U.S.A., Internal Revenue Service v. Teal (In Re Teal)

16 F.3d 619, 30 Collier Bankr. Cas. 2d 996, 73 A.F.T.R.2d (RIA) 1252, 1994 U.S. App. LEXIS 3970, 25 Bankr. Ct. Dec. (CRR) 463

• Court: Court of Appeals for the Fifth Circuit
• Decided: February 9, 1994
• Docket: 93-8147
• Status: Unpublished

Opinion

PER CURIAM:

The Internal Revenue Service challenges the district court’s holding that James Carroll Teal did not owe penalties or associated interest arising out of his 1979 income tax year (1979). We REVERSE.

I.

In 1983, Teal filed an amended return for 1979, claiming that, because of a tax shelter, he was entitled to a refund of approximately $13,000. The IRS made the refund, but subsequently notified Teal (late 1985) that he was liable for it, as well as for four penalties and interest. Teal contested that decision by filing a petition in Tax Court in early 1986. Teal and the IRS agreed to a settlement, under which Teal would pay the $13,000, only one penalty and part of another, and interest. 1 The Tax Court entered an order and decision reflecting the terms of the agreement.

In 1990, Teal filed a Chapter 7 petition in bankruptcy court. He then filed an adversary complaint against the United States, seeking, among other things, a determination of his liability for penalties and interest for 1979. 2 The bankruptcy court held that it “lack[ed] jurisdiction to determine- [Teal’s] 1979 federal income tax liability, pursuant to 11 U.S.C. § 505(a)(2)(A).” The district court reversed, holding that neither § 505(a)(2)(A) nor claim preclusion prohibited relitigation of the issues. It concluded that Teal “does not owe nor does he have to pay the disputed penalties, and the associated interest thereon, for” 1979.

II.

The IRS asserts that the district court erred in two respects: in holding that § 505(a)(2)(A) did not deprive the bankruptcy court of jurisdiction; and, assuming jurisdiction, in refusing to find that, under principles of claim preclusion, the tax court judgment barred relitigation. 3

A.

Section 505(a)(2)(A) provides that a bankruptcy court may not determine

the amount or legality of a tax, fine, penalty, or addition to tax if such amount or legality was contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction before the commencement of the case under this title....

11 U.S.C. § 505(a)(2)(A) (emphasis added). The district court recognized that the tax court decision addressed the amount owed for 1979, and that it was a court of competent jurisdiction. It found, however, that the tax court’s decision assessing the amount of taxes and penalties owed did not adjudicate the legality of those items; therefore, it held that the bankruptcy court was free to inquire as to their legality.

We disagree. An assessment by the tax court of the amount of penalty or tax owed presupposes the legality of that assessment. Indeed, the district court recognized that “the amount of the penalties was assessed based upon the agreed stipulation that the tax was legal.” It is of no moment that the tax court, in entering the agreed judgment, did not expressly address the legality of what it was adjudicating.

Needless to say, the fact that the tax court’s judgment was reached by agreement does not undercut this conclusion; the taxes were still “contested before and adjudicated by” the tax court. See § 505(a)(2)(A). In bankruptcy court, Teal’s counsel “stipulate[d] that the Tax Court decision was an adjudication”; he cannot contend otherwise here. In any event, “adjudicate” is “[sjynon-ymous with adjudge in its strictest sense”. Black’s Law Dictionary 42 (6th ed. 1990). Thus, a matter has been “adjudicated” when a “[J]udgment of a court of competent jurisdiction” has been decreed. Id. The judgment entered by the tax court, pursuant to the parties’ settlement, satisfies § 505(a)(2)(A). 4

B.

1.

This conclusion is buttressed by reference to traditional principles of res judica-ta; “[sjimply because the Tax Court deei sion[ ] [was] reached by agreement does not mean that [Teal’s] income tax ... [was] not resolved by a final judgment[ ] on the merits for the purposes of res judicata. An agreed judgment is entitled to full res judicata effect.” See United States v. Shanbaum, 10 F.3d 305, 313 (5th Cir.1994) (citing United States v. International Building Co., 345 U.S. 502, 505-06, 73 S.Ct. 807, 808-09, 97 L.Ed. 1182 (1953), Jones v. Texas Tech. Univ., 656 F.2d 1137, 1144 (5th Cir.1981), and Kaspar Wire Works, Inc. v. Leco Engineering & Mach. Inc., 575 F.2d 530, 538-39 (5th Cir.1978)); see also Matter of West Texas Marketing Corp., 12 F.3d 497, 500-01 (5th Cir.1994) (recognizing that a settlement agreement between IRS and taxpayer embodied in a judgment is entitled to full res judicata effect).

2.

It appears that the district court ruled as it did because of its concerns about the equities of ■ the case. 5 A bankruptcy court, however, is barred by § 505(a)(2)(A) from “employ[ing] its equitable powers to look behind the judgment ]” of the tax court. See Matter of Hammers, 988 F.2d 32, 34 (5th Cir.1993). 6 Simply stated, § 505(a)(2)(A), a jurisdictional statute, is mandatory; Congress did not leave bankruptcy courts the discretion to disregard tax court adjudications and concomitantly seize jurisdiction out of equitable concerns. 7

III.

As the district court recognized, “Teal had the full and fair opportunity to contest the assessed penalties in the Tax Court litigation.” Pursuant to § 505(a)(2)(A), the bankruptcy court lacked jurisdiction to entertain claims regarding his 1979 tax year liabilities. Accordingly, the judgment of the district court is

REVERSED.

1 . The settlement agreement involved concessions by both sides. Teal conceded that he owed the tax amount, 100% of the amount of one penalty, and 75% of another. The IRS, in turn, abandoned two "negligence penalties” and 25% of the amount of another penalty.

2 . Subsequent to the entry of the tax court judgment, this court's decision in Heasley v. Commis sioner, 902 F.2d 380 (5th Cir. 1990), invalidated the application of the valuation overstatement penalty, 26 U.S.C. § 6659(a) (repealed 1989), under circumstances similar to those under which the penalty was applied to Teal. On this basis, Teal sought to relitigate his liabilities for 1979.

3 . These issues are closely related, if not identical. As the IRS states, with citation to the Congressional Record: "At bottom, Section 505(a)(2) expresses in jurisdictional terms, traditional principles of res judicata, or claim preclusion.” (Citation omitted.) Teal agrees, stating that “[a]l-though Section 505 is jurisdictional in nature, it appears to encompass the same considerations sought to be protected by the judicially created doctrines of res judicata and collateral estoppel." And, the district court did not distinguish between its discussion of res judicata and § 505.

4 . Although not necessary to our understanding of the plain meaning of § 505(a)(2)(A), the corn-ments of the House and Senate sponsors of § 505, which are identical, reflect Congress’ meaning of the phrase "contested before and adjudicated by”:

[T]he bankruptcy court will not have jurisdiction to rule on the merits of any tax claim which has been previously adjudicated, in a contested proceeding, before a court of competent jurisdiction. For this purpose, a proceeding of the U.S. Tax Court is to be considered "contested” if the debtor filed a petition in the Tax Court by the commencement of the case and the Internal Revenue Service had filed an answer to the petition. Therefore, if a petition and answer were filed in the Tax Court and if the debtor later defaults in the Tax Court, then, under res judicata principles, the bankruptcy court could not then rule on the debtor's or the estate's liability for the same taxes.

124 Cong.Rec. 32250, 32413 (Sept. 28, 1978) (statement of Rep. Edwards); 124 Cong.Rec. 33989, 34013 (Oct. 5, 1978) (statement of Sen. DeConcini). It is not disputed that Teal’s petition in the tax court was contested.

The Supreme Court has recognized:

Because of the absence of a conference and the key roles played by Representative Edwards and his counterpart floor manager Senator DeConcini, we have treated their floor statements on the Bankruptcy Reform Act of 1978 as persuasive evidence of congressional intent.

Begier v. IRS, 496 U.S. 53, 64 n. 5, 110 S.Ct. 2258, 2266 n. 5, 110 L.Ed.2d 46 (1990) (emphasis added; citations omitted).

5 . The district court made a number of statements suggesting that it could not abide by § 505 under the facts of this case, e.g., "the courts must be more protective of the rights and liabilities of individual, unrepresented taxpayers, than of the Internal Revenue Service.”

6 . This conclusion comports with the well-known rule that a federal court may not abrogate principles of res judicata out of equitable concerns. Federated Dept. Stores, Inc. v. Moitie, 452 U.S. 394, 401, 101 S.Ct. 2424, 2429, 69 L.Ed.2d 103 (1981). Indeed, it must give res judicata effect to a prior judgment even if it would be voidable on appeal because of legal error. Id. at 398-99, 101 S.Ct. at 2427-28.

7 . The district court also looked to this court’s decision in Logan Lumber Co. v. Commissioner, 365 F.2d 846 (5th Cir.1966), which allowed a stipulated tax court judgment to be set aside because of a subsequent change in the law; however, the change occurred while the case was on direct review. Id. at 847, 854-55. Unlike the instant case, Logan did not involve a collateral attack on a judgment, and neither res judicata nor § 505(a)(2)(A) was at issue.

The district court also relied on Brast v. Winding Gulf Colliery Co., 94 F.2d 179 (4th Cir.1938), where the Fourth Circuit allowed a taxpayer to undo a prior stipulated judgment of the Board of Tax Appeals because of a subsequent change in the law. Id. at 180. Of course, this case preceded enactment of § 505. And, we agree with the government that Brast is distinguishable because it was not clear, at the time Brast was decided, whether a decision of the Board of Tax Appeals was res judicata as to a refund action. See George S. Colton Elastic Web Co. v. White, 16 F.Supp. 726, 727-28 (D.Mass.1936). In contrast, § 505(a)(2)(A) makes clear that a tax court adjudication precludes a bankruptcy court from having jurisdiction over the same issues. Finally, if Brast is read as implying that stipulated judgments entered by the current tax court may be vitiated by subsequent collateral attack, it has been effectively overruled. See International Building Co., 345 U.S. at 506, 73 S.Ct. at 809 (agreed tax court judgments entitled to res judi-cata effect); Federated Dept. Stores, 452 U.S. at 398, 101 S.Ct. at 2427 (erroneous legal conclusions do not alter the res judicata effect of a final judgment).