U.S. v. Shanbaum

Decision Date03 January 1994
Docket NumberNo. 92-9015,92-9015
Citation10 F.3d 305
Parties-571, 94-1 USTC P 50,032, 27 Fed.R.Serv.3d 1221 UNITED STATES of America, Plaintiff-Appellant, v. Bernice H. SHANBAUM, et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Richard Stephens, U.S. Atty., John A. Dudeck, Gary R. Allen, Chief, Richard Farber, Appellate Sec., Tax Div., U.S. Dept. of Justice, Washington, DC, for U.S.

Linda S. Aland, Dallas, TX, for Bernice Shanbaum.

J. Michael Tibbals, F. David Stone, Godwin & Carlton, Dallas, TX, for Rozine Optical Export.

Douglas A. Barnes, Dallas, TX, for Woods & Woods.

Demetris A. Sampson, Heard, Goggan, Blair & Williams, Dallas, TX, for City of Dallas and Country of Dallas.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, JONES, and DUHE, Circuit Judges.

GOLDBERG, Circuit Judge:

The United States brought this suit to reduce to judgment income tax and transferee liability assessments that it had made against Bernice H. Shanbaum and her husband, Theodore B. Shanbaum, and to foreclose upon tax liens that it had asserted against the Shanbaums' real estate. The assessments were made after the government and the Shanbaums entered into agreed decisions in the United States Tax Court. The income tax liability assessments stemmed from deficiencies that the Shanbaums had incurred from eight years of underpayments on their joint income tax returns. The transferee liability assessment arose because the Shanbaums received the assets of Grayson Enterprises, Inc., a company that, at the time of the transfer, had a substantial amount of tax liability. After a one-day bench trial in which Bernice Shanbaum was the only defendant, 1 the district court concluded that Mrs. Shanbaum should be relieved of her tax liability because she was an "innocent spouse" within the meaning of 26 U.S.C. Sec. 6013(e). The district court then determined the priorities of the various liens on the property involved in the case and entered judgment accordingly. The government appeals, contending that the doctrine of res judicata required the district court to give the Tax Court decisions preclusive effect and thus barred Mrs. Shanbaum from raising the innocent spouse defense in the court below. Alternatively, the government maintains that Mrs. Shanbaum did not show that she was entitled to the innocent spouse defense. Finally, the government asserts that the district court erred in holding that the innocent spouse defense applied to Mrs. Shanbaum's transferee liability. Agreeing with the government's contentions, we find that the district court erred, and we reverse.

I. Facts and Proceedings Below

The record amply demonstrates that the Shanbaums were familiar with proceedings before the Tax Court. In early 1985, the Tax Court entered an agreed decision which found that Theodore and Bernice Shanbaum were liable for the following income tax deficiencies for the following years:

                Taxable Year  Deficiency
                    1974      $10,861.10
                    1975      $ 8,451.92
                    1976      $43,443.86

The government then assessed these income tax deficiencies, plus the allowable statutory interest, against the Shanbaums.

Approximately two years later, on November 10, 1987, the Tax Court filed another agreed decision which determined the following income tax deficiencies for Theodore and Bernice Shanbaum for the following years:

                Taxable Year     Deficiency
                    1977      $  126,485.58
                    1978      $  165,817.62
                    1980      $1,275,289.17
                    1981      $  295,833.36
                    1982      $  235,193.34

This decision included a five percent negligence penalty for each taxable year as well as an additional penalty assessed for the year 1982 because that income tax return contained a substantial understatement of liability. Later, the government assessed these deficiencies, plus the allowable statutory interest, against the Shanbaums.

On November 13, 1987, still another agreed decision was entered by the Tax Court. This order determined that the Shanbaums were each liable as transferees of the assets of Grayson Enterprises, Inc. However, the Shanbaums' liability was expressly limited to $1,954,269.21. Again, the government assessed the transferee liability, plus the allowable statutory interest, against the Shanbaums. Later, notices of federal tax liens were filed by the Internal Revenue Service in the public records of Dallas County, Texas, with respect to all of these assessments. None of the Tax Court decisions were appealed. Furthermore, all of the decisions were signed by Edward Esping, the attorney for both Mr. and Mrs. Shanbaum.

The government then brought this suit to reduce to judgment the assessments made against the Shanbaums and to foreclose upon the tax liens asserted against the Shanbaums' property. Mr. Shanbaum failed to answer the government's complaint, and the district court entered a default judgment against him. Mrs. Shanbaum answered the complaint; however, she did not raise any affirmative defenses.

Pursuant to Rule 16 of the Federal Rules of Civil Procedure, the parties submitted a proposed pretrial order which included, among others, sections entitled "Summary of the Claims and Defenses of Each Party" and "Contested Issues of Law." The day that the trial began, the court approved of and filed this order. In her portion of the Summary of Claims and Defenses, Mrs. Shanbaum asserted for the first time that she was not liable for the taxes at issue because she was an "innocent spouse" within the meaning of the Internal Revenue Code. See 26 U.S.C. Sec. 6013(e). In response, the government claimed in its portion of the Summary of Claims and Defenses that Mrs. Shanbaum was "collaterally estopped from asserting an 'innocent spouse' defense as to her liability for income (1040) taxes for the years 1974, 1975, and 1976" and that "[t]he 'innocent spouse' defense is not available as to the transferee liability of ... Bernice H. Shanbaum." The pretrial order also listed as one of the "Contested Issues of Law" whether Mrs. Shanbaum "may assert the 'innocent spouse' [defense] as a defense to the taxes assessed against her and for which judgment is requested in this action."

Thus, the only specific defense that the government raised to Mrs. Shanbaum's innocent spouse defense was collateral estoppel. However, collateral estoppel and res judicata are not necessarily fungible concepts. Pleading one of these defenses does not necessarily signify that the other has also been pleaded. Hence, the government did not specifically raise res judicata in the pretrial order. Nevertheless, in its trial brief, filed the same day that the pretrial order was filed, the government did argue that the doctrine of res judicata barred Mrs. Shanbaum from relitigating the Tax Court decisions that determined her income tax and transferee liability.

During the trial, the attorney who represented the government in the Shanbaum's Tax Court proceedings testified that the those proceedings were resolved pursuant to settlement agreements reached between the Shanbaums and the Internal Revenue Service. Then, without objection, the government introduced into evidence copies of the Tax Court decisions that determined the Shanbaums' income tax deficiencies and transferee liability.

Mrs. Shanbaum testified that during the taxable years at issue she had worked as a housewife, that she had earned no independent income, and that almost all of her living expenses had been provided by her husband's earnings. Mrs. Shanbaum also stated that she had received an eighth-grade education and that, during the years at issue in this case, she had not been involved in her husband's financial affairs or business activities. She further testified that she had signed the joint income tax returns for the years at issue without taking the opportunity to review them. Finally, Mrs. Shanbaum asserted that she did not personally take part in the Tax Court proceedings and that she did not know anything about the specific items of income or deductions reported on her joint tax returns.

After the trial, the government filed a post-trial brief in which it again urged that Mrs. Shanbaum was barred by the doctrine of res judicata from raising the innocent spouse defense and that, in any event, Mrs. Shanbaum had failed to prove that she was entitled to relief under that defense. In her response, Mrs. Shanbaum continued to maintain that, because she was an innocent spouse, the government was not entitled to obtain judgment against her. She also argued that the government had waived res judicata because that defense was not raised in a responsive pleading.

Later, the district court filed a Memorandum Decision and Order in which it ruled that Mrs. Shanbaum was an innocent spouse who was not liable for any of the assessments made against her. The court then entered its judgment, ordering that the government take nothing from Mrs. Shanbaum.

II. The Preclusive Effect of the Prior Tax Court Decisions

We first address the government's contention that res judicata barred Mrs. Shanbaum from raising the innocent spouse defense. The doctrine of res judicata, read in the broad sense of the term, embraces two distinct preclusion concepts: claim preclusion (often termed "res judicata") and issue preclusion (often referred to as "collateral estoppel"). Migra v. Warren City School Dist. Bd. of Education, 465 U.S. 75, 77 n. 1, 104 S.Ct. 892, 894 n. 1, 79 L.Ed.2d 56 (1984). Unfortunately, the terminology used in this area of the law often breeds confusion. This confusion is reflected in the government's contentions in the pre-trial order. In that document, the government asserted that collateral estoppel--not res judicata--prevented Mrs. Shanbaum from asserting the innocent spouse defense. We will thus pause to outline the contours of claim and issue preclusion.

A. The Legal Background

Claim preclusion, or "pure" res judicata, is the "venerable legal...

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