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.
The doctrine of res judicata, or claim preclusion, bars claims when (1) the prior judgment was rendered by a court of competent jurisdiction, (2) the decision was a final judgment on the merits, and (3) the same cause of action and the same parties or their privies were involved in both cases.View Full Point of Law
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.
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?
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.
Justice Frankfurter and Justice Jackson
Would affirm the Tax Court’s judgement because it is based on substantial evidence and is consistent with the law.
1. Collateral estoppel is intended to bar relitigation of issues when the matter has already been decided and when the facts and law have remained the same.
2. Taxation is an annual event and collateral estoppel will not bar litigation relating to taxation to the extent that it was not already litigated.
3. Collateral estoppel will also not bar relitigation if the controlling law or facts have changed since the previous proceeding.
4. The IRS correctly argues that a change in case law between the first and second lawsuit allows Sunnen to be taxed for the 1928 contract for the years 1929–1931.
5. The case law relates to gifts to spouses and the tax implications of them.
6. Sunnen’s gifts to his wife were reallocations of marital wealth and are therefore taxable to him.
7. The judgementbelow is reversed.