UNITED STATES TAX COURT



    MICHAEL K. AND JUNE C. HAMBRICK, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 9260-00.          Filed April 22, 2002.



     Ps filed for a ch. 11 reorganization in
bankruptcy. R filed a proof of claim setting forth
income tax liabilities for 3 taxable years. The
bankruptcy court ordered Ps to file returns. After the
returns were filed, R made amendments to his proof of
claim. Ps did not object to the tax liabilities set
forth in R’s claim, and the bankruptcy court confirmed
the plan of reorganization without deciding the merits
of Ps’ tax liabilities. Following the bankruptcy
court’s confirmation of the plan, R determined income
tax deficiencies and additions to tax for the same 3
taxable years. The deficiencies, if approved, would
result in tax liabilities exceeding those already
claimed by R in the bankruptcy. Ps contend that R is
estopped from determining deficiencies for the same tax
years already claimed in Ps’ bankruptcy reorganization.
                               - 2 -

          Held: R is not estopped from determining
     deficiencies that could result in liabilities for the
     same tax years greater than those R claimed in Ps’
     confirmed plan of reorganization in bankruptcy.



     Michael K. and June C. Hambrick, pro sese.

     William J. Gregg, for respondent.


                             OPINION

     GERBER, Judge:   In the setting of a motion for partial

summary judgment, we consider whether respondent is collaterally

estopped from determining income tax deficiencies for the same

taxable years in amounts that exceed respondent’s tax claims in

petitioners’ confirmed reorganization under chapter 11 of the

Bankruptcy Code.   We also consider petitioners’ claim that we

lack jurisdiction to consider the income tax deficiencies because

of the bankruptcy court’s jurisdiction over the confirmed plan,

which includes a claim for Federal tax liabilities for the same

taxable years.

     The facts are not in dispute.     On August 30, 1996,

petitioners filed a bankruptcy petition, under chapter 11 of the

Bankruptcy Code, which was styled In re Michael Keith Hambrick

and June C. Hambrick, Case No. 96-14754, in the U.S. Bankruptcy

Court for the Eastern District of Virginia.     As of the date of

their bankruptcy petition, petitioners had not filed Federal

income tax returns for 1993, 1994, or 1995.     On or about December
                                 - 3 -

17, 1996, respondent filed a proof of claim in petitioners’

bankruptcy proceeding.     Respondent’s claim consisted of estimated

liabilities because petitioners had not filed tax returns.         On

June 16, 1997, the bankruptcy court compelled petitioners to file

Federal income tax returns for their 1993, 1994, and 1995 tax

years.     The returns were to be filed within 3 years of the date

of petitioners’ bankruptcy petition.

     On the basis of the tax liability petitioners reported,

respondent filed his first, second, and third amendments to the

proof of claim on or about December 16, 1997, March 10, 1998, and

February 9, 1999, respectively.     On February 9, 1999,

respondent’s unsecured priority claims were as follows:

                        Unsecured Priority Claims
            Year     Tax Due    Interest to Bankruptcy Petition Date

            1993     $41,517               $9,123.09
            1994       2,163                  258.80
            1995        1                      -0-
            1996       2,191                   -0-

At the same time, respondent’s unsecured general claims totaled

$20,090.

     On October 5, 1999, petitioners’ Fourth Amended Plan of

Reorganization was confirmed by the bankruptcy court.      On or

about June 5, 2000, respondent mailed a statutory notice of

deficiency to petitioners determining income tax deficiencies and

additions to tax for their 1993, 1994, and 1995 tax years.      The

deficiencies, if approved, would result in the following
                                  - 4 -

increases to petitioners’ income tax liabilities over the amounts

claimed for the same taxable years in petitioners’ bankruptcy

proceeding:

                                  Additions to Tax    Penalties
          Year      Deficiency       Sec. 6651        Sec. 6662

          1993      $57,252          $14,650.50       $11,450.40
          1994       59,545           14,886.25        11,909.00
          1995       38,330            9,582.50         7,666.00

In response to the notice, petitioners filed a petition with this

Court.     Petitioners resided in Leesburg, Virginia, at the time

their petition was filed.

I.   Jurisdiction

      Preliminarily, petitioners questioned whether we have

jurisdiction over the deficiency determination considering that

the bankruptcy court had jurisdiction over petitioners’ assets,

debts, and more particularly the same taxable years.      This

Court’s jurisdiction is limited to the extent provided by

statute.     Sec. 7442;1   Pyo v. Commissioner, 

, 632

(1984).     Our jurisdiction to redetermine a deficiency in tax

depends on a valid notice of deficiency and a timely filed

petition.     Sec. 6213(a); Savage v. Commissioner, 

, 48

(1999).     Respondent issued a timely notice of deficiency on June

5, 2000.     Petitioners timely filed their petition with this Court


      1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the tax years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                - 5 -

on September 1, 2000, resulting in our jurisdiction to

redetermine the deficiencies determined in the notice.    See

generally secs. 6211 through 6214.

      At any time during this proceeding, petitioners could have

moved the bankruptcy court to reopen their bankruptcy proceeding

in order to adjudicate the proposed deficiency.    See sec.

6871(c).    If petitioners’ bankruptcy proceeding was to be

reopened, 11 U.S.C. sec. 505 (2000) would permit the bankruptcy

court to:

      determine the amount or legality of any tax, any fine
      or penalty relating to a tax, or any addition to tax,
      whether or not previously assessed, whether or not
      paid, and whether or not contested before and
      adjudicated by a judicial or administrative tribunal of
      competent jurisdiction.

Because petitioners did not seek to reopen their bankruptcy

proceeding, we continue to have jurisdiction over the

deficiencies respondent determined.

II.   Motion for Partial Summary Judgment

      Summary judgment is an appropriate means by which to resolve

legal issues where the pleadings, admissions, and other

materials, including affidavits, demonstrate that no genuine

issue exists as to any material fact and a decision may be

rendered as a matter of law.   Rule 121(b); Sundstrand Corp. v.

Commissioner, 

, 520 (1992), affd. 

(7th

Cir. 1994).   Summary judgment is a procedure used to expedite

litigation, but it is not a substitute for trial where factual
                                - 6 -

issues are in controversy.    Espinoza v. Commissioner, 

, 415-416 (1982); Shiosaki v. Commissioner, 

(1974).    No factual issues exist with regard to the question of

whether collateral estoppel applies in this case.

     Petitioners argue that the principles of collateral estoppel

and/or res judicata apply to preclude respondent from determining

deficiencies that would cause the tax liabilities to exceed those

claimed by respondent and approved in connection with the

confirmation of petitioners’ plan for reorganization.

Petitioners contend that the filing of a proof of claim in

conjunction with the bankruptcy court’s confirmation of the plan

precludes respondent from determining additional income tax

deficiencies for the same taxable years.

     The judicially created doctrines of collateral estoppel and

res judicata are intended to protect litigants from the burden of

relitigating an identical issue and to promote judicial economy

by preventing unnecessary or redundant litigation.   The general

principle of res judicata is that once a court of competent

jurisdiction has entered a final judgment on the merits of a

cause of action, the parties to the suit and their privies are

bound as to each matter that sustained or defeated the claim, and

as to any other matter that could have been offered for that

purpose.   Commissioner v. Sunnen, 

, 597 (1948).   The

traditional elements of res judicata are:   Identity of the
                               - 7 -

parties; prior judgment by a court of competent jurisdiction;

final judgment on the merits; and the same cause of action.     In

re A.H. Robins Co., 

(4th Cir. 1989); Republic Supply

Co. v. Shoaf, 

(5th Cir. 1987).

     In a substantially similar case to the case we consider, the

Court of Appeals for the Tenth Circuit addressed the issue of

whether the Commissioner is precluded by res judicata or

equitably estopped from assessing deficiencies in connection with

tax liabilities already claimed in and allowed in lesser amounts

in a confirmed plan of reorganization.   In re DePaolo, 

(10th Cir. 1995).   In that case, the debtor filed for

bankruptcy, and the Commissioner filed a proof of claim and

amendments to the proof of claim which set forth the debtor’s tax

liability for the tax years 1984 through 1987.   The Commissioner

did not object to the debtor’s plan of reorganization, which was

confirmed by the bankruptcy court in 1988.   The debtor began

making payments on his tax liability pursuant to the plan, and in

October 1989, the bankruptcy court issued an order closing the

bankruptcy proceedings.   Thereafter, the Commissioner audited the

debtor’s 1986 tax return and, as a result of the audit, issued a

notice of deficiency determining that the debtor owed an

additional $12,000 in income tax and additions to tax of $2,024.

The debtor moved to reopen the bankruptcy proceedings, seeking a

declaratory judgment to determine the scope and effect of the
                               - 8 -

confirmed plan.   The debtor argued that the principles of res

judicata and equitable estoppel prohibited the Commissioner from

assessing additional tax for 1986.

     The provisions of a confirmed plan generally bind the debtor

and the creditors whether or not the debtor’s claim or interest

is impaired under the plan and irrespective of whether the debtor

has accepted the plan.   11 U.S.C. sec. 1141 (2000).    Excepted

from discharge under 11 U.S.C. sec. 1141, however, are any debts

outlined in 11 U.S.C. sec. 523 (2000).   The court in In re

at 375, held that a confirmed plan does not

discharge an individual debtor from any tax debt within the

purview of 11 U.S.C. sec. 507(a)(7) (now 11 U.S.C. sec.

507(a)(8)), whether or not a claim for such tax was filed or

allowed.   The court in In re 

, opined:

          While principles of res judicata apply generally
     to bankruptcy proceedings, the plain language of 1141
     and 523 forbid the application of those principles to
     the facts of this case. By expressly providing that
     the described taxes are not discharged “whether or not
     a claim for such taxes was filed or allowed,” 11 U.S.C.
     523(a)(1)(A)(emphasis added), Congress has determined
     that the IRS may make a claim for taxes for a
     particular year in a bankruptcy proceeding, accept the
     judgment of the bankruptcy court, then audit and make
     additional claims for that same year, even though such
     conduct may seem inequitable or may impair the debtor’s
     fresh start. * * * “although allowing the IRS to
     pursue its claim after the confirmation and
     consummation of a Chapter 11 plan admittedly conflicts
     with the ‘fresh start’ policy animating the
     [Bankruptcy] Code’s discharge provisions, ‘it is
     apparent to us that Congress has made the choice
     between collection of revenue and rehabilitation of the
     debtor by making it extremely difficult for a debtor to
                              - 9 -

     avoid payment of taxes under the Bankruptcy Code.’
     This is an express congressional policy judgment that
     we are bound to follow.” [In re 

at 376
     (quoting Grynberg v. United States, 

, 371
     (10th Cir. 1993) (quoting United States v. Gurwitch,
     

, 585 (11th Cir. 1986))); fn. ref.
     omitted.]

     The facts of this case and the facts in In re 

, are substantially similar.   Here, the claims respondent

filed in petitioners’ bankruptcy were for the type of debts

described in 11 U.S.C. sec. 523.    The only factual difference of

any significance between the case we consider and In re 

, is that petitioners chose to file a petition in the Tax

Court rather than moving to reopen the bankruptcy proceeding.

That distinction does not make a difference with respect to the

issue we consider here.

     In Fla. Peach Corp. v. Commissioner, 

(1988), we

held that a taxpayer was precluded from relitigating tax

liabilities that the bankruptcy court had allowed.   In Fla. Peach

Corp., upon the Commissioner’s filing of a proof of claim, the

debtor’s objection created a need for a hearing under 11 U.S.C.

sec. 505 to determine the viability of the underlying tax claim.

     In the present case, there is no indication that the

bankruptcy court inquired into the merits of petitioners’ tax

liability in the process of confirmation.   Petitioners did not

object to respondent’s proof of claim, and there was no need for

an 11 U.S.C. sec. 505 hearing to determine the merits of the
                                 - 10 -

underlying tax claim.    Without a final judgment on the merits,

res judicata cannot apply.

     Next we consider whether collateral estoppel precludes

respondent from determining a deficiency larger than the one

claimed in the bankruptcy proceeding.     Under the doctrine of

collateral estoppel, or issue preclusion, the judgment in the

prior suit precludes, in the second cause of action, litigation

of issues actually litigated and necessary to the outcome of the

first action.    Parklane Hosiery Co. v. Shore, 

, 326

(1979).   In Montana v. United States, 

(1979), the

Supreme Court used a three-prong test to determine when the use

of collateral estoppel is appropriate.     The Supreme Court looked

at whether the issues in the subsequent litigation were, in

substance, the same as those in the first case; whether the

controlling facts or legal principles have significantly changed

since the first litigation; and whether other special

circumstances warrant an exception to the normal rules of

preclusion.     

  In Peck v. Commissioner, 

,

166 (1988), affd. 

(9th Cir. 1990), we held that

collateral estoppel applies in the context of a factual dispute

only when the following conditions are satisfied:     (1) The issue

in the second suit must be identical in all respects with the one

decided in the first suit; (2) there must be a final judgment

rendered by a court of competent jurisdiction; (3) collateral
                              - 11 -

estoppel may be invoked against the parties and their privies to

the prior judgment; (4) the parties must actually have litigated

the issues, and the resolution of these issues must have been

essential to the prior decision; and, (5) the controlling facts

and applicable legal rules must remain unchanged from those in

the prior litigation.

     Here, petitioners’ tax liability was incorporated into their

plan for reorganization on the basis of respondent’s uncontested

proof of claim, which in turn was based on petitioners’ tax

returns filed during the bankruptcy proceeding.   As we discussed

above, there is no indication that the merits of petitioners’ tax

liability were litigated in the bankruptcy proceeding or that the

plan was confirmed on the bases of the underlying merits of the

tax claims.   Because the bankruptcy court did not enter a

judgment on the bases of the merits of the tax claim, respondent

is not precluded from determining a tax deficiency.   See Limited

Gaming of Am., Inc. v. Commissioner, T.C. Memo. 2001-273.

     To reflect the foregoing,


                                         An appropriate order will

                                    be issued.