Warda v. C.I.R.

• Decision Date: 26 January 1994
• Docket Number: No. 92-2344,92-2344
• Citation: 15 F.3d 533
• Parties: -2324, 73 A.F.T.R.2d 94-839 Ethel M. WARDA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 533

15 F.3d 533

73 A.F.T.R.2d 94-2324, 73 A.F.T.R.2d 94-839

Ethel M. WARDA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 92-2344.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 15, 1993.

Decided Jan. 26, 1994.

Peter J. Johnson (briefed), Jay L. Schultz (argued and briefed), St. Joseph, MI, for petitioner-appellant.

Gary R. Allen, Acting Chief (briefed), David English Carmack, Christine Grant (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, DC, for respondent-appellee.

Before: NELSON and NORRIS, Circuit Judges; and HEYBURN, District Judge. ^*

JOHN G. HEYBURN II, District Judge.

Petitioner Ethel Warda appeals the tax court's determination that certain conveyances of land from Mrs. Warda to her son were taxable gifts. This Court is faced with two Michigan probate court decisions, one from 1953 and another from 1992, each of which, if followed here, would produce completely different results. The 1953 probate ruling declared that Mrs. Warda held title to the property the Commissioner now wishes to tax; the 1992 ruling declared that Mrs. Warda had not held title to the land in question but held the property in constructive trust for the benefit of her son. We must determine whether the doctrines of res judicata or collateral estoppel grant conclusive effect to either probate decision and, if not, whether Mrs. Warda is nevertheless entitled to rely upon the 1992 probate ruling, which would bar the Commissioner from collecting the desired gift tax.

Although we approach this complex case differently than did the tax court, we agree with the tax court's result. Neither Michigan probate decision binds this Court under the circumstances. We hold instead, however, that Mrs. Warda is judicially estopped from disputing the result of the 1953 probate litigation, and we further hold that an independent review of the original probate proceedings does not support the retroactive imposition of a constructive trust. We therefore affirm.

I.

A.

Mrs. Warda's father, William Matthews, owned several parcels of Michigan land at his death in 1953. He had written two wills and a later codicil disposing of this property. The first will devised his land to Mrs. Warda; the second will revoked the earlier one and left the property instead to Mrs. Warda's son, Henry, the grandson of Mr. Matthews. Both wills also provided, in substantially identical terms, for monthly payments of support and medical assistance to Mr. Matthews' surviving wife. Some two years after he made his second will, Mr. Matthews executed a codicil which referred to and amended certain administrative provisions of the first will. The codicil did not expressly revoke, or even refer to, the second will. This ambiguity led to a will contest in 1953.

Mrs. Warda insisted during that litigation that her father's codicil impliedly revoked the second will and revived the first. Henry Warda, nineteen years old and represented by his father, who was the boy's legal guardian, responded that the second will should govern Mr. Matthews' estate. The Michigan courts had taken no clear position on that legal issue prior to 1953, and the question indeed remains unresolved to this day. (See In re Estate of Matthews, No. 17664, Berrien County, Mich.P.Ct.1992.) More significant than the content of the parties' arguments, however, was the fact that Mrs. Warda and her son, though they had potentially conflicting interests in the litigation, were both represented by the same attorney. This conflict of interest, Mrs. Warda now argues, was a constructive fraud committed by Mrs. Warda against her son, one that tainted the entire probate proceedings.

The attorney for Mrs. Warda and Henry persuaded them to settle their differences through an agreement which would provide a lump-sum payment to Mr. Matthews' widow in lieu of lifetime support and then convey the rest of the estate to Mrs. Warda. Henry Warda's father petitioned the probate court to accept this settlement, suggesting that further litigation "would cause great expense and dissipate the assets [of the estate] and would be wholly unwarranted and unjust." That petition informed the court that "it is for the best interests of said estate and for the best interests of said minor [Henry Warda] that said settlement be made...." The probate court adopted this view and authorized Henry Warda's father to enter the proposed settlement on Henry's behalf.

As the years passed, Mrs. Warda transferred virtually all of her father's land to Henry. Federal tax officials took note of these conveyances during an audit of Henry's finances. Henry Warda first contended that he had purchased these properties from his mother. Mrs. Warda substantiated her son's view of the transfers by sending a notarized letter to a revenue agent asserting that she had conveyed the parcels to Henry Warda as consideration for his work on the family farm. On advice of counsel, however, Henry later recharacterized the transactions as gifts rather than sales. Mrs. Warda reversed herself, too, executing a series of affidavits in which she swore that the land transfers represented gifts to her son. When the government insisted that Mrs. Warda pay gift taxes on these transactions, however, Mrs. Warda again shifted ground, arguing that the transfers to Henry were either distributions from a constructive trust or ordinary sales.

The tax court rejected Mrs. Warda's constructive trust theory, summarizing its view in the following terms:

[Mrs. Warda's] argument is based on the premise that her acquisition of the properties resulted from an erroneous decision of the Michigan probate court, i.e., petitioner should not have been granted a fee simple interest in the properties. We address petitioner's argument simply by stating that we defer to the Michigan probate court's [1953] order. The terms of the order speak for themselves: petitioner received a fee simple interest in the properties she inherited from her father.

The tax court accordingly determined that the land transfers were gifts from Mrs. Warda to her son, and were properly taxable as such. This appeal followed. 26 U.S.C. Sec. 7482(a)(1).

B.

To complicate matters, Mrs. Warda began a parallel lawsuit in a Michigan probate court in October, 1990, even as her challenge was pending in the tax court. Mrs. Warda asked the Michigan court to declare that she had defrauded her son in the 1953 probate proceedings, and she petitioned the court to impose a constructive trust retroactively on all property she had taken under the original settlement.

This litigation attracted the attention of the district counsel for the Internal Revenue Service. That official, in a letter, informed the probate court that a similar action was pending before the tax court; the official also forwarded several documents related to the federal litigation. The Commissioner did not otherwise participate in this Michigan probate litigation.

Mrs. Warda's most recent probate litigation ended successfully. In a decision rendered in 1992 after the tax court entered its ruling, the Michigan probate court declared that Mrs. Warda had defrauded her son of his rightful inheritance, and the court imposed a constructive trust stripping her of title to all property she had taken under the 1953 settlement. ¹ The court stopped short of holding, as a matter of law, that Mr. Matthews' second will--the one conveying his estate to Henry Warda--was indeed the valid and enforceable will. The court observed, though, that Henry Warda's legal claim under the second will was at least not "insubstantial", despite the complicating presence of Mr. Matthews' later codicil. ²

Mrs. Warda contends that the fraud she perpetrated against her son in 1953 prevents the tax court from basing its decision on the result of those tainted proceedings. She argues specifically that the doctrines of res judicata and collateral estoppel do not assign preclusive effect to the 1953 probate decree. By her view, though, the same preclusion doctrines do require this Court to defer to the result of the 1990 probate litigation. Even if we are not bound by those recent proceedings and must conduct an independent review of the 1953 litigation, Mrs. Warda continues, the later probate court's sound reasoning should lead us to an identical conclusion.

II.

Whether a taxpayer holds an interest in property, and the nature of that interest, is determined by reference to state law. Aquilino v. United States, 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). Mrs. Warda's title to the property she transferred to her son traces back to the 1953 probate court decree. Where, as here, the judgment of a state probate court bears on a taxpayer's rights in property, that judgment is entitled to the same deference in federal court as it would receive under the law of that state. U.S. Const., art. IV, Sec. 1 (Full Faith and Credit Clause); 28 U.S.C. Sec. 1738; Migra v. Warren City Sch. Dist., 465 U.S. 75, 80-81, 104 S.Ct. 892, 895-96, 79 L.Ed.2d 56 (1984). We accordingly must determine whether, under Michigan law, the principles of res judicata make the 1953 order of the probate court conclusive with respect to Mrs. Warda's title. We conclude that the 1953 ruling is not entitled to such binding effect.

The doctrine of res judicata, now more commonly called claim preclusion, assures that an original cause of action is extinguished by a judgment, regardless of the particular issues raised and litigated in the action. Howell v. Vito's Trucking & Excavating Co., 386 Mich. 37, 191 N.W.2d 313, 315 (1971). Under Michigan law, then, a plaintiff cannot maintain a subsequent lawsuit against a defendant based upon the same cause of action determined by the original judgment. Id. The cause of action between the parties to the present lawsuit--Mrs. Warda's purported liability for the payment of gift taxes--is not the same cause of action...