Filed: Jun. 05, 2015
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Summary: Case: 14-10742 Date Filed: 06/05/2015 Page: 1 of 38 [PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT _ No. 14-10742 _ D.C. Docket No. 1:12-cv-20038-FAM ANNE (SANDY) BATCHELOR-ROBJOHNS, et al. Plaintiffs-Appellees Cross-Appellants, versus UNITED STATES OF AMERICA, Defendant-Appellant Cross-Appellee. _ Appeals from the United States District Court for the Southern District of Florida _ (June 5, 2015) Before MARTIN and DUBINA, Circuit Judges, and RODGERS, * District Judge. R
Summary: Case: 14-10742 Date Filed: 06/05/2015 Page: 1 of 38 [PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT _ No. 14-10742 _ D.C. Docket No. 1:12-cv-20038-FAM ANNE (SANDY) BATCHELOR-ROBJOHNS, et al. Plaintiffs-Appellees Cross-Appellants, versus UNITED STATES OF AMERICA, Defendant-Appellant Cross-Appellee. _ Appeals from the United States District Court for the Southern District of Florida _ (June 5, 2015) Before MARTIN and DUBINA, Circuit Judges, and RODGERS, * District Judge. RO..
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Case: 14-10742 Date Filed: 06/05/2015 Page: 1 of 38
[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 14-10742
________________________
D.C. Docket No. 1:12-cv-20038-FAM
ANNE (SANDY) BATCHELOR-ROBJOHNS,
et al.
Plaintiffs-Appellees
Cross-Appellants,
versus
UNITED STATES OF AMERICA,
Defendant-Appellant
Cross-Appellee.
________________________
Appeals from the United States District Court
for the Southern District of Florida
________________________
(June 5, 2015)
Before MARTIN and DUBINA, Circuit Judges, and RODGERS, * District Judge.
RODGERS, District Judge:
*
Honorable Margaret C. Rodgers, Chief United States District Judge for the Northern District of
Florida, sitting by designation.
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This is an appeal of a federal income tax refund suit filed by the Estate of
George Batchelor (“Estate”).1 Counts I and II of the Estate’s three-count
Complaint involve Batchelor’s personal income taxes for 1999 and 2000. Count
III concerns the Estate’s attempt to claim a credit for its 2005 income taxes for
payments it made in settlement of various lawsuits against Batchelor. The district
court entered judgment in favor of the Estate on Counts I and II and in the
government’s favor on Count III. The Estate appeals the district court’s judgment
as to Count III, which we affirm, and the government appeals as to Counts I and II,
which we reverse.
I. Background
George Batchelor passed away in July 2002. Prior to his death, he owned all
of the stock in International Air Leases, Inc. (“IAL”), an aviation business which
bought, sold, repaired, serviced, and leased aircraft and aircraft parts. On February
10, 1999, Batchelor sold his IAL stock to International Air Leases of Puerto Rico,
Inc. (“IALPR”), for approximately $502 million. 2 As part of the transaction,
IALPR gave Batchelor a promissory note for $150 million (“Note”), which was
secured by IAL assets that had been transferred in the sale, such as aircraft planes
1
The Complaint was filed by Plaintiffs Anne-Batchelor-Robjohns, Daniel J. Perraresi, and
Father Patrick O’Neill, as co-personal representatives of the Estate of George E. Batchelor. The
Court refers to Plaintiffs collectively as “the Estate.”
2
Batchelor’s cost basis in his stock was $35,000. Thus, nearly the entire sales price represented
long-term capital gain.
2
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and engines (“Option Assets”). Batchelor retained an option to buy back the
Option Assets, and the parties agreed that if Batchelor exercised the option, they
would reduce the balance of the $150 million Note by a certain negotiated price for
each asset. On April 1, 1999, Batchelor exercised his option and purchased the
Option Assets for approximately $92.5 million, which reduced the balance on the
Note by that amount. IALPR paid off the Note in August 2000. 3 As a result of the
transaction, Batchelor received capital gains and interest income, and IAL realized
a capital gain through its sale of the Option Assets. On his 1999 personal income
tax return, Batchelor declared the income he received from the sale in 1999,
approximately $483 million, as capital gain, and paid capital gains tax on the
proceeds.4 On his 2000 personal income tax return, Batchelor declared $18.8
million of the sale proceeds as capital gain, and an additional $5.8 million as
interest income on the Note.
In February 2002, IAL was placed into involuntary bankruptcy. The IRS
determined that IAL was liable for approximately $100 million in unpaid taxes,
largely as a result of its attempt to use a tax shelter scheme after the stock sale, and
3
The government claims, and the district court found, that Batchelor received $131.2 million of
the $150 million Note in 1999 and $24.7 million in 2000. Although the total amount Batchelor
received exceeds the $150 million face value of the Note, $5.8 million of the amount received in
2000 represented interest on the Note, which Batchelor reported as ordinary income.
4
It was later stipulated that Batchelor should have reported part of the 1999 income (about $6.5
million) from payments on the Note as interest income.
3
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issued a notice of deficiency for that amount. Although there was never any
suggestion that Batchelor was involved in the scheme, the government nevertheless
sought to collect IAL’s corporate income tax obligation directly from Batchelor
under a transferee liability theory. 5 This suit is referred to as “Batchelor I.”
In Batchelor I, the government attempted to prove that the sale of the IAL
stock rendered IAL insolvent because the transferring parties undervalued the
Option Assets by approximately $23.5 million, such that Batchelor received excess
consideration relative to the actual fair market value of the IAL stock. The
government sought to establish the relative values of the IAL stock and Option
Assets through expert testimony. The district court, however, struck the experts
based on the government’s failure to comply with the expert disclosure
requirements under the civil rules of procedure, and granted summary judgment in
the Estate’s favor. Consequently, the value of the Option Assets was not decided
in Batchelor I.
In December 2004, the government sued the Estate based on its
determination that Batchelor had underreported his capital gains in conjunction
with the IAL sale on his 1999 and 2000 personal income tax returns. This suit is
5
Under 26 U.S.C. § 6901, the government may collect a tax liability that a taxpayer cannot pay
from a transferee who has received assets from the taxpayer. Here, the government sought to
collect IAL’s unpaid corporate income tax from Batchelor, and subsequently from his Estate,
pursuant to 28 U.S.C. § 3304(b)(1)(B), which provides that certain transfers for less than fair
market value will be considered fraudulent as to a debt to the United States.
4
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referred to as “Batchelor III.” In that suit, the government argued, as it did in
Batchelor I, that Batchelor had undervalued the Option Assets by $23.5 million,
resulting in a tax deficiency of approximately $6.7 million. The Estate
subsequently paid the tax, and the government then dismissed the case without
prejudice while acknowledging the Estate’s right to sue for a refund.6 Thereafter,
the IRS denied the Estate’s refund claim, and the Estate filed the instant suit
seeking a refund of these tax payments in Counts I and II.
Count III of the Estate’s Complaint concerns settlement payments the Estate
made in connection with four civil lawsuits. In 2002, both IAL and IALPR sued
the Estate, seeking to set aside the sale of Batchelor’s stock as a fraudulent
transfer. In addition, the Estate inherited two suits commenced prior to that sale,
each stemming from Batchelor’s involvement with Rich International Airways
(“Rich”). The Estate eventually settled all four lawsuits, and made settlement
payments totaling $41 million in July 2004.7 The Estate subsequently filed its
Federal Estate Tax Return and deducted the settlement payments from Batchelor’s
gross estate as claims against the Estate pursuant to 26 U.S.C. § 2053(a)(3). The
6
To protect its interest in the probate estate, the government filed suit in Batchelor III before the
IRS had issued a Notice of Deficiency to Batchelor or his Estate for Batchelor’s 1999 and 2000
income tax returns. After the IRS issued a Notice of Deficiency on April 29, 2005, the Estate
chose to pay the tax and sue for a refund.
7
In 2002, the Estate settled with the Rich plaintiffs for $2 million and $25 million. The Estate
settled with IALPR for $12 million in 2003, and with IAL for $1 million in 2004.
5
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Estate later sought a refund of $8.3 million on its 2005 income tax return for those
payments pursuant to 26 U.S.C. § 1341, which the IRS denied and the Estate now
seeks to recover in Count III.
During the district court proceedings, the Estate filed a motion for summary
judgment with respect to Count I on the basis of res judicata, arguing that both
Batchelor I and its refund claim in Count I of this case involve the same cause of
action. The government filed a cross-motion for summary judgment on Count III,
arguing that the Estate should be precluded from taking both an income tax
deduction and an estate tax deduction for the settlement payments. The district
court granted both motions. With respect to the Estate’s motion on Count I, the
court found that res judicata barred the government’s claim because the instant
case and Batchelor I “arise out of the very same transaction” and because in both
cases the government sought to establish that the value of the Option Assets
transferred to Batchelor in 1999 had a higher value than Batchelor had reported.
Regarding the government’s motion on Count III, the court determined that
because the Estate deducted the settlement payments from Batchelor’s gross estate
to reduce its estate tax obligations, the Estate could not also use those payments to
reduce Batchelor’s personal income tax liability. The case then proceeded to trial
on Count II, which, like Count I, concerned the effect of the IAL stock sale on
Batchelor’s personal income taxes. As with Count I, the district court determined
6
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that Count II arose from the sale of the Option Assets at issue in Batchelor I, and
that res judicata precluded the government from contesting the Estate’s refund
claim. 8 These cross-appeals followed.
II. Standards of Review
The district court’s application of res judicata presents a question of law
which we review de novo. In re Piper Aircraft Corp., 244 F.3d 1289, 1295 (11th
Cir. 2001). Likewise, the district court’s interpretation of a statute – here, various
provisions of the Tax Code – is also a question of law we review de novo. Comm’r
v. Neal,
557 F.3d 1262, 1269 (11th Cir. 2009).
III. Analysis
First, we address the district court’s application of res judicata to Counts I
and II. Second, we address the Estate’s attempt to claim an income tax deduction
for the settlement payments at issue in Count III.
8
Count I of the Estate’s Complaint concerns Batchelor’s 1999 income tax return. Count II
focuses on Batchelor’s 2000 income taxes, and involves a proposed increase in Batchelor’s
capital gains by approximately $5.8 million. On July 21, 2005, the Estate paid the additional tax
allegedly owed on the proposed increase ($584,637), along with interest, and subsequently
initiated the instant refund suit. The government later conceded that Batchelor had in fact
reported the $5.8 million at issue and that no additional tax was owed for 2000, but claimed the
Estate was not entitled to a refund because the government should be permitted to offset
Batchelor’s 1999 tax deficiency by the excess amounts paid for 2000. In its Order dated
November 13, 2013, the district court found that the IRS had erroneously determined that
Batchelor failed to report the $5.8 million at issue, and that the challenges the government made
to this refund claim, including its attempt to offset its proposed recalculation of Batchelor’s 1999
taxes, were barred by res judicata. Our opinion addresses only the district court’s application of
res judicata.
7
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A. Res Judicata
The district court determined that the government was precluded from
defending against the Estate’s claim that it had accurately reported the value of the
Option Assets when calculating Batchelor’s 1999 and 2000 income tax obligations.
According to the district court, res judicata applies because both this suit and
Batchelor I “arise out of the very same transaction” and “the government here is
attempting to establish the exact same thing it sought to prove in Batchelor I: that
the value of the option assets transferred to Batchelor in 1999 had a higher value
than Batchelor and IALPR agreed upon.” The district court also found that
Batchelor’s 1999 and 2000 income tax obligations could have been raised and
decided in Batchelor I, such that those claims may not be raised here.
The government makes two primary arguments on appeal. First, it argues
that res judicata does not apply because the personal income tax claims against
Batchelor in this case and the transferee liability claim against IAL in Batchelor I
are not the same cause of action. Second, the government argues that, even if the
claims are part of the same cause of action, it could not have asserted the instant
claims in Batchelor I given that the IRS had not yet issued a Notice of Deficiency
with respect to the income tax claims against Batchelor at the time the complaint in
Batchelor I was filed or when the time to amend the pleadings expired. 9 See Piper
9
On April 29, 2005, the IRS issued a Notice of Deficiency to the Estate for Batchelor’s 1999 and
2000 income taxes, which was within the extended statute of limitations on assessment
8
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Aircraft Corp., 244 F.3d at 1296 (explaining that res judicata does not bar a claim
that could not have been raised in the prior action). In response, the Estate argues
that both Batchelor I and the Estate’s refund claims in Counts I and II arise out of
the same transaction, i.e., the sale of Batchelor’s stock and subsequent transfer of
the Option Assets, and that the value of the Option Assets is the critical factual
issue in both cases. The Estate also argues that the deficiency in Batchelor’s 1999
and 2000 income taxes existed when Batchelor filed each return in 2000 and 2001,
such that the government could have pursued a deficiency suit against him in
Batchelor I, thereby satisfying this particular res judicata requirement. Finally, the
Estate argues that although the value of the Option Assets was not actually
resolved in Batchelor I, the government should not be given a second bite at the
apple with respect to that determination, particularly since it sought to employ the
same expert witnesses and valuation reports across the two cases. Because we find
that Batchelor I and the instant suit are not the same cause of action, and therefore
the instant suit is not barred, we need not address whether the government could
have pursued its claims in Batchelor I, under a res judicata analysis, even though
the IRS did not issue a Notice of Deficiency with respect to Batchelor’s 1999 and
2000 tax returns until the period to amend the pleadings in Batchelor I had expired.
applicable in this case. This is significant because the Tax Code’s provisions relating to the
assessment of deficiencies do not permit the government to bring suit to collect a tax deficiency
until a Notice of Deficiency has been issued and the requisite 90-day period during which the
taxpayer may file a petition in Tax Court has passed. See 26 U.S.C. § 6213(a).
9
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The primary dispute on appeal is whether the Estate’s refund claims in
Counts I and II are part of the same cause of action as the transferee liability claim
in Batchelor I. The party asserting res judicata bears the burden of showing that
the later-filed suit is barred. In re Piper Aircraft, 244 F.3d at 1296. For a prior
judgment to bar a subsequent action under the doctrine of res judicata, the
following requirements must be met: (1) the prior judgment must have been a final
judgment on the merits; (2) the prior judgment must have been rendered by a court
of competent jurisdiction; (3) the parties, or those in privity with them, must be
identical in both suits; and (4) the same cause of action must be involved in both
cases. Ray v. Tenn. Valley Auth.,
677 F.2d 818, 821 (11th Cir. 1982); Ragsdale v.
Rubbermaid, Inc.,
193 F.3d 1235, 1238 (11th Cir. 1999). We address only the last
of these requirements.
When determining whether the causes of action are the same for purposes of
res judicata, we consider “whether the primary right and duty are the same in each
case.” Ragsdale, 193 F.3d at 1239. Although we have described the “rights and
duties” test as the “principal” res judicata test,
id., we have stressed that courts
must also consider the factual context of each case along with the “rights and
duties” at issue. See Manning v. City of Auburn,
953 F.2d 1355, 1359 (11th Cir.
1992) (explaining that it is an “oversimplification” to focus on rights and duties
alone and that we must also compare the factual issues in each case). In general,
10
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even if the rights and duties at issue are distinct, where a case “arises out of the
same nucleus of operative fact, or is based upon the same factual predicate,” as a
former action, the two cases constitute the same “claim” or “cause of action” for
purposes of res judicata. Ragsdale, 193 F.3d at 1239. When applying the “same
nucleus of operative fact” test, we “look to the factual issues to be resolved [in the
second lawsuit between the parties] and compare them with the issues explored in
[the first lawsuit].”
Id. We apply a pragmatic approach to this analysis by
comparing the substance of the actions, not their form. See
id. at 1239 & 1239 n.8.
Applying these principles, we conclude that res judicata does not preclude
the government from contesting the Estate’s refund claims. First, the instant case
and Batchelor I do not share the same nucleus of operative fact. The Estate’s
refund claims in Counts I and II pertain to Batchelor’s personal income tax
liabilities for 1999 and 2000. Relevant to that determination are all facts that might
impact Batchelor’s income tax liability for those particular years, including
whether he should have treated a portion of the income he received from the IAL
stock sale as interest on the Note rather than as capital gain, a fact unrelated to
Batchelor’s potential liability for IAL’s tax obligations as transferee. In contrast,
the government’s claims in Batchelor I involve IAL’s corporate income tax
liability. Facts impacting that issue include IAL’s alleged use of a tax shelter
scheme (in which Batchelor played no role), and IAL’s solvency before and after
11
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the transfer, neither of which impact the computation of Batchelor’s own income
tax obligations. Given the different tax liabilities at issue, the cases are factually
distinct.
The Estate argues unconvincingly that both Batchelor I and the instant suit
involve the same fundamental issue regarding the value of the Option Assets and
the impact that valuation might have on its eventual tax liabilities, such that the
cases share the same nucleus of operative fact. The Estate’s focus is too narrow.
Although it is true that both suits involve a common factual issue, i.e., the value of
the Option Assets, this is often the case in tax law, where an individual transaction
may have multiple tax consequences. See Towe v. Comm’r, 64 T.C.M. 1424,
1992
WL 353773, at *3 (1992) (noting that “[a] single transaction or series of
transactions can result in the incidence of both gift and income taxes”). Yet, what
matters for res judicata purposes is not whether one common factual issue exists
across two distinct tax liabilities, but whether the two suits constitute the same
cause of action. Where, as here, the two suits involve different tax liabilities with a
host of potential issues unique to each type of tax, the causes of action cannot be
the same. Moreover, if we agreed with the Estate and ruled that the existence of
one such common question across distinct tax liabilities precludes the future
assessment of a tax liability that has not actually been litigated, our decision would
potentially preclude the IRS, through an overly-broad interpretation of res judicata,
12
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from collecting unpaid taxes for distinct tax liabilities linked only by a particular
common transaction (from among potentially dozens of transactions in a given
year’s tax). This would be an unworkable result, and would not square with the
Tax Code’s detailed statutory scheme on assessments. See Michael v. Comm’r, 75
F.2d 966, 969 (2d Cir. 1935) (rejecting taxpayers’ argument “that in one
proceeding there must be determined the liability of the petitioner for his own taxes
and his liability . . . for the taxes of all other taxpayers” because such a rule “would
involve great difficulty in its administration and would practically render valueless
the provision of the law which grants a longer period in which to assert the liability
of a transferee of assets”). 10
We reach the same outcome under the rights and duties test. Here, we find it
significant that the instant case involves Batchelor’s individual income tax liability
under the statutory provisions governing personal income tax obligations,
including 26 U.S.C. §§ 1, 6012, 6072, whereas Batchelor I was based on the
corporate income tax liability imposed on IAL under statutes pertaining to that
10
In a related argument, the Estate insists that the tax implications of specific completed
transactions should be litigated only once. The Estate’s argument, however, rests on principles
of issue preclusion rather than claim preclusion, and would be more persuasive had the value of
the Option Assets actually been decided in Batchelor I. See Pleming v. Universal-Rundle Corp.,
142 F.3d 1354, 1359-60 (11th Cir. 1998) (noting that for collateral estoppel to apply, the issue
must have been actually litigated and determined in the prior proceeding); Adolph Coors Co. v.
Comm’r,
519 F.2d 1280, 1283 (10th Cir. 1975) (stating that “[t]he doctrine of collateral estoppel
is strictly applied in tax cases,” and rejecting taxpayer’s attempt to invoke the doctrine where the
relevant issue had been raised, but not decided, in a previous case).
13
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particular tax, including 26 U.S.C. § 11. Thus, the two suits involve distinct tax
obligations with a different set of rights and duties. 11 Seeking to define the
applicable “right” or “duty” more broadly, the Estate argues that the primary right
at issue in both suits is the government’s right to have the proper values reported
and taxes paid on a particular transaction. Although in some cases we have
defined the applicable “right” or “duty” broadly, such as the right to continued
employment, Ray, 677 F.2d at 821-22, 12 in other contexts we have focused more
narrowly on specific statutory rights and duties to determine whether the cases are
substantively distinct, see, e.g., White v. World Fin. of Meridian, Inc.,
653 F.2d
147, 150 (5th Cir. 1981); 13 I.A. Durbin, Inc. v. Jefferson Nat’l Bank,
793 F.2d
1541, 1549-50 (11th Cir. 1986).14 In the tax context, which is largely statutory, we
11
Although the government sought to collect the unpaid tax directly from Batchelor in Batchelor
I, his potential liability as transferee does not change the nature of the corporate tax liability at
issue in Batchelor I.
12
In Ray, we found that an employee’s breach of contract claim arising from his termination was
barred by res judicata due to an earlier suit alleging improper termination in violation of the
employee’s civil rights because in both suits “the primary right at issue was [plaintiff’s] right of
continued employment” and the breach of contract claim was substantively identical to the
earlier civil rights claims.
Ray, 677 F.2d at 821-22.
13
All decisions of the former Fifth Circuit issued before October 1, 1981, are binding precedent
in this circuit. See Bonner v. City of Prichard,
661 F.2d 1206, 1209 (11th Cir. 1981).
14
In White, we rejected the res judicata defense because “[a]lthough the primary right and duty
in both statutes . . . is identical in that they require [certain bank] disclosures, the nature and
extent of those disclosures and the remedies afforded for nondisclosure are distinct” under the
governing statutes, such that the “violations or wrongs” sued for under each statute were
different.
White, 653 F.2d at 150. In I.A. Durbin, we ruled that plaintiffs’ contempt proceeding
in bankruptcy court alleging wrongful seizure of personal property did not bar their subsequent
civil rights suit alleging various constitutional claims based on the same seizure of property
14
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believe the latter approach is best. Accordingly, given that each type of tax at issue
in this case is governed by substantively distinct provisions of the Tax Code, we
find that the suits derive from different “rights and duties” within the meaning of
our prior precedent, and thus do not constitute the same cause of action.
Although the decision in this case is grounded in Eleventh Circuit res
judicata principles, our determination of whether Batchelor I and the instant suit
involve the same “cause of action” is guided as well by cases applying res judicata
in the tax context. The federal income tax is based on a system of annual
accounting, rather than transactional accounting. See 26 U.S.C. § 441. For this
reason, the United States Supreme Court in Comm’r v. Sunnen, 333 U.S. 591
(1948), recognized, in the context of a personal income tax dispute, that each tax
year “is the origin of a new liability and of a separate cause of action.” See
id. at
598. According to Sunnen, “if a claim of liability . . . relating to a particular tax
year is litigated, a judgment on the merits is res judicata as to any subsequent
because the primary right in the contempt proceeding was the statutory right “to prevent
[defendants] from taking possession of the property after the filing of the bankruptcy petition,”
whereas the civil rights suit implicated the distinct “rights to be free from unreasonable searches
and seizures and to due process in the taking of their property.” I.A.
Durbin, 793 F.2d at 1549-
50. See also Nash County Bd. of Educ. v. Biltmore Co.,
640 F.2d 484, 487-88 (4th Cir. 1981)
(stating that res judicata will apply “when the two statutes afford the same right or interdict the
same wrong,” and finding the defense applicable where “the state and federal statutes upon
which the two actions are based are identical in language except in the requirement of the federal
statute, but not of the state statute, of a showing of interstate commerce,” particularly where the
two suits involve the same wrongful act and operative facts).
15
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proceeding involving the same claim and the same tax year.” Id. (emphasis
added). Consistent with Sunnen, this Court has recognized that a taxpayer’s total
tax liability for a particular type of tax and particular tax year constitutes a single
cause of action. See Finley v. United States,
612 F.2d 166 (5th Cir. 1980). In
Finley, we determined that “in federal tax litigation one’s total income tax liability
for each taxable year constitutes a single, unified cause of action, regardless of the
variety of contested issues and points that may bear on the final computation,”
id.
at 170, and thus there can only be one suit related to a taxpayer’s tax liability for a
particular year and particular tax (e.g., a taxpayer’s year 2014 income tax liability).
See
id. See also United States v. Davenport,
484 F.3d 321, 326 (5th Cir. 2007)
(noting, for purposes of res judicata, that “the tax liability of a particular tax for a
particular taxable year is a single cause of action”) (internal marks omitted);
Michael v. Comm’r,
75 F.2d 966, 969 (2d Cir. 1935) (recognizing that there can
only be one suit to determine a taxpayer’s individual tax liability for a particular
year); see also Estate of Hunt v. United States,
309 F.2d 146, 147-49 (5th Cir.
1962) (affirming dismissal of taxpayer’s suit for refund of estate taxes because a
prior refund suit involving the same estate taxes was res judicata as to any
additional issues that could have been raised with respect to the estate tax). For
this reason, courts have long held that res judicata does not bar a subsequent tax
suit unless the suit involves the same tax year and tax liability as a previous one.
16
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See S. Bancorporation, Inc. v. Comm’r, 847 F.2d 131, 136 (4th Cir. 1988) (“In tax
cases, res judicata is rare, since a prior income tax judgment could only bar a
subsequent proceeding involving the same claim in the same tax year.”); S-K
Liquidating Co. v. Comm’r,
64 T.C. 713, 719 (1975) (finding that a prior suit
involving the taxpayer’s withholding taxes for calendar years 1968 and 1969 did
not bar the IRS from pursuing a separate deficiency action for the taxpayer’s
corporate income tax liability for its fiscal year ending October 31, 1969, because
“[t]he two taxes and the two taxable periods . . . are different”); Smith v. United
States,
242 F.2d 486, 488 (5th Cir. 1957) (holding that res judicata does not apply
to suits involving monthly excise taxes because “[e]ach month . . . is the origin of a
new liability and of a separate cause of action”).
It makes sense that res judicata would not apply to suits involving different
tax years because the applicable laws and facts pertaining to distinct tax years are
ever-changing. See Sunnen, 333 U.S. at 597-99. According to Sunnen, for suits
involving different tax years, issue preclusion, which precludes litigation of only
those issues actually determined in the initial suit, is the more appropriate defense,
albeit one which should be used sparingly and with caution. See
id. at 599-600;
see also Precision Air
Parts, 736 F.2d at 1501 (distinguishing res judicata and
collateral estoppel); Parklane Hosiery Co. v. Shore,
439 U.S. 322, 327 n.5 (1979)
17
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(same). 15 Thus, as one court has explained, “claim preclusion (res judicata) should
give way to issue preclusion (collateral estoppel) where a different tax year is in
question, even if the legal issues and facts are otherwise the same.” Burlington N.
Santa Fe R. Co. v. Assiniboine and Sioux Tribes, 323 F.3d 767, 771 (9th Cir. 2003)
(emphasis added). See also, e.g., Cooper v. United States,
238 F.2d 40 (D.C. Cir.
1957) (finding taxpayer’s income tax refund suit for 1946 through 1950 barred by
res judicata for 1946 and by collateral estoppel for 1947 through 1950 where
taxpayer had previously brought suit on his 1946 taxes and lost and same tax issue
applied across all tax years); Jonas v. Trapp,
186 F.2d 951, 953-54 (10th Cir.
1950) (under the doctrine of collateral estoppel, taxpayer could not relitigate issue
of whether he was a business partner with his wife for his 1941 income taxes when
the court in a previous suit had rejected taxpayer’s argument as it pertained to his
1940 income taxes).
Relevant to the instant suit, courts applying the principles of Sunnen have
determined that res judicata does not apply to suits involving different types of tax
liability, even when the suits involve the same underlying transaction, and, at least
15
Sunnen explained,
[I]f a claim of liability or non-liability relating to a particular tax year is litigated,
a judgment on the merits is res judicata as to any subsequent proceeding involving
the same claim and the same tax year. But if the later proceeding is concerned
with a similar . . . claim relating to a different tax year, the prior judgment acts as
a collateral estoppel only as to those matters in the second proceeding which were
actually presented and determined in the first suit.
333 U.S. at 598-99.
18
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in some respects, the same tax year. Frank Sawyer Trust of May 1992 v. Comm’r,
133 T.C. 60 (2009), is such a case. There, the party attempting to invoke res
judicata, a trust, owned all of the stock in four corporations involved in the taxi
business.
Id. at 62. During the 2000 tax year, the corporations sold substantially
all of their assets to unrelated third parties, recognizing substantial capital gains.
Id. at 63. During the 2000 and 2001 tax year, the trust sold its stock in the
corporations to a different third party. See
id. at 63-65. The trust reported the sale
of its stock on its income tax returns for tax years 2000 and 2001. Thereafter, the
government sought to collect an alleged tax deficiency directly from the trust for
unreported gain on the sale of its stock, arguing not only that the trust’s basis in its
stock was underreported, but also that the stock sale should be recharacterized to
reflect the reality of the trust having sold the corporations’ assets and having
retained the sales proceeds for itself, without having paid any tax.
Id. at 66-67.
When the initial suit against the trust failed, the government then brought a
separate action against the trust, as transferee of the corporations, seeking to collect
the corporations’ unpaid income tax attributable to the corporations’ sale of
assets. 16 See
id. at 67-70.
Although both suits in Frank Sawyer implicated the sale of the corporate
assets, the Tax Court found that res judicata did not bar the transferee liability
16
The government was unable to collect against the corporations because they were insolvent at
the time the additional taxes were assessed. Frank Sawyer Trust, 133 T.C. 70.
19
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action because the “cause of action” in each case was not the same. See id. at 76 &
72. According to the court, “[t]he deficiency cases [against the trust] dealt with the
trust’s gain on the sale of its stock,” and had the government prevailed the trust
would have been required to pay more tax on the sale of its stock.
Id. at 76. The
trust, however, would not have been required to pay the corporations’ unpaid tax
liabilities at issue in the transferee action, which arose from the corporations’
attempts to artificially generate capital losses to offset their capital gains.
Id. The
court emphasized that in the first suit against the trust, the government had not
attempted to collect the corporations’ unpaid corporate tax. Accordingly,
“[a]lthough the deficiency cases [against the trust for its own tax liabilities] and the
instant action [against the trust as transferee] arise out of similar facts, there [wa]s
no identity between the causes of action,” and therefore res judicata did not apply.
Id. at 78 (emphasis added).
The Tax Court applied this same reasoning nearly twenty years earlier in
Towe v. Comm’r, 64 T.C.M. 1424,
1992 WL 353773 (1992), in which it
determined that an income tax deficiency and a gift tax deficiency were separate
causes of action for purposes of res judicata, even though each deficiency suit
arose out of the same transaction and involved the same tax years. In Towe, the
taxpayers argued that the IRS was precluded from making a gift tax determination
concerning the same transaction and same taxable periods for which income tax
20
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determinations had already been made and judicially resolved. See id. at *1-*2
(noting that “[t]he 1979-81 income tax determinations concerned the same
transactions (transfers of realty) as the gift tax and transferee determinations”).
The taxpayers argued that “the [tax] treatment of the transfer of property was the
subject of earlier litigation and that there was an opportunity to litigate the issue”
in the earlier case.
Id. at *4. Rejecting that argument, the court reasoned that “the
question of whether a particular transaction results in the incidence of gift tax is a
different issue or cause of action from whether it results in the incidence of income
tax.”
Id. at *5. Thus, the court concluded that “[t]he determination of one [tax
liability] does not preempt the determination of the other . . . even though both
determinations may concern the same transaction and/or taxable period.”
Id.
Accordingly, the IRS was not precluded by res judicata from making the gift tax
determinations.
Id.
Frank Sawyer Trust and Towe are distinguishable from those cases where
res judicata has been applied in transferee liability suits involving a dispute as to
only one tax liability, including, for example, United States v. Davenport,
484 F.3d
321 (5th Cir. 2007), and Baptiste v. Comm’r,
29 F.3d 1533 (11th Cir. 1994), on
which the Estate relies. Davenport involved gifts of stock made by Birnie
Davenport, who passed away several years after making the gifts to her two
nephews and a niece without having paid the requisite gift tax. In an initial suit to
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determine the tax liabilities of Davenport’s estate, the Tax Court found the estate
liable for unpaid gift tax on Davenport’s stock gifts. The Tax Court valued the
stock at $2,000 per share, and calculated the tax deficiency owed by the estate
based on that amount. See Davenport, 484 F.3d at 324. The estate later failed to
pay the taxes owed.
Id. The government then filed suit in federal district court
against both the estate and the recipients of the stock gifts as transferees pursuant
to 26 U.S.C. § 6324(b). 17 The Fifth Circuit found that the two suits involved the
same operative facts and underlying transactions, as well as the same tax liability
(i.e., the estate’s gift tax liability), such that both cases involved the same cause of
action. See
id. at 327-28. Accordingly, the value of the stock, and the amount of
gift tax due, could not be re-litigated.
Id. at 329.
This Court considered a factually similar case in Baptiste and reached the
same result. In that case, three brothers each received $50,000 as beneficiaries to
their father’s life insurance policy upon his death. Baptiste, 29 F.3d at 1535. After
the decedent’s estate filed an estate tax return, the IRS determined that the estate
owed additional estate tax, which the estate contested in Tax Court.
Id. The
parties eventually stipulated to the amount of tax owed, and the court entered
17
Title 26 of the United States Code section § 6324(b) provides an avenue by which the
government may pursue a gift tax liability directly from the donee, who may be held personally
liable for the unpaid gift tax. The statute provides, “If the [gift] tax is not paid when due, the
donee of any gift shall be personally liable for such tax to the extent of the value of such gift.”
26 U.S.C. § 6324(b). See also
Davenport, 484 F.3d at 325 (describing section 6324(b) as a
“transferee liability provision”).
22
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judgment in that amount. Id. at 1535-36. After the estate failed to pay the tax, the
government attempted to collect from the Baptiste brothers as transferees pursuant
to a statute that, like the gift tax statute at issue in Davenport, makes the recipient
of the decedent’s property personally liable for the estate tax. See 26 U.S.C. §
6324(a)(2). Applying res judicata, this Court held that Richard Baptiste, one of the
Baptiste brothers who resided in Florida, was not permitted to relitigate the value
of the property for purposes of calculating the amount of estate tax due. See
Baptiste, 29 F.3d at 1539-41. We explained that “[t]he fact that [Richard
Baptiste’s] purpose is to decrease his personal liability, rather than in the interest of
the estate, is of no moment. The estate’s liability [for the estate tax] and Baptiste’s
liability [as transferee] both embrace the same determination – the amount of estate
tax imposed by chapter 11.”18
Id. at 1539. See also Egan’s Estate v. Comm’r,
260
F.2d 779, 780-85 (8th Cir. 1958) (holding res judicata barred transferee of
corporation from relitigating transferor corporation’s income tax liability for 1948
for purposes of determining transferee’s liability for that particular tax).
As with Frank Sawyer Trust and Towe, and unlike Davenport and Baptiste,
Counts I and II of the instant suit involve different tax liabilities and different
underlying taxpayers than the claims at issue in Batchelor I. Therefore, the claims
are not part of the same cause of action, even though they each involve the same
18
Although Baptiste appears to be based on issue preclusion, it is still a useful comparison.
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underlying transaction. 19 For these reasons, we find that the district court erred in
applying res judicata to bar the government’s claims in Counts I and II and the
decision must be reversed.
B. Settlement Payments
Count III of the Estate’s Complaint concerns the $41 million in payments
the Estate made in 2004 to settle various lawsuits against Batchelor. In 2003, the
Estate deducted the payments from Batchelor’s gross estate as claims against the
estate pursuant to 26 U.S.C. § 2053(a)(3). The parties agree that this deduction
was proper, and Batchelor’s estate tax liability was not at issue before the district
court. However, after taking the estate tax deduction, the Estate also claimed an
$8.3 million credit on its 2005 income tax return for the settlement payments. The
IRS denied the claim, and the Estate then filed the instant suit seeking a refund for
the perceived overpayment pursuant to 26 U.S.C. § 1341. The district court
rejected the Estate’s claim, finding that 26 U.S.C. § 642(g) barred the Estate from
claiming both an estate tax deduction under § 2053 and an income tax deduction
for the same payment. We agree, and therefore affirm the district court’s ruling.
The Estate’s position is straightforward. According to the Estate, 26 U.S.C.
§ 1341 entitles it to a return of the taxes Batchelor paid on the $41 million in IAL
stock proceeds the Estate subsequently returned to IAL, IALPR, and the Rich
19
The parties dispute whether the two cases involve the same tax year. We need not resolve that
issue, however, based on our determination that the underlying tax liabilities are distinct.
24
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plaintiffs as settlement payments. The Estate argues it is not seeking a tax
windfall, but rather, because the $41 million at issue was originally reported as
capital gain, by effectively returning that income, it should now be permitted a
corresponding deduction or credit effectively consisting of a capital loss, and it
insists § 1341 was designed to accomplish precisely that result. 20 The government
maintains that the Estate cannot use the $41 million repayment to reduce both its
estate and income tax obligations, and instead may only deduct the payments from
either one tax or the other. We agree.
Section 1341 accounts for the fact that discrete financial transactions
sometimes implicate multiple tax years. In the ordinary case, deductions on a
particular item of income are taken during the same year the income is earned and
reported. See Mooney Aircraft, Inc. v. United States, 420 F.2d 400, 402-03 (5th
Cir. 1969). It is not always possible, however, to match income and expenses in
the same tax year, which may disadvantage the taxpayer due to changing
circumstances across the two tax years. See
id. at 404-05; see also Healy v.
Comm’r,
345 U.S. 278, 284 (1953) (noting that when a taxpayer restores an item of
income in a later tax year, changes in income or fluctuations in tax rates between
the year of receipt and the year of repayment could disadvantage the taxpayer). In
North American Oil v. Burnett,
286 U.S. 417 (1932), the United States Supreme
20
The Estate calculated a refund of $8,322,466 under § 1341.
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Court recognized that “[i]f a taxpayer receives earnings under a claim of right and
without restriction as to its disposition, he has received income which he is
required to [report], even though it may still be claimed that he is not entitled to
retain the money, and even though he may still be adjudged liable to restore its
equivalent.” Id. at 424. This is known as the “claim of right” doctrine. Although
the taxpayer in North American Oil was eventually entitled to keep the income,
id.
at 421, the Court explained that if the taxpayer, a corporation, “had been obliged to
refund the [income] received in 1917, it would have been entitled to a deduction
from the profits of 1922,” the year the dispute regarding the income was resolved.
Id. at 424. Although this was a hypothetical statement when made in North
American Oil, the Supreme Court later faced this very scenario in United States v.
Lewis,
340 U.S. 590 (1951). In that case, an employer gave his employee a
$22,000 bonus in 1944, which the employee reported as income in 1944.
Id. at
590. In 1946, a court determined that half of the bonus had to be returned to the
employer.
Id. The taxpayer returned the money, and then sought to amend his
1944 tax return to reduce his income for that year. See
id. at 591. Consistent with
what it had said previously in North American Oil, the Supreme Court rejected this
approach, deciding instead that the proper solution would be to permit a deduction
in the year of repayment, 1946, for the amount of tax that had been erroneously
paid in 1944. See
id. at 591-92. According to Lewis, the tax year in which the
26
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contested amount was received could not be reopened, regardless of whether this
would “result[] in an advantage or disadvantage to a taxpayer.” Id. at 592. 21
Congress later enacted 26 U.S.C. § 1341 to provide a statutory solution to
the problem presented in cases like Lewis and to account for the tax disparities that
may exist when a taxpayer claims a deduction in one year for an item of income
received in an earlier year that the taxpayer was obliged to return. See United
States v. Skelly Oil Co., 394 U.S. 678, 680-81 (1969) (“Section 1341 of the 1954
Code was enacted to alleviate some of the inequities which Congress felt existed in
this area”); Maxwell v. United States,
334 F.2d 181, 183 (5th Cir. 1964)
(“[O]rdinarily amounts received under a claim of right must be included in taxable
income in the taxable year of receipt, although repaid in a later year. Section 1341
was designed to alleviate the harsh effect of this rule”). Under 26 U.S.C. § 1341,
“a taxpayer is entitled to relief if in one year the taxpayer included an item as gross
income and paid tax on that income, then in a subsequent year is compelled to
return the item.” Steffen v. United States,
349 B.R. 734, 738 (M.D. Fla. 2006).
The purpose of § 1341 is to “put the taxpayer in the same position he would have
been in had he not included the item as gross income in the first place.” Fla.
Progress Corp. v. Comm’r,
348 F.3d 954, 957 (11th Cir. 2003). When § 1341
applies, the taxpayer is entitled to either a “deduction” or a tax “credit” in the year
21
Justice Douglas dissented, noting that the decision might allow the government to exact tax on
money that was not income to the taxpayer. See
Lewis, 340 U.S. at 592 (Douglas, J., dissenting).
27
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of repayment; the taxes due for the year the income was received are not affected.
See 26 U.S.C. § 1341(a)(4) & (5).
For § 1341 to apply, the taxpayer must show the following:
(1) an item was included in gross income for a prior taxable year
(or years) because it appeared [at the time the income was
received] that the taxpayer had an unrestricted right to such
item;
(2) a deduction is allowable for the [current] taxable year because it
was established after the close of such prior taxable year (or
years) that the taxpayer did not have an unrestricted right to
such item or to a portion of such item; and
(3) the amount of such deduction exceeds $3,000.
26 U.S.C. § 1341(a). In addition to these statutory requirements, a taxpayer must
demonstrate a “substantive nexus between the right to the income at the time of
receipt and the subsequent circumstances necessitating a refund.” Steffen, 349
B.R. at 738. The taxpayer’s return of the income must not be the result of the
taxpayer’s purely voluntary choice; rather, it must be “established,” for example,
by a court, that the taxpayer did not have an unrestricted right to the income. See
id. at 739. The Tax Court has determined that payments made to settle a lawsuit
may satisfy this requirement. See Barrett v. Comm’r,
96 T.C. 713 (1991).
When § 1341 applies, the taxpayer is required to pay the lesser of two
computed tax payments in the year of repayment. See 26 U.S.C. § 1341(a) (“the
tax imposed by this chapter for the taxable year shall be the lesser of” the two
28
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computations) (emphasis added). Under the statute’s first method of calculation,
set forth in subsection (a)(4), the taxpayer simply computes the taxes owed in the
year of repayment by deducting the restoration payment from his income in that
year. 26 U.S.C. § 1341(a)(4). The second calculation method set forth in
subsection (a)(5) is more complex, and results in a credit based on the taxes that
would have been saved in the original year of receipt had the income never been
received in that year. 22 See id. at § 1341(a)(5) & (b); see also Fla.
Progress, 348
F.3d at 957 (explaining that the (a)(4) method of calculation results in a deduction
from the current year’s taxes, whereas the (a)(5) method permits the taxpayer to
claim a tax credit for the amount his tax was increased in the prior year by
including the item of income).
In Fla. Progress, this Court decided, based on the language of the statute
and its corresponding regulations, that § 1341 does not, by itself, create an
independent tax deduction and instead applies “only if another code section would
provide a deduction for the item in the current year.” 348 F.3d at 963. See also
id.
at 958-59 (rejecting the argument that “§ 1341 stands on its own” as a source of a
22
Under 26 U.S.C. § 1341(a)(5), the taxpayer first computes his original, prior year tax with the
restoration income included (as it was originally calculated in the year of receipt), then
recomputes his tax for the prior year as if the item had not been included. The taxpayer then
compares the two resulting tax obligations to determine the amount by which his tax would have
been reduced had he not originally received the restored income. In the final step, the taxpayer
reduces his current year’s tax obligation by the amount his tax liability would have been reduced
in the year of receipt under the re-computation.
29
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deduction); see also Alcoa, Inc. v. United States, 509 F.3d 173, 178 n.4 (3d Cir.
2007) (“[I]t is a prerequisite for section 1341 treatment that the taxpayer be entitled
to a deduction for all or part of the repaid amount under some other Code
section.”). 23 Thus, contrary to the Estate’s argument, we cannot resolve the instant
dispute simply by reference to § 1341.
To determine whether “another code section would provide a deduction for
the item in the current year,” Fla. Progress, 348 F.3d at 963, the district court
found, and we agree, that the tax code provisions relating to overlapping estate and
income tax deductions are relevant. In this context, 26 U.S.C. § 642(g), entitled
“Disallowance of double deductions,” generally prevents an estate from claiming
both an estate tax deduction under 26 U.S.C. § 2053 and an income tax deduction
for the same payment. The statute provides:
Amounts allowable under section 2053 or 2054 as a deduction in
computing the taxable estate of a decedent shall not be allowed as a
deduction . . . in computing the taxable income of the estate or of any
other person, unless there is filed . . . a statement that the amounts
have not been allowed as deductions under section 2053 or 2054 and a
23
In finding that § 1341 does not itself create an independent tax deduction, the Court reasoned:
Subsection (a) of § 1341 provides that “if” three requirements are met, “then” the
taxpayer is entitled to preferential treatment under [§ 1341]. 26 U.S.C. § 1341(a)
(emphasis added). One of those requirements is that “a deduction” be “allowable
for the taxable year because it was established after the close of such prior taxable
year . . . that the taxpayer did not have an unrestricted right to such item. . . .” 26
U.S.C. § 1341(a)(2). The provision itself does not indicate whether a deduction
should be allowable. That answer must be found in another provision of the code.
. . . The regulations interpreting this provision confirm this conclusion.
Fla. Progress, 348 F.3d at 958-59 (emphasis in original).
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waiver of the right to have such amounts allowed at any time as
deductions under section 2053 or 2054.
26 U.S.C. § 642(g). Section 642 contains an exception, however, for “income in
respect of decedents.” See id. (“subsection [g] shall not apply with respect to
deductions allowed under part II (relating to income in respect of decedents)”).
Thus, a double deduction is permitted for “taxes, interest, business expenses, and
other items accrued at the date of a decedent’s death” that fall within § 2053(a)(3)
as claims against the estate, as long as they are also allowable under § 691(b). See
26 C.F.R. § 1.642(g)-2. Section 691(b), in turn, provides that a decedent’s estate
may claim both deductions if the expense falls within one of six statutes: sections
162, 163, 164, 212, 611, or 27.24 The district court in this case properly required
the Estate to show that one of these statutes applied in order to claim both an estate
tax deduction under § 2053 and an income tax deduction for the same payment.
The Estate argues on appeal, as it did in the district court, that sections 162
and 212 provide the basis for permitting the “double deduction” of the settlement
payments at issue because the payments arise out of Batchelor’s business activities
24
Section 691(b) provides, in pertinent part:
The amount of any deduction specified in section 162, 163, 164, 212, or 611 . . .
or credit specified in section 27 . . ., in respect of a decedent which is not properly
allowable to the decedent in respect of the taxable period in which falls the date of
his death, or a prior period, shall be allowed . . . in the taxable year when paid . . .
to the estate of the decedent.
31
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in selling his IAL assets, and thus are ordinary and necessary business expenses.25
We disagree. The $41 million at issue derives from income Batchelor originally
reported as capital gain through the sale of his IAL stock. Batchelor’s treatment of
this income as capital gain determines the character of a subsequent repayment of
that income pursuant to Kimbell v. United States, 490 F.2d 203 (5th Cir. 1974), in
which this Court determined that “a payment made by a taxpayer in satisfaction of
a liability arising from an earlier transaction, on which that taxpayer reported
capital gain [as here], must be treated as a capital loss at least to the amount of the
capital gain,” rather than as a § 162 business expense.
Id. at 205. It is undisputed
that Batchelor obtained the $41 million of income as a result of his sale of IAL
stock. It is also undisputed that the settlement payments were made to resolve
claims that Batchelor had received excess consideration in selling his interest in
IAL, such that the Estate’s repayments are sufficiently linked to Batchelor’s
original receipt of income. 26 Accordingly, Kimbell does not permit the Estate to
25
26 U.S.C. § 162(a) provides, “There shall be allowed as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or
business.” 26 U.S.C. § 212 similarly provides, “In the case of an individual, there shall be
allowed as a deduction all the ordinary and necessary expenses paid or incurred during the
taxable year . . . (1) for the production or collection of income.” Although the provisions are
similar, unlike § 162(a), § 212 lacks a “trade or business” requirement. See Estate of Yaeger,
889 F.2d 29, 33 (2d Cir. 1989).
26
The Estate concedes that if IAL was rendered insolvent by the stock sale and Batchelor
received excess consideration, he was liable to return it to IAL or its creditors, including the
plaintiffs in the four unrelated suits against Batchelor. Thus, we find that the amounts paid in
settlement of those suits are sufficiently linked to the initial income so as to trigger Kimbell.
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claim a deduction under § 162, and the Estate thus fails to satisfy § 691(b) by way
of § 162.
The Estate also attempts to satisfy § 691(b) by invoking § 212, which, in
pertinent part, permits a deduction to “an individual” for “ordinary and necessary
expenses paid or incurred during the taxable year . . . for the production or
collection of income.” 26 U.S.C. § 212(1). In this Circuit, however, “§ 162(a) and
212 are . . . considered in pari materia;” thus, “the restrictions and qualifications
applicable to the deductibility of trade or business expenses [under § 162] are also
applicable to expenses covered by section 212.” Sorrell v. Comm’r, 882 F.2d 484,
487 (11th Cir. 1989) (quoting Fishman v. Comm’r,
837 F.2d 309, 311 (7th Cir.
1988), cert. denied,
487 U.S. 1235 (1988)); Estate of Meade v. Comm’r,
489 F.2d
161, 164 n.6 (5th Cir. 1974) (“For purposes of this distinction between capital
expenses and ordinary expenses, sections 162 and 212 are construed in the same
manner . . . .”). Moreover, the rationale of Kimbell – that a taxpayer who initially
reported income as capital gain may not receive the tax windfall that would result
by recharacterizing a related expense as an ordinary business expense – applies
with equal force to § 212. 27 See Estate of
Meade, 489 F.2d at 163-66 (taxpayers
who received settlement payments in a lawsuit and reported those proceeds as
27
The parties dispute whether Batchelor’s liability accrued before his death. Having determined
that the Estate’s proffered income tax deduction is not allowable under section 691(b), we need
not address this argument.
33
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capital gain were not permitted to deduct their legal fees associated with the suit as
payments for the production of income under § 212). Thus, the Estate’s attempt to
invoke § 212 also fails.
In an attempt to circumvent the statutes, the Estate insists it should be
allowed a double deduction because otherwise the government will receive a
windfall from the income taxes Batchelor paid on the $41 million at issue. In
effect, the Estate urges us to fashion an equitable result; however, doing so would
require us to either disregard § 642(g), or to construe § 691(b) as though it also
included § 1341 as an exception, neither of which we can do. The double
deduction the Estate seeks is plainly prohibited by 26 U.S.C. § 642(g), see Estate
of Luehrmann v. Comm’r, 287 F.2d 10, 12-13 (8th Cir. 1961) (recognizing that the
purpose of § 642(g)’s predecessor statute “was to prevent taxpayers claiming the
same items of administration expenses as deductions for both estate income tax
and estate tax purposes”), and § 1341 is not one of the enumerated exceptions in
§ 691(b). Accordingly, we do not believe Congress intended to allow a double
deduction based solely upon the potential application of § 1341. See Andrus v.
Glover Constr. Co.,
446 U.S. 608, 616-17 (1980) (“Where Congress explicitly
enumerates certain exceptions to a general prohibition, additional exceptions are
not to be implied, in the absence of evidence of a contrary legislative intent.”).
See also CBS Inc. v. Prime Time 24 Joint Venture,
245 F.3d 1217, 1226 (11th Cir.
34
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2001) (“‘[W]here Congress knows how to say something but chooses not to, its
silence is controlling.’”) (quoting In re Griffith, 206 F.3d 1389, 1394 (11th Cir.
2000) (en banc)); Harris v. Garner,
216 F.3d 970, 976 (11th Cir. 2000) (“[T]he
role of the judicial branch is to apply statutory language, not to rewrite it.”). Thus,
even assuming the equities actually favor the Estate, such concerns cannot trump
the applicable statutes. See Long v. Comm’r,
772 F.3d 670, 678 (11th Cir. 2014)
(“[D]eductions under the Internal Revenue Code are a matter of legislative grace
and the taxpayer who claims the benefit must . . . ‘clearly establish’ his entitlement
to a particular deduction.”) (internal marks and citations omitted); Estate of
Luehrmann, 287 F.2d at 15 (“Tax exemptions and deductions do not turn upon
general equitable considerations but depend upon legislative grace. Statutes
authorizing tax exemptions and deductions are to be strictly and narrowly
construed.”); Culley v. United States,
222 F.3d 1331, 1334 (Fed. Cir. 2000) (“It is
basic tax law that deductions from taxable income, for purposes of computing tax
due the United States, are matters of statutory grant”).
Finally, the Estate points to three authorities as grounds for invoking § 1341
without reference to either 642(g) or 691(b): Revenue Ruling 77-322, which
permits “[a]n estate [to] utilize . . . section 1341 . . . in computing its tax when it
restores an item that was previously included in income by the decedent under a
claim of right;” Estate of Good v. United States, 208 F. Supp. 521 (E.D. Mich.
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1962), in which the court determined that an estate was entitled to use § 1341 to
obtain a refund of the income taxes a decedent had paid on income that the
decedent’s employer later determined had been erroneously paid even though the
estate also took an estate tax deduction for the repayment; and Nalty v. United
States, No. 73-1574-B, 1975 WL 577 (E.D. La. Apr. 16, 1975), which followed
Estate of Good.
Aside from the fact that these authorities are not binding, see Redwing
Carriers, Inc. v. Tomlinson, 399 F.2d 652, 657 (5th Cir. 1968) (noting that
Revenue Rulings are merely persuasive), we disagree with their rationale. First,
Estate of Good, Nalty, and Revenue Ruling 77-322 do not account for this Circuit’s
requirement that a deduction must be allowable under another provision of the Tax
Code for § 1341 to apply. See Fla.
Progress, 348 F.3d at 958-59. Thus, it is not
enough to merely conclude that the requirements of § 1341(a)(1)-(3) are met when
the facts of the case implicate § 642(g). Second, although the Estate’s authorities
purport to distinguish between the “credit” offered by subsection (a)(5) and the
“deduction” offered by subsection (a)(4), see Estate of
Good, 208 F. Supp. at 523;
Nalty,
1975 WL 577, at *5 (relying on the same distinction); Rev. Rul. 77-322
(adopting Estate of Good without supporting explanation), we do not believe §
642(g)’s prohibition on double deductions would give way to § 1341 regardless of
whether the Estate claimed a credit or a deduction. The deduction/credit
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distinction merely determines how to account for a § 1341 repayment on one’s
return, nothing more. What matters is not whether a taxpayer may use § 1341 to
reduce his present year taxes through a tax credit or a deduction, but rather whether
a reduction in his income taxes is permitted at all (along with a corresponding
estate tax deduction). In addition, whether a particular application of § 1341 would
result in more favorable treatment to a taxpayer under subsection (a)(4) or (a)(5)
depends on the fortuities of a given case, including changing tax rates and tax
brackets between the year of receipt and the year of repayment. See Missouri Pac.
R.R. Co. v. United States, 423 F.2d 727, 729-35 (Ct. Cl. 1970) (discussing the
legislative history of § 1341 and its alternative methods of calculation in a case
where the taxpayer’s tax rates varied widely over the tax years in question); cf.
Skelly Oil
Co., 394 U.S. at 681 (noting that, under the claim of right doctrine, “the
tax benefit from the deduction in the year of repayment might differ from the
increase in taxes attributable to the receipt; for example, tax rates might have
changed, or the taxpayer might be in a different tax ‘bracket.’”). We do not
believe Congress intended the availability of a double deduction under § 642(g) to
turn on such fortuities. Regardless of whether a taxpayer would be entitled to a
“deduction” under subsection (a)(4) or a “credit” under subsection (a)(5), section
642(g) and its accompanying regulations make clear that § 1341 alone does not
determine whether a taxpayer may reduce both his income and estate tax liabilities
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for the same outlay without consideration of § 691(b). Thus, we reject the
underlying rationale of the Estate’s authorities. Since the Estate has failed to
identify an applicable deduction identified in § 691(b), we find no error in the
district court’s determination that the Estate cannot avoid § 642(g)’s bar on double
deductions, and therefore affirm on Count III.
Accordingly, we reverse the district court’s judgment in favor of the Estate
on Counts I and II and affirm the judgment in favor of the government on Count
III.
AFFIRMED IN PART; REVERSED IN PART; AND REMANDED.
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