Finley v. U.S., 78-1066

• Decision Date: 20 February 1980
• Docket Number: No. 78-1066,78-1066
• Citation: 612 F.2d 166
• Parties: 80-1 USTC P 13,337 John F. FINLEY, Executor of the Estate of Mildred B. Whitlock, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 166

612 F.2d 166

80-1 USTC P 13,337

John F. FINLEY, Executor of the Estate of Mildred B Whitlock, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 78-1066.

United States Court of Appeals Fifth Circuit.

Feb. 20, 1980.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Act. Chief, App. Section, Richard Farber, James A. Riedy, Attys., Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant-appellant.

George H. DeCarion, South Miami, Fla., for plaintiff-appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before MORGAN, REAVLEY and HATCHETT, Circuit Judges.

REAVLEY, Circuit Judge:

This appeal arises from a refund suit in which the district court determined that the value of a trust, over which taxpayer's decedent held a general testamentary power of appointment, could not be included under I.R.C. § 2041(a), (b)(1) in decedent's taxable estate since she had been mentally incompetent and therefore legally incapable of exercising that power throughout her possession of it. We decide, however, that under I.R.C. § 7422(e) ¹ the district court lost jurisdiction over the issue when taxpayer filed a petition in the Tax Court for redetermination of an additional disputed deficiency in the estate's tax payment.

Appellee taxpayer, executor of the estate of Mildred B. Whitlock, timely filed a federal estate tax return showing a tax liability of $116,020 on a gross estate of $653,147. The inclusion of a trust valued at $395,342 accounted for well over half of the gross estate and most of the resultant tax liability. The Internal Revenue Service had included the trust in decedent's estate under I.R.C. § 2041(a)(2) because it had been subject to her general testamentary power of appointment. Taxpayer disputed the inclusion of the trust, however, on the ground that decedent had been legally incapable of using her power since she had been mentally incompetent, lacking testamentary capacity, for as long as she had held the power. Thus, appellee argued, that power had been neither legally nor actually "exercisable" by the decedent and, therefore, was not within the definition of a "general power of appointment" includible in her federal taxable estate. I.R.C. § 2041(b)(1).

After the Internal Revenue Service rejected his request for a refund based on this argument, taxpayer filed this refund action on June 6, 1975. On September 30, 1975, prior to any hearing in the suit, the government mailed to the taxpayer a notice of deficiency based on taxpayer's having claimed in the estate tax return a $14,983 credit for state death tax without having actually paid that tax as required by I.R.C. § 2011(a). Under I.R.C. § 7422(e) proceedings in the district court should then have been stayed for the ninety-day period during which the taxpayer could file for a redetermination of the deficiency in the Tax Court and for sixty days thereafter. No one, however, informed the district court of the mailing of the deficiency notice. In fact, even the attorney representing the government apparently was not made aware of the deficiency notice for several months. Therefore, on November 6, 1975, the parties submitted the case for decision based on written stipulations, and on December 2, 1975, the district court unaware of its duty to stay proceedings pending action on the deficiency notice handed down a judgment for taxpayer, entering a "final summary judgment" on December 15, 1975.

Taxpayer then petitioned the Tax Court on December 29, 1975, for a redetermination of the credit deficiency, asserting that since the decision of the district court had finally fixed the size of the federal estate, and therefore the maximum allowable credit for state taxes under section 2011(b) as well, the state tax, which was based on these amounts, See Fla.Stat.Ann. § 198.02 (West Supp.1979), could and would be paid. Now aware of the deficiency notice and of taxpayer's petition in the Tax Court, the government on June 24, 1976, moved the district court to vacate its judgment based on its having lost jurisdiction under section 7422(e). The district court denied the motion to vacate and, following submission by the parties of the amount computed to be due taxpayer in refund, entered an amended final judgment on November 7, 1977. We reverse.

I.

Section 7422(e) of the Internal Revenue Code requires that, when prior to the hearing of his refund suit in the district court the Internal Revenue Service mails to a taxpayer a deficiency notice "in respect of the tax which is the subject matter" of the refund suit, if the taxpayer petitions the Tax Court for redetermination of this deficiency, the district court "shall lose jurisdiction of taxpayer's suit to whatever extent jurisdiction is acquired by the Tax Court of the subject matter of taxpayer's suit for refund." The extent of Tax Court acquisition of jurisdiction over the "subject matter" of the refund suit is not a narrow reference to the particular issues raised in the deficiency notice as compared to those involved in the refund suit. Instead, it refers to the cause or causes of action involved in each. S.Rep.No.1622, 83d Cong., 2d Sess. 611, Reprinted in (1954) U.S.Code Cong. & Admin.News, pp. 4621, 5261. The displacement of jurisdiction must be given a scope at least this broad in order to avoid res judicata conflicts between the proceeding commenced in the Tax Court and that carried on in the district court.

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. Commissioner v. Sunnen, 333 U.S. 591, 598, 68 S.Ct. 715, 92 L.Ed. 898 (1948). As in any other area, res judicata bars subsequent litigation of a previously adjudicated cause of action, including those claims and defenses that could have been, but were not, raised in the earlier proceeding. Id. All such issues are considered to have merged into the prior judgment. Accordingly, when during the course of a refund suit a taxpayer petitions the Tax Court in response to an additional disputed deficiency for the same tax year, the Tax Court acquires jurisdiction over the entire cause of action, necessarily including all possible issues controlling the determination of the amount of tax liability for the year in question whether or not raised by the deficiency notice. The district court is then divested of jurisdiction over all such issues under section 7422(e). United States v. Joe Graham Post No. 119, American Legion, 340 F.2d 474, 476-77 (5th Cir.), Cert. denied, 382 U.S. 824, 86 S.Ct. 55, 15 L.Ed.2d 70 (1965); Russell v. United States, 592 F.2d 1069, 1071-72 (9th Cir.), Cert. denied, --- U.S. ----, 100 S.Ct. 308, 62 L.Ed.2d 315 (1979). See, e. g., Fairchild Ind., Inc. v. United States, 590 F.2d 343 (Ct.Cl.1978) (text at 78-2 U.S.T.C. (CCH) P 9755).

This court has ruled, similar to the rule in Sunnen, that the tax liability of an estate constitutes a single cause of action and that an adjudication of that liability bars under res judicata another litigation even of issues and defenses that were not, but could have been, raised in the first proceeding. Estate of Hunt v. United States, 309 F.2d 146, 147-49 (5th Cir. 1962). Thus, consistent with the result in Russell and Joe Graham Post No. 119, when in a situation governed by section 7422(e) an estate taxpayer files a petition in the Tax Court, that court acquires jurisdiction over the entire cause of action regarding the estate's tax liability, and the district court is divested of jurisdiction over the estate's refund suit, regardless of the lack of common identity between the issues raised by the two claims.

In the case at bar a deficiency notice regarding the estate's tax liability was mailed prior to any hearing in the refund suit. In response to this notice taxpayer filed a petition in the Tax Court. Under the standard application of section 7422(e), outlined above, it appears that the district court should have been divested of jurisdiction. Two unique characteristics of this case, however, warrant consideration regarding whether, because of these characteristics, this case should be excepted from the ordinary operation of section 7422(e) and the jurisdiction of the district court upheld.

II.

Taxpayer contends, first, that section 7422(e) should not operate to oust district court jurisdiction because of the unique nature of the credit issue raised in the deficiency notice with which his Tax Court petition dealt. The allowable credit for state death taxes varies under I.R.C. § 2011(b) with the size of the taxable estate and therefore cannot be ascertained until after the size of that estate is determined. Section 2011(c), therefore, explicitly provides that the taxpayer may wait to claim this credit until sixty days after final judgment in any Tax Court or refund suit regarding the estate. By so providing, taxpayer argues, Congress implied an intention that the credit for state death taxes should constitute a cause of action separate from general questions of estate tax liability. To a limited extent, he is correct. Where, pursuant to the statutory scheme of section 2011(c), a taxpayer properly claims a state death tax credit following an adjudication of general estate tax liability and then files a request for refund of the amount of such credit, an action to collect that refund would be predicated on a claim not subject to being raised in the first suit and therefore would not be barred under res judicata by that prior proceeding. Any other result would frustrate congressional purpose and the section 2011(c) statutory mechanism for claiming such credits.

Any such inference of a congressional intent to allow separate consideration of the state death tax credit issue an obvious departure from the general judicially created rule that all...