904 F.2d 525 (9th Cir. 1990), 88-7484, Peck v. C.I.R.

Docket Nº:88-7484.
Citation:904 F.2d 525
Party Name:Donald A. PECK; Judith W. Peck, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Date:June 05, 1990
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 525

904 F.2d 525 (9th Cir. 1990)

Donald A. PECK; Judith W. Peck, Petitioners,



No. 88-7484.

United States Court of Appeals, Ninth Circuit

June 5, 1990

Argued and Submitted Dec. 14, 1989.

Page 526

Harry J. Kaplan, San Jose, Cal., for petitioners.

James I.K. Knapp, Acting Asst. Atty. Gen., Gary R. Allen, David English Carmack, Kenneth W. Rosenberg, Tax Division, Dept. of Justice, Washington, D.C., for respondent.

Appeal from a Decision of the United States Tax Court.

Before WRIGHT, HUG, and LEAVY, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

This case requires us to apply collateral estoppel principles in the tax context. The taxpayers, Donald and Judith Peck, entered into a 30-year lease of real property in 1974 from their controlled corporation. The lease terms did not change for the first five years. In a prior action, the Tax Court found that the Pecks' rent deductions under the lease for 1974, 1975 and 1976 must be reduced by the full amount of gardening expenses and 25% of the property taxes and mortgage payments under 26 U.S.C. Sec. 482. 1 This court affirmed that decision, with one judge dissenting in part. Peck v. Commissioner, 752 F.2d 469 (9th Cir.1985) (per curiam) (Peck I ).

In this action, the IRS assessed deficiencies against the Pecks for 1977 and 1978 based on their rental deductions in connection with the same lease. The Tax Court applied collateral estoppel, and held that because the terms of the lease for these two years were the same as those for the first three years, the parties were bound by the courts' determination in Peck I in computing the amount of rent deductions. Peck v. Commissioner, 90 T.C. 162, 168 (1988).

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The doctrine of collateral estoppel (issue preclusion) is intended to limit the number of times a defendant may be forced to litigate the same claim or issue, and to promote efficiency in the judicial system by putting an end to litigation. Gilbert v. Ben-Asher, 900 F.2d 1407, 1409-10 (9th Cir.1990). The doctrine provides that "once an issue is actually litigated and necessarily determined, that determination is conclusive in subsequent suits based on a different cause of action but involving a party or privy to the prior litigation." United States v. ITT Rayonier, Inc., 627 F.2d 996, 1000 (9th Cir.1980). 3

The Supreme Court explained the application of collateral estoppel in the tax context in Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948). After articulating special concerns with respect to the doctrine's application in tax actions, id. at 598-99, 68 S.Ct. at 720, the Court adopted what has come to be known as the "separable facts" doctrine:

Of course, where a question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination in a subsequent proceeding even though the cause of action is different.... And if the very same facts and no others are involved in the second case, a case relating to a different tax year, the prior judgment will be conclusive as to the same legal issues which appear, assuming no intervening doctrinal change. But if the relevant facts in the two cases are separable, even though they be similar or identical, collateral estoppel does not govern the legal issues which recur in the second case.

Id. 333 U.S. at 601, 68 S.Ct. at 721 (emphasis added) (citations omitted). The Court concluded:

Before a party can invoke the collateral estoppel doctrine ..., the legal matter raised in the second proceeding must involve the same set of events or documents and the same bundle of legal principles that contributed to the rendering of the first judgment.

Id. at 601-02, 68 S.Ct. at 721 (citing Tait v. Western Md. Ry. Co., 289 U.S. 620, 53 S.Ct. 706, 77 L.Ed. 1405 (1933)).

The Court's decision in Montana v. United States, 440 U.S. 147, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979), calls Sunnen's separable facts doctrine into question. Starker v. United States, 602 F.2d 1341, 1346 (9th Cir.1979). The Court limited the application of Sunnen to cases where there has been a significant " 'change in the legal climate.' " Montana, 440 U.S. at 161, 99 S.Ct. at 977 (quoting Sunnen, 333 U.S. at 606, 68 S.Ct. at 723); Starker, 602 F.2d at 1347. Two circuits have concluded that the Sunnen separable facts doctrine is not good law after Montana. American Medical Int'l, Inc. v. Secretary of Health, Education and Welfare, 677 F.2d 118, 120 (D.C.Cir.1981) (per curiam); Hicks v. Quaker Oats Co., 662 F.2d 1158, 1167 (5th Cir.1981).

There is conflicting authority in this circuit as to whether Sunnen's separable facts doctrine is still alive. 4 The Supreme Court has rejected the separable facts doctrine in general terms, but has implied that it might have continuing validity in the tax context. United States v. Stauffer Chemical

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Co., 464 U.S. 165, 172 n. 5, 104 S.Ct. 575, 579 n. 5, 78 L.Ed.2d 388 (1984) ("Whatever applicability [the Sunnen separable facts doctrine] may have in the tax context, ... we reject its general applicability outside of that context."); see also 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure Sec. 4425, at 255-57 (1981) (stating that tax litigation may present "the strongest case" for continued adherence to the Sunnen separable facts rule).

We need not decide whether the separable facts doctrine is still good law. Assuming, without deciding, that the more restrictive Sunnen test applies, we hold that the Tax Court properly used the collateral estoppel doctrine in this case.



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