IRS v. Palmer
| Decision Date | 20 March 2000 |
| Docket Number | No. 98-35577,98-35577 |
| Citation | 207 F.3d 566 |
| Parties | (9th Cir. 2000) In re: GALE PALMER; JULIE A. PALMER, Debtors. UNITED STATES INTERNAL REVENUE SERVICE; UNITED STATES OF AMERICA,OPINION Appellants, v. GALE PALMER; JULIE A. PALMER, Appellees |
| Court | U.S. Court of Appeals — Ninth Circuit |
Thomas J. Sawyer, Tax Division, United States Department of Justice, Washington, D.C., for the appellants.
W. Scott Green, West, Patten, Bekkedahl & Green, Billings, Montana, for the appellees.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Hagan, Ryan, and Russell, Judges, Presiding. BAP No. MT-96-02134-HaRyRu
Before: William C. Canby, Jr., Melvin Brunetti, and Diarmuid F. O'Scannlain, Circuit Judges. Opinion by Judge Canby
The question before us is whether a fraud determination by the Tax Court, which resulted from a petitioner's failure to controvert the Commissioner's allegations of fraud and otherwise to participate in the proceedings, collaterally estops that petitioner from contesting the fraud in a subsequent bankruptcy proceeding. We hold that it does not, because the question of fraud was not "actually litigated" in the Tax Court proceeding.
The Internal Revenue Service mailed taxpayer Gale A. Palmer a notice of deficiency for the years 1979 through 1983. Palmer filed a timely petition for a redetermination of his tax liability in the United States Tax Court. Palmer asserted that he was not liable for any of the taxes or penalties. The Commissioner of Internal Revenue filed an answer that included affirmative allegations of tax fraud against Palmer. Palmer failed to respond to the Commissioner's answer and affirmative allegations. The Commissioner then filed a motion requesting that the Tax Court deem these allegations admitted pursuant to Tax Court Rule 37(c), I.R.C. foll. S 7453. Palmer did not file a timely response. 1 The Tax Court granted the Commissioner's motion and deemed the allegations admitted.
In light of the admissions, the Commissioner filed a motion for summary judgment. Palmer did not enter a pretrial stipulation of facts, and he made no appearance to dispute the motion for summary judgment. Predictably, the Tax Court granted the motion and found that Palmer had engaged in tax fraud. Palmer did not appeal, and the decision became final.
The Palmers subsequently filed a petition for relief under Chapter 7 of the Bankruptcy Code.2 They then filed an adversary proceeding against the Commissioner seeking a discharge of their federal income tax debts for the years 1980 through 1983. The Commissioner filed a motion for summary judgment, arguing that the debt was non-dischargeable under 11 U.S.C. S 523(a)(1)(C) because of tax fraud. To support the motion, the Commissioner submitted the Tax Court's determination that Palmer had engaged in tax fraud. The bankruptcy court held that the Tax Court's determination was preclusive, and granted the summary judgment motion denying the discharge. The Bankruptcy Appellate Panel reversed on the ground that Palmer essentially defaulted in the Tax Court and therefore the fraud issue was not "actually litigated." The United States now appeals. We have jurisdiction pursuant to 28 U.S.C. S 158(d).
We review de novo a decision of the Bankruptcy Appellate Panel. In re Arden, 176 F.3d 1226, 1227 (9th Cir. 1999). We also review de novo the bankruptcy court's application of collateral estoppel. See Clark v. Bear Stearns & Co., 966 F.2d 1318, 1320 (9th Cir. 1992).
Collateral estoppel is appropriate when the following elements are met:
(1) there was a full and fair opportunity to litigate the issue in the previous action;
(2) the issue was actually litigated in that action;
(3) the issue was lost as a result of a final judgment in that action; and
(4) the person against whom collateral estoppel is asserted in the present action was a party or in privity with a party in the previous action.
Pena v. Gardner, 976 F.2d 469, 472 (9th Cir. 1992); see generally Parklane Hosiery Co. v. Shore, 439 U.S. 322, 329 (1979); Charles Alan Wright, Law of Federal Courts 724-26 (5th ed. 1994). Because the parties do not dispute that requirements (1), (3) and (4) are met here, the critical issue is whether Palmer's alleged tax fraud was "actually litigated" in the prior Tax Court proceeding. We conclude that it was not.
We begin with the proposition that a default judgment is generally not entitled to collateral estoppel effect because there is no actual litigation of issues. See In re Gottheiner, 703 F.2d 1136, 1140 (9th Cir. 1983); see also In re Raynor, 922 F.2d 1146, 1150 (4th Cir. 1991); Lombard v. Axtens, 739 F.2d 499, 502 (10th Cir. 1984). For all practical purposes, Palmer's adverse fraud ruling in the Tax Court was the product of a default. Palmer petitioned pro se for a redetermination of his tax liability in the Tax Court. He did nothing after that. He did not substantially participate in the proceedings. The government introduced no evidence of fraud; it simply made allegations of fraud in its answer to the petition. Palmer made no reply. He did not respond to the Commissioner's motion to deem the uncontroverted assertions admitted pursuant to Tax Court Rule 37(c). He participated in no discovery. He ignored the Commissioner's motion for summary judgment.
Although Palmer's behavior may not amount to a classic default, because he initiated the Tax Court proceeding, it is close enough for present purposes. Once Palmer filed his Tax Court petition to contest the deficiency, he did nothing else. The government's fraud assertions placed him in a defensive position, which he totally abandoned. In these circumstances, we agree with the Bankruptcy Appellate Panel that the issue of fraud was not "actually litigated" in the Tax Court.
The government argues that Palmer is in no different position from a litigant who loses a summary judgment motion because of a failure to controvert affidavits submitted in support of the motion. The government relies on Gottheiner. But the usual summary judgment comes after a greater degree of participation and involvement by the losing party than was the case with Palmer. Gotthe...
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