Commissioner of Internal Revenue v. Sunnen

Brief Fact Summary.

The IRS attempts to tax a Defendant on royalties in subsequent years for a contract that happened almost a decade before. The court using res judicata says the IRS cannot do it.

Synopsis of Rule of Law.

Collateral estoppel only bars relitigation of tax liability in various years if the second matter is identical to the first and the controlling facts and legal rules are the same.

Facts.

Between 1937–1941 Defendant Sunnen gifted his wife patent-license contracts to avoid paying income taxes on the royalties. The IRS sued Defendant claiming the royalties were taxable as income. The court, using res judicata, concluded that Sunnen could be taxed for all the royalties except for the royalties paid in 1937 on a 1928 contract based on a prior ruling by the Board of Tax Appeals that disallowed collection of taxes on royalties received between 1929–1931 on a 1928 contract. The United States Court of Appeals for the Eighth Circuit affirmed and the Supreme Court granted certiorari.

Issue.

In a case involving income tax in varying years, will collateral estoppel only bar relitigation of tax liability if the second matter is identical to the first and the controlling facts and legal rules are unchanged?

Held.

Yes, in a case involving income tax in varying years, collateral estoppel will only bar relitigation of tax liability if the second matter is identical to the first and the controlling facts and legal rules are unchanged. The judgement below is reversed.

Dissent.

Justice Justice Frankfurter and Just Jackson. Would affirm the Tax Court’s judgement because it is  based on substantial evidence and is consistent with the law