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Tanne v. Commissioner of Internal Revenue Service

United States District Court, D. Utah, Central Division

February 12, 2018

JAMES S. TANNE and MEGAN M. TANNE Plaintiffs,
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE, Defendant.

          MEMORANDUM DECISION AND ORDER ON PLAINTIFFS' OBJECTION TO REPORT AND RECOMMENDATION

          ROBERT J. SHELBY, UNITED STATE DISTRICT JUDGE.

         This case arises out of a dispute over tax refunds for James and Megan Tanne (collectively, the Tannes). The Tannes requested leave from the court to file a supplemental claim addressing the penalty and interest amount applied to their 2005 tax return.[1] The case was referred to Magistrate Judge Evelyn J. Furse pursuant to 28 U.S.C. Section 636(b)(1)(B). Before the court is Judge Furse's Report and Recommendation, [2] which recommends denying the Tannes' Motion for Leave to File a Supplemental Claim.

         BACKGROUND

         The Tannes' supplemental claim arises from a deficiency as to their 2005 taxes. The Tannes applied a refund from their 2012 tax year to partially cover the 2005 deficiency. In March 2013, the Tax Court issued an Order stating that the Tannes had a deficiency of $1, 080 from the 2005 tax year. The Order also stated that an accuracy-related penalty would not apply and that the parties “stipulated that interest will accrue and be assessed as provided by law on the deficiency due from petitioners.”[3]

         The Tannes filed a Complaint with this court in April 2015, seeking refunds for overpayments from the 2004 and 2005 tax years. After the court dismissed their claims, the Tannes submitted a Motion for Leave to File a Supplemental Claim regarding interest and a failure-to-pay penalty assessed for the 2005 tax year.[4] Judge Furse denied the Motion in a Report and Recommendation, stating the court lacks jurisdiction over the supplemental claim, or, alternatively, res judicata bars the claim.[5] Judge Furse also concluded that, if the jurisdictional bar did not apply, the supplemental claim would not have been time barred.[6] The Tannes objected, arguing the court has jurisdiction over the supplemental claim and it is not barred by res judicata.

         The court reviews the portions of the Report and Recommendation to which the Tannes object under a de novo standard.[7] The court applies a “clearly erroneous” standard to portions with no objection.[8] Under the “clearly erroneous” standard, the court affirms the Magistrate Judge's ruling unless, after reviewing all the evidence, the court “is left with the definite and firm conviction that a mistake has been committed.”[9]

         ANALYSIS

         The Tannes argue that in her Report and Recommendation Judge Furse erroneously denied their Motion on the bases of res judicata and jurisdiction. The IRS did not object to the Report and Recommendation, but argued in its opposition to the Tannes' Objection that, contrary to Judge Furse's conclusion, the supplemental claim is also time barred. The court addresses these issues in turn.

         I. Res judicata

         The Tannes argue Judge Furse erroneously concluded that the Tannes' stipulation in the Tax Court Order barred their claim through res judicata.

         The doctrine of res judicata provides that “when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound” to the judgment.[10] Where parties stipulate to a Tax Court judgment, the stipulation “has the full effect of final judgment and binds the parties as to all aspects of the taxpayer's liability for the time period in question.”[11]

         The Tannes stipulated in the Tax Court judgment “that interest will accrue and be assessed as provided by law on the deficiency due from petitioners.”[12] They also stipulated that an accuracy-related penalty would not apply but did not address the issue of a failure-to-pay penalty.

         Because the Tannes stipulated to the accrual and assessment of interest, they cannot now assert that interest should not have accrued on their deficiency.[13] However, the Tannes did not stipulate to the failure-to-pay penalty. Res judicata does not apply where the court has not entered a final judgment on the merits and the parties have not stipulated to the judgment. The failure-to-pay penalty was not part of the stipulation, and there is no evidence the issue of a failure-to-pay penalty was in front of the Tax Court at all, much less adjudicated on the merits. Especially where the application of penalties involves some amount of discretion on the part of the IRS, [14] the court concludes that it would be unreasonable to require plaintiffs to address all possible penalties or face the risk of their arguments being barred by res judicata.

         The court concludes the Tannes' claim for a refund of interest is barred by their stipulation, but the claim for a refund of the failure-to-pay penalty is not.

         II. ...


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