the Supreme Court urged caution in applying issue preclusion in tax cases.  That is because tax law changes so that what might not be allowable in one year might later become allowable, either through changes in the law by either Congress or the Courts.  Wrote the Court:

“[Issue preclusion] is designed to prevent repetitious lawsuits over matters which have once been decided and which have remained substantially static, factually and legally. It is not meant to create vested rights in decisions that have become obsolete or erroneous with time, thereby causing inequities among taxpayers. And so, where two cases involve income taxes in different taxable years, [issue preclusion] must be used with its limitations carefully in mind so as to avoid injustice. It must be confined to situations where the matter raised in the second suit is identical in all respects with that decided in the first proceeding, and where the controlling facts and applicable legal rules remain unchanged.” Id. at 599-600.

The Supreme Court later loosened one aspect of issue preclusion not relevant here in Montana v. United States, 440 U.S. 147 (1979).  Typically, issue preclusion had been confined to later litigation between identical parties.  The Montana Court expanded the reach of issue preclusion to parties who had not been, formally, parties to the prior litigation where the issue had been litigated and decided.  But Montana did not alter the cautions given in Sunnen, and the Tax Court’s approach is still highly cautious, given the slippery and shifting nature of tax law, even though the Tax Court now tends to cite to Montana and not Sunnen.  See, e.g. Peck v. Commissioner, 90 T.C. 162 (1988) (post-Montana).

Remember, issue preclusion is a doctrine that applies in a second suit.  You always need to find a first suit before you can apply issue preclusion.  You are looking at the relationship between what happened in the first suit and what is going on in the second suit.  Currently, the Tax Court evaluates that relationship using the following six tests:  (1) there must be a valid final judgment in the first suit: (2) the issue in the second suit must be identical with the one decided in the first suit; (3) the party to be precluded in the second suit must have been a party in the first suit (or be closely enough connected to a party); (4) the issue must have been actually litigated in the first suit and essential to the judgment; (5) the relevant facts and law must remain unchanged between the first and second suits; and (6) even so, special circumstances might warrant non-application of the doctrine.  See Peck, supra, and Atkinson v. Commissioner, T.C. Memo. 2012-226.

Examples in Tax Law:  One example is when a recurring issue affects multiple tax years.  Take a look at last week’s Lesson From The Tax Court: Retirement Plan Drafting Error Loses Taxpayer $51k Deduction, TaxProf Blog (Sept. 13, 2021).  There a taxpayer was not allowed a §404(a) deduction for contributions to a retirement plan because the retirement plan did not conform to §404(a)(8)(C)’s requirement to specify the trade or business it was associated with.  Although only two tax years were before the Court, it’s holding on that particular issue would preclude the taxpayer from re-litigating the appropriateness of that deduction in any other tax year, so long as both the plan language and the applicable statute remained unchanged.  No meant no.

Another example comes in today’s case, where the first case resulted in a dismissal of the taxpayer’s petition for lack of jurisdiction.  Remember, this is exactly the kind of dismissal that does not trigger claim preclusion.  But today we will see how it can trigger issue preclusion.  Let’s take a look at the facts.

Facts
Mr. Kaebel did not file tax returns from 2005 through 2010.  Between December 2010 and June 2013 the IRS prepared multiple SFRs and sent Mr. Kaebel the associated statutory NODs for those years.  He made no response.  The resulting assessments totaled over $210,000.

The IRS then started collection for the 2005-2009 liabilities, sending Mr. Kaebel CDP notices in 2012 and 2013 for those years.  Again, he made no response.

In February 2014 the IRS sent Mr. Kaebel yet another CDP notice, this one regarding only the collection of his 2010 liabilities.  This time he did request a CDP hearing.  It went nowhere.  He did not even get much delay value out of it because the IRS Office of Appeals quickly issued a Notice of Determination to proceed with collection in July 2014.  Mr. Kaebel timely petitioned Tax Court for review.

Mr. Kaebel argued that the assessments were invalid because the IRS had not properly mailed the 2010 NOD to his last known address.  He seems to have labored under the common misconception that NODs must be actually received to be valid.  The case went to trial and om February 2017 the Tax Court found the 2010 NOD had been properly mailed to Mr. Kaebel’s last known address in Lewisville, Texas.  See Kaebel v. Commissioner, T.C. Memo 2017-37 (Kaebel I).

Mr. Kaebel would not take no for an answer.  In January 2018 he randomly filed a new petition in Tax Court, now claiming that none of the other NODs for tax years 2005 through 2009 had been properly mailed to his last known address.  Kaebel v. Commissioner, T.C. Dkt 916-18 (Kaebel II).  In response, the IRS moved to dismiss the petition as untimely.  In support of its motion, the IRS provided evidence that all of the NODs had been properly mailed and those tickets to the Tax Court had long since expired.  Mr. Kaebel objected to the evidence and asked the Court to disregard it.  But Tax Court accepted the IRS’s evidence and on July 16, 2018, the Tax Court issued its opinion finding that all the NOD had been properly mailed and so dismissed his petition as untimely.

Mr. Kaebel appealed Kaebel II.  In 2019 the Court of Appeals affirmed, finding “no clear error in the Tax Court’s determination that the notices of deficiency were properly mailed and that Kaebel’s petition was filed long after the deadline expired.”  770 Fed. App’x 726, 727 (5th Cir. 2019).

In 2018, while Mr. Kaebel’s appeal was pending the IRS sent the Department of State a certification per §7345 that Mr. Kaebel had a seriously delinquent tax debt.  When the IRS does this it also sends the taxpayer a Notice CP508C.  That is another ticket to the Tax Court, as I described in Lesson From The Tax Court: Cheshire Cat Jurisdiction Over Passport Revocation Petitions, TaxProf Blog (June 29, 2020).

In 2018, Mr. Kaebel seized this ticket and filed yet another Tax Court petition, arguing yet again that the IRS did not properly send the NODs for 2005-2009.  Therefore, he could not owe taxes for those year and, therefore, did not have seriously delinquent tax debt.

Let’s call this one Kaebel III.  This third try was not a charm.

Lesson: Kaebel II Was Issue-Preclusive Even If Not Claim-Preclusive.
Here’s a taxpayer who just cannot take no for answer!  But issue preclusion forces him to.

Judge Halpern explains that Tax Court decisions finding no jurisdiction over a late-filed petition are not decisions on the merits and, hence, are not claim-preclusive.  But if they might be issue-preclusive, depending on the relationship between the issue that triggered the dismissal in the first suit and the issue in the second suit.

Judge Halpern uses the Tax Court’s standard six-test formulation, finding only one of the six tests even possibly questionable, the fourth one: whether the issue before the court in Kaebel III (whether the IRS properly sent the 2005-2009 NODs to Mr. Kaebel) had been actually litigated in Kaebel II and was essential to that dismissal.

As to being actually litigated, Judge Halpern finds that in Kaebel II Mr. Kaebel had filed an objection to the IRS’s use of Post Office Forms 3877 to prove proper mailing.   Further, he had appealed the decision, challenging the finding.  That meant he had actually litigated the NOD issue.

The NOD issue was also essential to the dismissal.  Although not explicitly explained by Judge Halpern, here’s why.  When a taxpayer believes that an NOD was not properly mailed to the taxpayer’s last known address, the proper procedure is to file a petition in Tax Court to “redetermine” the deficiency.  The taxpayer then moves to dismiss their own petition for lack of jurisdiction!  And, typically, the IRS will also move to dismiss the case.  Both parties are claiming the Tax Court has no jurisdiction but the taxpayer says there is simply no deficiency to redetermine and the IRS says the taxpayer is too late.

Thus, the reason for dismissal is crucial.  If the Tax Court finds that the NODs were invalid or improperly mailed, then the dismissal operates to bar any assessment or render any assessment made invalid.  That is what Mr. Kaebel was attempting to do in Kaebel II.  But he lost and the case was dismissed because his petition was untimely.  The issue of whether the NODs were validly mailed, therefore, was essential to that dismissal.

In this case, Mr. Kaebel thought the State Department certification gave him another chance to argue that the NODs had been improperly mailed despite having been told “no, they were properly mailed.”  He was wrong.

Coda 1: Penalties under §6673?  Mr. Kaebel is a reliably litigious taxpayer who in all three of these cases (Kaebel I, II, and III) offers highly dubious arguments that border on frivolous.  And it’s not just the NOD issue where he took positions against all evidence and common sense.  He has been battling IRS collection efforts in federal district court with equal futility and in reliance on groundless arguments.  See e.g. Kaebel v. United States, Civil Action No. 3:15-MC-0064-D-BK (N.D. Tex. Oct. 21, 2015) (vainly attempting to avoid plain language of 7609 to quash a collection summons issued to one of his banks).   I do note, however, that it does look like he has successfully avoided collection if his tax liabilities still qualify him for State Department certification!  So he has not yet been thrown from his hobby horse.

That said, I do not think Mr. Kaebel’s actions in Kaebel III warrant sanctions, at least solely on the basis of persisting with his NOD argument.  First, it’s easy to confuse claim preclusion and issue preclusion, especially for a lay person. And there is no indication that Mr. Kaebel is a lawyer.  I can understand why a non-attorney taxpayer might well believe that the Kaebel II dismissal for lack of jurisdiction was not preclusive.  They were just googling the wrong legal doctrine!  Second, and perhaps a little more importantly, alert readers will note that Mr. Kaebel filed Kaebel III before the Court of Appeals had affirmed Kaebel II.  So while it is true that a better behaved taxpayer would have conceded that particular issue (no means no) promptly after the 5th Cir. issued its opinion in May 2019, I don't think failure to do that warrants 6673 sanctions for having filed the petition previously.  The petition in Kaebel III was not so much groundless at the time it was filed as it was just optimistic.  And while the concern of wasting both IRS Chief Counsel’s time and the Court’s time is totally legit, you have to ask how much time did it take, really, to apply issue preclusion here after the Circuit Court affirmed Kaebel II?

Besides, Mr. Kaebel's mindless head-banging has now given all the rest of us another useful Lesson From The Tax Court!  So....thanks Mr. Kaebel....?

Bryan Camp is the ever-questioning George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites curious readers to return each week to TaxProf Blog for another Lesson From The Tax Court.