T.C. Memo. 1996-233
UNITED STATES TAX COURT
DAVID A. STURMAN AND CELINDA M. STURMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10024-95. Filed May 22, 1996.
F. Richard Losey and Daniel J. Leer, for petitioners.
Debra K. Estrem, for respondent.
MEMORANDUM OPINION
LARO, Judge: Petitioners move for summary adjudication in
their favor, arguing that res judicata disposes of this case.
Petitioners support their motion with two affidavits (with
attached exhibits), as well as a memorandum of law. Petitioners’
affiants are: (1) David A. Sturman, one of petitioners herein
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and the sole shareholder of Inter-Regional Service Corp.
(Corporation), and (2) Harlan Sharpers, Corporation’s director.
Respondent objects to petitioners’ motion, arguing primarily that
a genuine issue of fact exists as to the applicability of res
judicata. Respondent supports her objection with two affidavits,
one of which has attached exhibits, and a memorandum of law.
Respondent’s affiants are: (1) Jerry Li, Associate Chief of
Appeals, Internal Revenue Service, in San Francisco, California,
and (2) Debra K. Estrem, respondent’s counsel herein.
We agree with respondent that this case is not ripe for
summary adjudication due to differences in opinion as to material
facts, and we shall deny petitioners’ motion.
Background1
Corporation was incorporated in the State of California on
October 24, 1983, and Mr. Sturman is its only shareholder. Since
its incorporation, Corporation has been engaged in the adult
entertainment industry. It owns and services arcade machines
that it places in adult book stores. At all relevant times,
Mr. Sturman was Corporation’s general manager and chief executive
officer. Mr. Sturman was indicted by a Federal grand jury in
1986. In relevant part, the indictment charged that he had
1
The “facts” presented in this Opinion are stated solely
for purposes of deciding the motion and are not findings of
fact for this case. Fed. R. Civ. P. 52(a); Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965
(7th Cir. 1994). When they petitioned the Court, petitioners
resided in Hillsborough, California.
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conspired to hamper, hinder, and impede the ascertaining,
computation, assessment, and collection of his father’s Federal
income taxes.
In its taxable year ended June 30, 1990 (the 1989 taxable
year), Corporation incurred and paid $137,744 in legal fees and
$11,642 in travel-related expenses defending the criminal action.
On its 1989 Federal income tax return, Corporation deducted the
former amount as “legal expenses” and the latter amount as
“travel and entertainment”. Corporation paid $41,671 and
$163,753 in legal fees during its 1990 and 1991 taxable years,
respectively, defending the criminal action. Corporation
deducted these amounts as “legal expenses” on its 1990 and 1991
Federal income tax returns.
In 1993, the Commissioner audited Corporation’s 1989, 1990,
and 1991 Federal income tax returns. The Commissioner disallowed
the above-mentioned deductions taken by Corporation, and she
issued Corporation a notice of deficiency reflecting her
disallowance. According to the notice of deficiency, which was
dated April 4, 1994, Corporation could not deduct these amounts
because: (1) The underlying expenses were not “directly or
proximately related to the corporation’s trade or business”,
(2) “the source of the criminal charges or the character of the
conduct from which the charges arise determines the deductibility
or nondeductibility of the legal expenses in question”, and
(3) the legal expenses were incurred by Mr. Sturman and
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indemnified by Corporation in connection with the personal
Federal income tax returns of him and his father, rather than the
returns of Corporation.
Corporation petitioned the Court with respect to the notice
of deficiency, alleging that it could deduct the subject expenses
as employee compensation. The Commissioner transferred the case
to her Appeals office for their development, and that office
eventually settled the case without trial. On January 9, 1995,
the Court entered a stipulated decision that allowed Corporation
to deduct the subject expenses.
On March 16, 1995, the respondent issued a notice of
deficiency to petitioners. In relevant part, this notice
reflected the respondent’s determination that: (1) The $149,386
of expenses deducted by Corporation on its 1989 tax return
($137,744 + $11,642) was constructive dividends to Mr. Sturman in
1990, and (2) the $205,424 of expenses deducted by Corporation on
its 1990 and 1991 Federal income tax returns ($41,671 + $163,753)
was constructive dividends to Mr. Sturman in 1991. In her
answer, respondent asserted alternatively that the amounts
deducted by Corporation were “in the nature of salary or other
compensation” paid on behalf of Mr. Sturman, and that Mr. Sturman
was not entitled to a deduction with respect thereto because the
underlying expenses were personal.
Discussion
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Summary adjudication is intended to expedite litigation and
avoid unnecessary and expensive trials of phantom factual issues.
Kroh v. Commissioner, 98 T.C. 383, 390 (1992); Shiosaki v.
Commissioner, 61 T.C. 861, 862 (1974). A decision on the merits
of a taxpayer's claim can be made by way of summary adjudication
"if the pleadings, answers to interrogatories, depositions,
admissions, and any other acceptable materials, together with the
affidavits, if any, show there is no genuine issue as to any
material fact and that a decision may be rendered as a matter of
law." Tax Court Rules of Practice and Procedure Rule 121(b).
Because summary adjudication decides an issue against a party
before trial, we grant such a remedy cautiously and sparingly,
and only after carefully ascertaining that the moving party has
met all the requirements for summary adjudication. Associated
Press v. United States, 326 U.S. 1, 6 (1945); Espinoza v.
Commissioner, 78 T.C. 412, 416 (1982).
The Court will not resolve disagreements over material
factual issues through summary adjudication. Espinoza v.
Commissioner, supra at 416. The burden of proving that there is
no genuine issue of material fact is on the moving party, and
factual inferences are viewed in the light most favorable to the
nonmoving party. United States v. Diebold, Inc., 369 U.S. 654,
655 (1962); Kroh v. Commissioner, supra at 390. A fact is
material if it "tends to resolve any of the issues that have been
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properly raised by the parties." 10A Wright et al., Federal
Practice and Procedure: Civil, sec. 2725, at 93 (2d ed. 1983).
Res judicata requires that the parties and their privies to
a prior action that has resulted in a final decision on the
merits be bound as to all issues that were or might have been
decided in that action. Commissioner v. Sunnen, 333 U.S. 591,
597 (1948). Res judicata applies in tax cases, United States v.
International Bldg. Co., 345 U.S. 502, 506 (1953), and a
stipulated decision is a judgment on the merits for purposes of
applying res judicata, Pert v. Commissioner, 105 T.C. 370 (1996).
Petitioners ask us to hold that res judicata mandates that
the amount of the subject deductions was not income to
Mr. Sturman as a matter of law based on the stipulated decision
in Corporation’s case. This we cannot do. The parties disagree
on the breadth of the stipulated decision. Petitioners’ affiants
allege that the Commissioner allowed Corporation to deduct the
subject expenses as corporate legal fees. Respondent’s affiants
allege that the Commissioner allowed Corporation to deduct the
expenses as payments to Mr. Sturman in lieu of salary or other
compensation. Petitioners’ affiants allege that the criminal
action was related to Corporation. Respondent’s affiants allege
that the criminal action was unrelated to Corporation. The
resolution of these conflicting allegations presents a question
of fact that must be decided by the Court as the trier of fact.
See Commissioner v. Heininger, 320 U.S. 467, 473 (1943). The
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value of a trial with complete opportunity to view the demeanor
of the witnesses and each party’s evidence is obvious. See
Hoeme v. Commissioner, 63 T.C. 18, 20 (1974).
To reflect the foregoing,
An appropriate order
denying petitioners’ motion
for summary judgment will be
issued.