United States District Court, D. Utah, Central Division
JAMES S. TANNE and MEGAN M. TANNE Plaintiffs,
COMMISSIONER OF INTERNAL REVENUE SERVICE, Defendant.
MEMORANDUM DECISION AND ORDER ON PLAINTIFFS'
OBJECTION TO REPORT AND RECOMMENDATION
J. SHELBY, UNITED STATE DISTRICT JUDGE.
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. 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,  which recommends denying the Tannes'
Motion for Leave to File a Supplemental Claim.
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.”
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. 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. Judge Furse also concluded that, if the
jurisdictional bar did not apply, the supplemental claim
would not have been time barred. The Tannes objected, arguing
the court has jurisdiction over the supplemental claim and it
is not barred by res judicata.
court reviews the portions of the Report and Recommendation
to which the Tannes object under a de novo
standard. The court applies a “clearly
erroneous” standard to portions with no
objection. 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
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.
Tannes argue Judge Furse erroneously concluded that the
Tannes' stipulation in the Tax Court Order barred their
claim through res judicata.
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. 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
Tannes stipulated in the Tax Court judgment “that
interest will accrue and be assessed as provided by law on
the deficiency due from petitioners.” They also
stipulated that an accuracy-related penalty would not apply
but did not address the issue of a failure-to-pay penalty.
the Tannes stipulated to the accrual and assessment of
interest, they cannot now assert that interest should not
have accrued on their deficiency. 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,  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
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.