Res judicata prevented a taxpayer's innocent spouse claim

The Tax Court has held that the doctrine of res judicata prevented a taxpayer from relitigating a claim for innocent spouse relief. It also held that the taxpayer did not meet the conditions for overcoming res judicata under Code Sec. 6015(g)(2). (Eugene Koprowski, (2012) 138 TC No. 5)

Background. Each spouse is jointly and severally liable for the tax, interest, and penalties (other than the civil fraud penalty) arising from a joint return. However, Code Sec. 6015 provides relief from joint and several liability under certain conditions. In general, a joint filer may obtain relief: (1) under Code Sec. 6015(b) where the taxpayer did not have actual or constructive knowledge of the understatement of tax on a return; (2) under Code Sec. 6015(c), if no longer married to the other joint filer, the taxpayer may limit liability to his or her allocable portion of any deficiency; or (3) under Code Sec. 6015(f), if ineligible for relief under Code Sec. 6015(b) or Code Sec. 6015(c), where, in view of all the facts and circumstances, it would be inequitable to hold the joint filer liable.

In general, res judicata requires that when a court of competent jurisdiction enters a final judgment on the merits of a cause of action, the parties to the action are bound by that decision as to all matters that were or could have been litigated and decided in the proceeding. (Commissioner v. Sunnen, (S Ct 1948) 36 AFTR 611)

However, Code Sec. 6015(g)(2) provides an exception to this general rule. Under that section, determinations made in a final court decision in any prior proceeding for the same tax period are conclusive, except with respect to the spouse's qualification for relief under the innocent spouse election or the separate liability election or a request for equitable relief, if that relief wasn't an issue in the prior proceeding. But the exception in the preceding sentence won't apply if the court determines that the spouse participated meaningfully in the prior proceeding.

Res judicata bars suit. The Tax Court observed that four conditions must be met to preclude relitigation of a claim under the doctrine of res judicata:

(1) the parties in each action must be identical (or at least be in privity);

(2) a court of competent jurisdiction must have rendered the first judgment;

(3) the prior action must have resulted in a final judgment on the merits; and

(4) the same cause of action or claim must be involved in both suits.

The Court found that those four conditions were met in this case:

(1) In the deficiency case, Mr. Koprowski was a petitioner, and IRS was the respondent. In the current case, Mr. Koprowski was again the petitioner, and IRS was again the respondent. Thus, the parties are identical.

(2) In the deficiency case the Koprowskis filed their deficiency suit in the only court authorized under Code Sec. 6213(a) to hear such suits—i.e, the Tax Court. Clearly the Tax Court had jurisdiction in the prior case.

(3) The deficiency case concluded with the entry of a decision by the Court on Nov. 9, 2009, pursuant to the stipulation of the parties. That decision was a final judgment on the merits of the Koprowskis' 2006 joint and several liability.

(4) In the current case Mr. Koprowski sought innocent spouse relief from the very liability—i.e., the 2006 joint income tax liability—as to which the Court in the deficiency case determined that he was jointly and severally liable. The claims were thus identical.

Since these four condition were met, res judicata barred relitigation of Mr. Koprowski claim, absent some exception to its application.

Mr. Koprowski argued that res judicata does not arise from a small case under Code Sec. 7463. The Court rejected this argument because Code Sec. 7463(b) provides that a decision entered in a small tax case proceeding may not be reviewed in any other court.

No help from Code Sec. 6015(g)(2). Under Code Sec. 6015(g)(2), an innocent spouse claimant can sometimes overcome res judicata, if the claimant can meet two conditions. He must show (1) that his innocent spouse claim was not an issue in the prior proceeding and (2) that he did not participate meaningfully in the prior proceeding.

The Tax Court found that he did not meet either condition. His innocent spouse claim was explicitly put at issue in the prior proceeding by the Koprowskis. This alone prevented Code Sec. 6015(g)(2) from overcoming res judicata. Even if he had not explicitly raised innocent spouse relief in the prior proceeding, he meaningfully participated in the deficiency case. This, too, prevented Code Sec. 6015(g)(2) from allowing his case to move forward.