Williams v. C.I.R.

• Decision Date: 31 August 1993
• Docket Number: No. 92-3691,92-3691
• Parties: -5508, 93-2 USTC P 50,422 Lloyd E. WILLIAMS, Jr. and Mildred A. Williams, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 502

1 F.3d 502

72 A.F.T.R.2d 93-5508, 93-2 USTC P 50,422

Lloyd E. WILLIAMS, Jr. and Mildred A. Williams, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 92-3691.

United States Court of Appeals, Seventh Circuit.

Argued June 10, 1993.

Decided July 23, 1993.

Rehearing and Suggestion for Rehearing En Banc Denied Aug. 31, 1993.

J. Gordon Hansen (argued), Scott R. Carpenter, Parsons, Behle & Latimer, Salt Lake, UT, for petitioners-appellants.

Gary R. Allen, Teresa McLaughlin, Sara S. Holderness (argued), Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for respondent-appellee.

Before POSNER and COFFEY, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

POSNER, Circuit Judge.

Section 483 of the Internal Revenue Code, before it was amended in 1984, provided that if the first installment of the price for a purchase was not due for more than six months, the purchaser could pretend that he had borrowed the amount of the installment from the seller and could compute--and when he finally paid the installment, deduct from his taxable income--the portion of the installment that represented implicit interest on the "loan." The method of calculating this implicit interest was extremely favorable to the taxpayer. The taxpayers in this case took such an interest deduction, but were assessed a deficiency on the ground that the sale had occurred when the first installment was due (and paid) rather than, as they had believed, more than six months earlier. The Tax Court agreed with the Internal Revenue Service. 63 T.C.M. (CCH) 2959, 1992 WL 95656 (1992).

The taxpayers argue that the Tax Court was precluded by either the doctrine of res judicata or (somewhat more plausibly) the doctrine of law of the case from disallowing the deduction. The case had initially been assigned to a judge of the Tax Court, who granted partial summary judgment for the taxpayers, 94 T.C. 464, 1990 WL 29267 (1990), implicitly (the taxpayers argue) resolving the main issue in this case--the applicability of section 483--in their favor. The case was later reassigned to another judge, who reached the opposite conclusion. If the same judge had handled the case throughout, the law of the case doctrine would not have prevented him from reversing himself, Johnson v. Burken, 930 F.2d 1202, 1207 (7th Cir.1991); Peterson v. Lindner, 765 F.2d 698, 704 (7th Cir.1985); Dictograph Products Co. v. Sonotone Corp., 230 F.2d 131, 134 (2d Cir.1956) (L. Hand, J.), unless the time for reconsideration had expired. Johnson v. Burken, supra, 930 F.2d at 1207. This is an important qualification, though inapplicable here. If a final judgment had been entered, the case appealed, the judgment reversed, and the case remanded, the trial judge would be required to adhere on remand to the rulings that he had made before the case was first appealed, provided of course that they had not been set aside by the appellate court. Williamsburg Wax Museum, Inc. v. Historic Figures, Inc., 810 F.2d 243, 250 (D.C.Cir.1987); cf. General Tire & Rubber Co. v. Firestone Tire & Rubber Co., 489 F.2d 1105, 1124 (6th Cir.1973); Dillard v. Chesapeake & Ohio Ry., 136 F.Supp. 689, 691 (S.D.W.Va.1955). Even more clearly would he be required--this is the most elementary application of the doctrine of law of the case--to comply with the rulings of the appellate court. Johnson v. Burken, supra, 930 F.2d at 1207.

The situation is different when judges are changed in midstream. Litigants have a right to expect that a change in judges will not mean going back to square one. The second judge may alter previous rulings if new information convinces him that they are incorrect, but he is not free to do so even though the time for reconsideration has not expired, merely because he has a different view of the law or facts from the first judge. Peterson v. Lindner, supra, 765 F.2d at 704; Diaz v. Indian Head, Inc., 686 F.2d 558, 562-63 (7th Cir.1982); Dictograph Products Co. v. Sonotone Corp., supra, 230 F.2d at 134-35; United States v. Desert Gold Mining Co., 433 F.2d 713, 715 (9th Cir.1970); see generally Annot., 20 A.L.R.Fed. 13 (1974 and 1992 Supp.). In this situation the doctrine of law of the case has bite. But as explained in Peterson v. Lindner, supra, 765 F.2d at 704-05, the bite is lessened when the case is appealed. At that point, if rulings by the district court on issues of law are challenged the question is not whether the second judge should have deferred to the ruling of the first judge, but whether that ruling was correct. If it was, the ruling of the second judge was incorrect, whether or not he even had the power to make it, and the aggrieved party is entitled to obtain correction on appeal even if the second trial judge should not have tried to correct it himself. Champaign-Urbana News Agency, Inc. v. J.L. Cummins News Co., 632 F.2d 680, 683 (7th Cir.1980). Matters stand differently if the rulings challenged are not ones on which appellate review is plenary. Suppose they concerned a discretionary matter. Then even though the first and second judges had disagreed, neither might have committed reversible error, and the law of the case doctrine would require the court of appeals to defer to the first judge's ruling. Moses v. Business Card Express, Inc., 929 F.2d 1131, 1137-38 (6th Cir.1991). With this important exception, the doctrine when applied at the appellate level concerns previous rulings by the appellate court itself. If a case that the court had remanded should return after the proceedings on remand, the court will not reexamine its previous rulings unless there is a compelling reason, such as an intervening change in law, to do so. Evans v. City of Chicago, 873 F.2d 1007, 1014 (7th Cir.1989).

If the rulings by the two Tax Court judges in the present case had been inconsistent, and the rulings had concerned discretionary matters as to which appellate review is limited, the taxpayers might, therefore, have a good argument based on the doctrine of law of the case. But the rulings were not inconsistent. The first rejected one set of contentions of the Internal Revenue Service; the second accepted another contention of the Service. Rejecting arguments a and b does not imply the rejection of c unless it is related to a or b in particular ways, and in this case it was not.

The taxpayers' alternative suggestion, that the Tax Court's initial ruling had res judicata (they mean collateral estoppel) effect, is frivolous. Only a final judgment has such effect. G. & C. Merriam Co. v. Saalfield, 241 U.S. 22, 28, 36 S.Ct. 477, 479, 60 L.Ed. 868 (1916); 18 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure Sec. 4432 (1981). What is true is that a judgment final in the trial court may have collateral estoppel effect even though the loser has not exhausted his appellate remedies. 18 id., Sec. 4433 at pp. 308-15; Restatement (Second) of Judgments Sec. 13, comment f, at p. 135 (1980); Kurek v. Pleasure Driveway & Park District, 557 F.2d 580, 595 (7th Cir.1977), vacated on other grounds, 435 U.S. 992, 98 S.Ct. 1642, 56 L.Ed.2d 81 (1978); Martin v. Malhoyt, 830 F.2d 237, 264 (D.C.Cir.1987). And it has been suggested that this rule might be extended to certain cases of summary judgment and even of partial summary judgment. 18 Wright, Miller & Cooper, supra, Sec. 4434 at p. 325; cf. Miller Brewing Co. v. Joseph Schlitz Brewing Co., 605 F.2d 990, 996 (7th Cir.1979); Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 89-90 (2d Cir.1961) (Friendly, J.). But the purpose would be to cut off a litigant's right to press or contest the same issues in different suits when one of the suits is almost though not quite concluded. 18 Wright, Miller & Cooper, supra, Sec. 4434 at p. 328. There is no basis for using res judicata or collateral estoppel to prevent a judge from reconsidering an earlier ruling in the same, ongoing case.

So much for procedural matters; we turn to the tax issue. On June 22, 1983, the taxpayers signed a contract to buy an unfinished ski condominium in Utah from the developer-builder. The contract fixed a purchase price of $1,514,000, of which $10,000 was to be paid immediately and the balance in two installments as specified in the buyers' promissory note, dated the next day. The first installment, of $477,000, was to be paid on what the contract called the "settlement date," December 30, 1983, and the balance on July 24, 2013. The note recited that no interest was to be payable on it but of course the note itself is mostly interest--the appraised value of the (completed) condominium in 1983 was only $500,000. The contract required the seller to execute and place in escrow a warranty deed to be delivered to the buyers on the settlement date; and it required the buyers both to execute a quitclaim deed and place it in escrow from which it would be delivered to the seller if the buyers defaulted on the contract, and to execute a judgment note for $50,000 which would be returned to the buyers on the settlement date. The contract further recites that the buyers entered into possession of the condominium on June 22 (though it hadn't been completed yet--indeed was not far beyond the foundations stage) and became liable for real estate taxes on that day and that if the buyers break the contract before the settlement date the seller's "sole remedy" is to retain the down payment, enforce the judgment note, and, of course, get the condominium back. If the seller breaks the contract before the settlement date, the buyers' "sole and exclusive remedy" is to rescind the contract and get back their down payment and the judgment note.

The contract was performed as agreed. The Tax Court held that the actual sale of the condominium did not take place until the settlement date. The buyers (the taxpayers) argue that it took place on the date of the contract, which was a few days more than six months previously....