Opinion
23585-17 23593-17 23594-17 25174-18 25175-18
10-21-2021
Yosef Sehati a.k.a. Joseph Sehati and Lilly Kohanim-Sehati, et al., Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
L. Paige Marvel Judge.
These consolidated cases arise under our jurisdiction pursuant to section 6213. We consider here petitioners' motion for partial summary judgment, filed May 21, 2020. Respondent filed a response to the motion on July 10, 2020, and on August 3, 2020, petitioners filed a reply to respondent's response.
Cases of the following petitioners are consolidated herewith: Shahbaz Sehati and Anna Demidova Sehati, docket Nos. 23593-17 and 25174-18; and Shahrokh Sehati and Farahnaz Makabi-Sehati, docket Nos. 23594-17 and 25175-18.
All section references are to the Internal Revenue Code in effect during the years at issue and any Rule reference is to the Rules of Practice and Procedure of the United States Tax Court, unless otherwise indicated.
In the notices of deficiency issued to the petitioners, respondent disallowed net operating loss (NOL) carryforward deductions claimed by petitioners for the years at issue. In the motion for partial summary judgment, petitioners allege that the 2011 NOL was the subject of an earlier audit conducted with respect to petitioners Yosef Sehati a.k.a. Joseph Sehati and Lilly Kohanim-Sehati, and that the Commissioner ultimately conceded that no deficiency was due for that tax year. Petitioners contend that the Commissioner's concession of the 2011 NOL deduction binds respondent in this case under the doctrine of res judicata. Alternatively, petitioners contend, for the first time in their reply to respondent's 1 response to petitioners' partial summary judgment motion, that respondent conducted an improper second examination of the NOL deductions in violation of section 7605(b) when respondent examined and disallowed NOL carryforward deductions for the years at issue in this case after auditing and allowing a similar deduction for 2011. For the reasons set forth below, we deny petitioners' motion.
Background
The following facts are drawn from the parties' pleadings and motion papers, including accompanying exhibits, and are not in dispute.
Petitioners Yosef Sehati a.k.a. Joseph Sehati, Shahbaz Sehati, and Shahrokh Sehati (Yosef, Shahbaz, and Shahrokh, respectively), are brothers and are equal owners of two jewelry businesses, Barukh Group, LLC (Barukh) and SJS Group, LLC (SJS). In all relevant years, each brother filed a Form 1040, U.S. Individual Income Tax Return, jointly with his wife (Yosef with Lilly Kohanim-Sehati (Lilly), Shahbaz with Anna Demidova Sehati (Anna), and Shahrokh with Farahnaz Makabi-Sehati (Farahnaz)).
In August 2017 respondent issued notices of deficiency for tax years 2012, 2013, and 2014 to Yosef and Lilly, Shahbaz and Anna, and Shahrokh and Farahnaz. On September 21, 2018, respondent issued notices of deficiency for tax years 2015 and 2016 to Shahbaz and Anna, and Shahrokh and Farahnaz. For each of the years at issue, respondent disallowed NOL carryforward deductions that petitioners had claimed in connection with Barukh and SJS.
The Commissioner previously examined the NOL in connection with an earlier audit of petitioners Yosef and Lilly's 2011 tax year. On January 29, 2015, the Commissioner issued a notice of deficiency to Yosef and Lilly for tax year 2011 in which the Commissioner disallowed a NOL deduction with respect to Barukh and SJS they had claimed on their 2011 Federal income tax return. Yosef and Lilly timely filed a petition with this Court at docket No. 8303-15 (2011 case), alleging that the Commissioner had erred in disallowing the NOL deduction. The 2011 case was resolved without trial by agreement of the parties reflecting that no deficiency or penalty was due from Yosef and Lilly, and no refund was due to them, for tax year 2011. This Court entered a stipulated decision on June 8, 2016, reflecting the agreement of the parties. The decision does not contain any findings of fact or legal analysis and was entered without benefit of a trial. There is no closing agreement with respect to future treatment of NOL carryforward deductions in the record, and we infer that no such agreement was executed.
The NOL at issue in these consolidated cases is, to the extent it relates to Barukh and SJS, the same as the one at issue in the 2011 case. On November 13, 2 2017, Yosef and Lilly, Shahbaz and Anna, and Shahrokh and Farahnaz each timely petitioned this Court with respect to the notices of deficiency issued by respondent on August 17, 2017 for taxable years 2012, 2013, and 2014. On December 19, 2018, Shahbaz and Anna, and Shahrokh and Farahnaz timely petitioned this Court with respect to the notices of deficiency issued by respondent on September 21, 2018 for taxable years 2015 and 2016. In the petitions, there are no allegations with respect to res judicata, and petitioners did not assert res judicata as an affirmative defense in any of their pleadings as required by Rule 39. On May 21, 2020, petitioners filed a motion for partial summary judgment, which alleges for the first time that the doctrine of res judicata applies to bar the alleged relitigation of the 2011 NOL. Petitioners resided in California when they petitioned this Court.
Discussion
Summary adjudication is designed to expedite litigation and avoid unnecessary and expensive trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Under Rule 121(b), we may grant summary judgment "if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits or declarations, if any, show that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law." See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). When resolving a motion for summary judgment, we view the facts and draw inferences in the light most favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985). The nonmoving party, however, may not rest on mere allegations or denials but must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see also Sundstrand Corp. v. Commissioner, 98 T.C. at 520.
Petitioners argue that they are entitled to partial summary judgment because the 2011 case involving Yosef and Lilly is res judicata with respect to the carryforward NOL for all petitioners in these consolidated cases. In their reply to respondent's response to the motion, petitioners allege for the first time, that the audit of the NOL for tax years 2012 through 2016 was a second examination of petitioners' books of account in contravention of section 7605(b).
Petitioners Waived Res Judicata Claim
Res judicata is an affirmative defense that must be raised in a party's pleading. Rule 39. An affirmative defense that is not pleaded is deemed waived. Enos v. Commissioner, 123 T.C. 284, 304 (2004); Gustafson v. Commissioner, 97 T.C. 85, 90 (1991). See also Bonaire Dev. Co. v. Commissioner, 76 T.C. 789, 802-803 (1981) (declining to apply collateral estoppel where the taxpayer did not 3 clearly raise the issue in its petition, and the elements of collateral estoppel were not satisfied), aff'd, 679 F.2d 159 (9th Cir. 1982); and Conner v. Commissioner, T.C. Memo. 2018-6 (finding that the taxpayers waived their res judicata argument because they did not assert it as an affirmative defense in their petition or amended petition), aff'd, 770 Fed.Appx. 1016 (11th Cir. 2019).
Petitioners did not assert res judicata as an affirmative defense in their pleadings and thus provided no notice to respondent or the Court that they were relying on the res judicata doctrine until they filed their partial summary judgment motion. Consequently, petitioners have waived their right to rely on res judicata as an affirmative defense, see Rule 39, and on this ground alone we could deny petitioners' motion for partial summary judgment.
Litigation With Respect to the NOL is Not Barred by Res Judicata
Even if we were to assume that petitioners properly asserted res judicata as an affirmative defense as Rule 39 requires, we would still conclude that petitioners' motion must be denied because the requirements for the application of res judicata are not met.
Res judicata preserves judicial economy and prevents parties from being burdened by redundant litigation involving the same claim or cause of action. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 326 (1979); Ron Lykins, Inc. v. Commissioner, 133 T.C. 87, 100 (2009) (citing Meier v. Commissioner, 91 T.C. 273, 282 (1988)). The general rule of res judicata is that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to that suit and their privies are bound not only as to every matter which was offered and received to sustain or defeat the claim, but as to any admissible matter that might have been offered for that purpose. Commissioner v. Sunnen, 333 U.S. 591, 597 (1948) (internal citation omitted).
Res judicata applies when there is an identity of parties and a court of competent jurisdiction has entered a final judgment on the merits of a cause of action that is the same as that being litigated in the later case. See Hambrick v. Commissioner, 118 T.C. 348, 351 (2002). In these cases, petitioners have claimed NOL carryforward deductions arising from an NOL that they assert arose in 2011 and was the subject of a final judgment on the merits for the 2011 year, at docket No. 8303-15. Petitioners argue that the doctrine of res judicata applies to bar the relitigation of the 2011 NOL that was carried forward and deducted in part during the years in issue. Petitioners' argument is misplaced, and fails to acknowledge a fundamental requirement of the res judicata doctrine.
The doctrine of res judicata requires that the cause of action in the earlier 4 and later cases be the same. A taxpayer's liability for one year is a separate and distinct cause of action, and a final judgment regarding that liability that is issued by a court with jurisdiction becomes res judicata as to all other litigation involving that same year. See Commissioner v. Sunnen, 333 U.S. at 597-598. Because Federal income taxes are levied on an annual basis, each year is the origin of a new liability and a separate cause of action. Id. at 598. Even if petitioners had properly pleaded the affirmative defense of res judicata, the defense must fail because the cause of action in docket No. 8303-15 is not the same as the causes of action in these consolidated cases as they involve different taxable years.
It appears that what petitioners are trying to argue is issue preclusion, otherwise known as collateral estoppel. Collateral estoppel may apply where a subsequent cause of action is different from the prior cause of action but involves one or more of the same issues actually litigated in the earlier case. Id. at 597-599. For collateral estoppel to bind a party with respect to an issue of law or fact, five conditions must be met: (1) the issue in the second suit must be identical to the one decided in the first suit; (2) there must be a final judgment rendered by a court of competent jurisdiction; (3) the party against whom collateral estoppel is invoked must have been a party, or a privy to a party, in the first suit; (4) the issue must have been actually litigated and resolution of the issue must have been essential to the judgment in the prior decision; and (5) the controlling facts and applicable legal rules must remain unchanged from those in the prior suit. Peck v. Commissioner, 90 T.C. 162, 166-167 (1988) (internal citations omitted), aff'd, 904 F.2d 525 (9th Cir. 1990); see also Ron Lykins, Inc. v. Commissioner, 133 T.C. at 100-101. Thus, if a taxpayer secures a judicial determination with regard to a particular tax matter and that matter recurs in subsequent years without any change in the relevant facts or the controlling law, the judgment in the initial action may preclude the parties from relitigating the issue in a later suit.
Petitioners did not plead the affirmative defense of collateral estoppel or assert it in their motion for partial summary judgment. Consequently, we will refrain from any detailed analysis of the defense. We note simply that a stipulated decision entered pursuant to an agreement by the parties with respect to a given tax year, absent a determination on the merits by the Court, does not have the effect of collateral estoppel on any other tax year. United States v. Int'l Bldg. Co., 345 U.S. 502, 505 (1953). Although such a decision is res judicata as to the tax year(s) that it covers, it does not satisfy the more stringent requirements of collateral estoppel. Id. at 506. A decision entered pursuant to the stipulation of the parties, without a hearing on the merits, is not a decision on the merits such as will support a claim of collateral estoppel. Frank Sawyer Trust of May 1992 v. Commissioner, 133 T.C. 60, 81-82 (2009) (internal citations omitted). 5
Second Inspection Argument
Petitioners argue for the first time in their reply to respondent's response that respondent violated section 7605(b) by disallowing the NOL carryover deductions claimed for the years at issue. Because this issue was not asserted in petitioners' motion for partial judgment in the first instance, we will not consider it here. Respondent did not have any opportunity to respond to petitioners' section 7605(b) argument and it is not properly before the Court. Moreover, the question of whether there has been an improper second inspection raises unresolved factual issues that preclude the granting of a summary judgment at this time even if petitioners had included the argument in their original motion. See Rule 121.
Sec. 7605(b) provides that "[n]o taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary."
Because petitioners have not established that they are entitled to summary adjudication with respect to the NOL carryforward deductions at issue in these cases as a matter of law, we will deny petitioners' motion for partial summary judgment.
Accordingly, it is hereby:
ORDERED that petitioners' Motion for Partial Summary Judgment, filed May 21, 2020, is denied. 6