Reynolds v. C.I.R.

• Decision Date: 16 November 1988
• Docket Number: No. 87-1813,87-1813
• Citation: 861 F.2d 469
• Parties: -385, 57 USLW 2316, 88-2 USTC P 9591 Harold M. REYNOLDS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 469

861 F.2d 469

63 A.F.T.R.2d 89-385, 57 USLW 2316, 88-2

USTC P 9591

Harold M. REYNOLDS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 87-1813.

United States Court of Appeals, Sixth Circuit.

Argued Aug. 1, 1988.

Decided Nov. 16, 1988.

Thomas A. Caldwell (argued), Joanne C. Beckman, Caldwell, Heggie & Helton, P.C., Chattanooga, Tenn., for petitioner-appellant.

William F. Nelson, Chief Counsel, I.R.S., Gary R. Allen, (lead) Chief, Appellate Section, Acting Asst. Atty. Gen., Tax Div., Dept. of Justice, William S. Rose, Jr., Gilbert S. Rothenberg (argued), Washington, D.C., for respondent-appellee.

Before KEITH, KENNEDY and NELSON, Circuit Judges.

DAVID A. NELSON, Circuit Judge.

The question in this case is whether the doctrine of judicial estoppel ought to be applied against the Commissioner of Internal Revenue on the issue of who, as between the petitioner and the petitioner's former spouse, is to be taxed on a certain capital gain. The gain resulted from the sale, in 1977, of leasehold interests and mineral rights in a coal mine. In 1983 the Commissioner determined that sale proceeds nominally received by petitioner's wife were attributable to petitioner. Earlier, however, in bankruptcy proceedings involving the wife, the Commissioner had entered into a bankruptcy court-approved stipulation binding the wife to recognize and pay taxes on the gain. We conclude that under the unusual facts presented here the doctrine of judicial estoppel does apply, and it precludes the Commissioner from repudiating the position on which the court-approved stipulation was based.

I

The pertinent facts are not in dispute. Petitioner Harold Reynolds, a Tennessee businessman, acquired a coal mine in the early 1970's. The coal lands were sold and leased back to a partnership nominally owned by Mr. Reynolds' new wife (who held a 90% share) and Darlene Johnston, Mrs. Reynolds' daughter from a previous marriage. Mrs. Reynolds' share in the leasehold interests was subject to a trust agreement that effectively provided that 54% of the total interest in the partnership would be held for the benefit of Mr. Reynolds. Mr. Reynolds retained the right to alter, amend, or revoke the agreement; the right to direct the decisions of the trustee; and the right to replace the trustee. Through another trust, the mineral rights in the coal mine were held for the benefit of Mr. and Mrs. Reynolds as tenants by the entirety.

On November 9, 1977, both the leasehold interests and mineral rights were sold to Gold Fields Mining Corporation. The consideration for the sale consisted of $9,883,000 in cash and a tract of land worth $117,000. The cash was to be paid over a four year period, with $7,383,000 due in 1977, the year for which petitioner's tax liability is in dispute. The property had a very low tax basis, so most of the receipts represented taxable gain.

Shortly before the closing Mr. and Mrs. Reynolds and the latter's daughter, each represented by separate counsel, reached agreement on how the proceeds from the sale would be divided among them. They agreed that Mr. Reynolds would receive $3,763,000, Mrs. Reynolds would receive $3,222,447, and the daughter would receive $397,553.

Mrs. Reynolds' 1977 return reported her receipts from the transaction, but also reported large capital losses for that year; the total tax liability was fairly modest as a result. The Commissioner subsequently disallowed Mrs. Reynolds' claimed losses and assessed a large deficiency against her.

Shortly after the closing on the Gold Fields sale, Mrs. Reynolds disappeared. When she resurfaced, it was to file a complaint for divorce in the Circuit Court of Hamilton County, Tennessee. Petitioner countersued. The circuit court found that Mrs. Reynolds was not entitled to keep her share of the sale proceeds, having obtained the property by fraud. The court also found, however, that she was entitled to receive a $2 million distribution of marital assets. Deducting her $2 million marital share from the $3.2 million she had received from the sale, the court ordered her to return the balance to petitioner. This judgment was affirmed on appeal.

The Internal Revenue Service audited petitioner's 1977 tax return in 1980, one year after the divorce. Petitioner--who had reported as 1977 receipts only those sale proceeds he had actually received in that year--claimed he was entitled to a $2,242 refund for overpayment. Petitioner and the IRS reached a settlement under which the IRS agreed to pay petitioner a refund of $352.

By 1981 petitioner had still not received the money that Mrs. Reynolds had been ordered to repay. On April 9, 1981, petitioner filed an involuntary bankruptcy petition against his ex-wife. On April 17, 1981, Mrs. Reynolds filed for voluntary bankruptcy under Chapter 11. The two cases were consolidated.

Soon thereafter Mrs. Reynolds filed an amended income tax return for 1977, claiming a refund on the theory that she had received no capital gain from the sale. Rather, she argued, citing the terms of the divorce decree, she had received only a nontaxable distribution of marital assets. Mrs. Reynolds simultaneously filed a complaint against the Commissioner in the bankruptcy proceedings, seeking a refund of taxes already paid on the 1977 gain.

At this point the IRS shifted gears. On February 23, 1983, it sent Mr. Reynolds a 30-day letter assessing a deficiency in excess of $370,000 for 1977. This marked the first occasion on which IRS took the position that the sale proceeds received by Mrs. Reynolds were attributable to Mr. Reynolds. On December 30, 1983, IRS issued a statutory notice of deficiency. (The notice also assessed a deficiency in petitioner's 1974 taxes and indicated that petitioner was entitled to a refund for overpaying his 1975 taxes, but those aspects of the deficiency determination are not before us.) On March 27, 1984, Mr. Reynolds filed a petition in the Tax Court for redetermination of his tax liability.

A few days later the IRS shifted gears again, entering into a stipulation of settlement with Mrs. Reynolds in the bankruptcy proceeding. Under the terms of that stipulation, which incorporated a schedule setting forth "agreed income" arising out of "cash received or constructively received" by Mrs. Reynolds in connection with the coal sale, Mrs. Reynolds was to pay the government not more than $440,150 in back taxes for 1977. Mrs. Reynolds conceded that $2,922,447 of the sale proceeds were attributable to her, while the IRS adhered to its position that her receipts were $3,222,447. After the stipulation had been signed as "approved and so ordered" by the bankruptcy judge, Mrs. Reynolds conceded the $300,000 difference. The Commissioner continued to maintain, as a "protective position," that petitioner was required to recognize and pay tax on the gain that was attributed to Mrs. Reynolds under the stipulation approved by the bankruptcy court.

On May 26, 1987, the Tax Court upheld the Commissioner's assessment of tax on petitioner for all of the gain from the 1977 sale. The Tax Court applied the "family partnership" and "anticipatory assignment of income" doctrines, finding that petitioner was the true owner of both the leasehold interest and the mineral rights that had nominally belonged to Mrs. Reynolds. Petitioner has appealed to this court.

II

Petitioner argues that the Commissioner is judicially estopped from taking a position inconsistent with that taken in the court-approved compromise under which Mrs. Reynolds agreed to pay tax on the disputed portion of the gain. The Commissioner having sought and obtained bankruptcy court approval of a settlement obligating Mrs. Reynolds to recognize that portion of the gain, petitioner argues that the Commissioner should not be heard to maintain now that it is taxable to Mr. Reynolds instead.

As an initial matter, we consider a possible jurisdictional obstacle to petitioner's invoking the doctrine of judicial estoppel in this case. Judicial estoppel has been viewed as an equitable doctrine governed by general equitable principles. Comment, Precluding Inconsistent Statements: The Doctrine of Judicial Estoppel, 60 Nw.U.L.Rev. 1244, 1261 (1986); see also 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure Sec. 4477 (1981). The Tax Court, however, does not have general equitable powers. Commissioner v. McCoy, 484 U.S. ----, ----, 108 S.Ct. 217, 219, 98 L.Ed.2d 2 (1987) (per curiam). Courts of Appeals, in reviewing Tax Court decisions, have no greater jurisdiction than the Tax Court had in the first instance. Id. Taxpayers who anticipate raising such equitable defenses as judicial estoppel, it has been argued, must do so in the district courts, paying the deficiency first and then bringing suit for a refund. T. Lynn and M. Gerson, Quasi-Estoppel and Abuse of Discretion as Applied Against the United States in Federal Tax Controversies, 19 Tax L.Rev. 487, 516-520 (1964).

This approach, while not unpersuasive as a matter of statutory construction, has not been followed by the Tax Court or the courts of appeals in equitable estoppel cases. See Graff v. Commissioner, 673 F.2d 784, 785 (5th Cir.1982), aff'g 74 T.C. 743, 760-65 (1980); Boulez v. Commissioner, 810 F.2d 209, 218 n. 68 (D.C.Cir.1987), cert. denied, --- U.S. ----, 108 S.Ct. 229, 98 L.Ed.2d 188 (1987), aff'g 76 T.C. 209, 214-17 (1981); Estate of Emerson v. Commissioner, 67 T.C. 612, 617-18 (1977). If, as these cases suggest, the Tax Court has jurisdiction to apply the doctrine of equitable estoppel, we see no reason why the Tax Court may not apply the doctrine of judicial estoppel where appropriate.

The judicial estoppel doctrine protects the integrity of the judicial process by preventing a party from taking a position inconsistent with one successfully and unequivocally asserted by the same party in a prior proceeding. Edwards v. Aetna Life Insurance Co., 690 F.2d 595, 598 (6th...