United States v. Abatti

• Citation: 463 F. Supp. 596
• Decision Date: 22 December 1978
• Docket Number: Crim. No. 78-0294.
• Parties: UNITED STATES of America, Plaintiff, v. Ben ABATTI and Mickey H. Macklin, Defendants.
• Court: U.S. District Court — Southern District of California

463 F. Supp. 596

UNITED STATES of America, Plaintiff, v. Ben ABATTI and Mickey H. Macklin, Defendants.

Crim. No. 78-0294.

United States District Court, S. D. California.

December 22, 1978.

Herbert B. Hoffman, Asst. U.S. Atty., San Diego, Cal., for plaintiff.

James O. Hewitt, Harry D. Steward, San Diego, Cal., for defendant Abatti.

John A. Mitchell, San Diego, Cal., for defendant Macklin.

GORDON THOMPSON, Jr., District Judge.

The defendants have filed motions to dismiss the indictment on the grounds that an earlier decision adverse to the government in the Tax Court bars this criminal prosecution under the doctrine of collateral estoppel. The case arises from the transactions of a profitable farming operation owned and operated by defendant Ben Abatti and his brother Tony. Defendant Macklin, an accountant, prepared the Abattis' tax returns during the years in question. Based upon the papers submitted by the parties and upon the arguments of counsel at a hearing on October 27, the court grants the defendants' motions to dismiss.

I FACTS AND ISSUES

The history of this case begins in the Tax Court. The Commissioner of Internal Revenue determined that defendant Ben Abatti, Ben's brother Tony, and their wives had deficiencies in income tax for the years 1971, 1972, and 1973. The Abattis disputed the Commissioner's claims and filed petitions for redetermination. The Tax Court set the case for trial on March 27, 1978; on that date, after the government moved to continue the trial date, the Tax Court "reluctantly" reset the cases for trial on June 26. On June 7, because of the expected length of trial, the Tax Court ordered the case reset for trial on June 21. Prior to trial the court denied another government motion to continue and granted the petitioners' motions to shift the burden of proof and to exclude reliance on I.R.C. § 482. The trial lasted eleven days. R.T. at 12. On September 28, the Tax Court ruled in favor of the taxpayers and against the government.

Meanwhile, on April 4, a federal grand jury returned a twelve-count indictment against Macklin and Ben Abatti. The indictment charged Abatti with three counts of tax evasion in violation of I.R.C. § 7201 and with three counts of making a false tax return in violation of I.R.C. § 7206(1). It charged Macklin with six counts of aiding in the preparation of false tax returns in violation of I.R.C. § 7206(2). All twelve counts covered the years 1971, 1972, or 1973, the same years at issue in the Tax Court proceeding. All twelve counts alleged, in specific dollar amounts, understatements in taxable income, in gross income, or in income from partnerships and small business corporations.

Certain matters are not in issue. The government does not deny that a motion to dismiss is the proper vehicle for challenging the indictment on grounds of collateral estoppel. See Fed.R.Crim.P. 12(b). It agrees that collateral estoppel applies in criminal cases, see Ashe v. Swenson, 397 U.S. 436, 90 S.Ct. 1189, 25 L.Ed.2d 469 (1970), and it does not challenge the defendants' assertions that the first proceeding's civil character does not alter the preclusive effect of the Tax Court's decision. See Yates v. United States, 354 U.S. 298, 77 S.Ct. 1064, 1 L.Ed.2d 1356 (1957). Nor do any of the parties attach significance to the Tax Court's status as an article I court. See I.R.C. § 7441. Finally, the government does not deny that Abatti and the United States were both parties to the Tax Court trial, while Macklin does not assert that he has ever been in privity with the Abattis.

The motion does present four questions. First, since the statutory time for appeal to the court of appeals from the Tax Court decision has not yet passed, does the principle of collateral estoppel apply to this proceeding? Second, did the Tax Court necessarily decide against the government any issue that is an element of the government's case in this proceeding? Third, even if collateral estoppel otherwise applies, should the court not invoke it on the grounds that the government did not have a "full and fair opportunity" to litigate its case in the Tax Court? Fourth, may Macklin take advantage of the decisions of the Tax Court in this litigation, even though he was not a party to the Tax Court proceeding?

II THE EFFECT OF APPEAL

The government maintains that, because the United States may still appeal the Tax Court decision, the Tax Court decision is not yet final and therefore is not yet collateral estoppel as to this case. The absence of a final judgment in a case does not necessarily prevent it from being collateral estoppel on identical issues in another case. See Zdanok v. Glidden Co., 327 F.2d 944, 955 (2d Cir. 1964); Aetna Cas. & Sur. Co. v. Jeppesen & Co., 440 F.Supp. 394 (D.Nev. 1977). The relevant question is whether litigation in the first case has concluded. Moreover, a decision in one proceeding in federal courts is collateral estoppel as to a later proceeding, even if the decision in the first case is under appeal. See Deposit Bank v. City of Frankfort, 191 U.S. 499, 510-11, 24 S.Ct. 154, 48 L.Ed. 276 (1903); Performance Plus Fund, Ltd. v. Winfield & Co., 443 F.Supp. 1188 (N.D.Cal.1977). The reason for this latter rule is that a decision rendered by a court of competent jurisdiction is presumptively correct.

The government acknowledges that these rules apply generally in the federal courts. It claims, however, that Congress created a statutory exception applicable to this case, because I.R.C. § 7481(a)(1), the statute governing appeal from Tax Court decisions, says those decisions "shall become final upon the expiration of the time allowed for filing a notice of appeal, if no such notice has been duly filed within such time." The government also quotes language from Ashe v. Swenson, 397 U.S. 436, 90 S.Ct. 1189, 25 L.Ed.2d 469 (1970), that collateral estoppel applies only when there is "a valid and final judgment." Reading this language and the statute together, the government argues that, since the time for appeal has not elapsed, the statute acts as a bar to collateral estoppel in this proceeding.

Neither the government's reference to Ashe nor its interpretation of the statute is correct. In Ashe the Court's statement was dicta, because the finality of the first case was not in dispute. Moreover, as the government concedes, its argument turns upon whether Congress intended section 7481 to create an exception to the general rules outlined above. It did not. In Denholm & McKay Co. v. Commissioner, 132 F.2d 243, 248 (1st Cir. 1942), the First Circuit stated that it was

the evident purpose of Congress in prescribing so minutely the dates on which the Board decisions become final ... to enable the Commissioner to know exactly when he is at liberty to make the deficiency assessment ... and ... to enable the Commissioner to know the exact date on which he comes under the duty of allowing the credit or of making a refund.

The court quoted relevant passages from the Senate and House reports on the legislation enacting this statute. The reports do not mention collateral estoppel or res judicata. The authorities cited by the government fail to discuss congressional intent or do not involve disputes about the finality of the Tax Court's judgment. Since Congress did not intend I.R.C. § 7481 to modify the general rule about the collateral estoppel effects of decisions on appeal, the Tax Court's ruling, even if appealed, still may be collateral estoppel for this proceeding.

III MATTERS NECESSARILY DECIDED IN THE FIRST LITIGATION

In its papers the government argues that the Tax Court did not necessarily decide against it any issue that is an element of its criminal prosecution. For the sake of clarity we discuss Abatti and Macklin separately.

A. Abatti. The government maintains, and the defendants do not dispute, that the defendants bear the burden of establishing that the Tax Court necessarily decided in their favor an issue they now seek to foreclose from litigation on the theory of collateral estoppel. See Russell v. Place, 94 U.S. 606, 24 L.Ed. 214 (1876); United States v. Cala, 521 F.2d 605 (2d Cir. 1975). The government concedes that the Tax Court decided against the government a question of ultimate fact—whether there was a deficiency in tax—that is an element of its three counts of tax evasion. It argues, however, that the other three counts against Abatti should not be dismissed, because neither of the questions decided by the Tax Court—whether there was a deficiency in tax and whether Abatti filed his returns with intent to defraud—are issues in those counts. Because we decide that the government is wrong with respect to the deficiency in tax, we need not analyze the preclusive effect of the Tax Court's finding of no fraudulent intent.

To determine the preclusive effects of the Tax Court's decisions, we must first determine what the Tax Court necessarily decided. In a section of its opinion, entitled, "Ultimate Findings of Fact," the Tax Court stated, "Petitioners did not understate their taxable income for the taxable years 1971, 1972 or 1973 nor did they understate their income tax liabilities for the taxable years 1971, 1972 or 1973." Abatti v. Commissioner, Tax Ct.Mem.Dec. (P-H) ¶ 78,392, at 78-1599. At oral argument the government urged that this language is susceptible to two constructions. The Tax Court might have found that the taxpayers did not understate any of their gross income, taxable income, or income from businesses and partnerships. Alternatively, the Tax Court might have found that the taxpayers understated one or more of these types of income but that the taxpayers had offsetting unreported expenses. Since either construction is possible, neither construction should be accorded effect as collateral estoppel.

As the government notes, a court should take a "practical," rather than a "hypertechnical" approach, in determining what issues were necessarily...