T.C. Memo. 2015-251
UNITED STATES TAX COURT
JUAN M. HERRERA AND SUSANA M. HERRERA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25093-12. Filed December 29, 2015.
John Edward Leeper, for petitioners.
Jeffrey D. Heiderscheit, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: This matter is before us on respondent’s motion for
summary judgment. Respondent determined a $48,872 deficiency in petitioners’
2008 Federal income tax and a $9,774 penalty for an underpayment attributable to
a substantial understatement of income tax under section 6662(a) and (b)(2).
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[*2] The issues before us on respondent’s motion for summary judgment are
whether (1) collateral estoppel applies to disallow a claimed $131,342 carryover to
2008 of business bad debt deductions originating in and claimed by petitioners for
2006 and 2007 and (2) whether summary judgment should be rendered to sustain
respondent’s determination of the penalty for an underpayment attributable to a
substantial understatement of income tax under section 6662(a) and (b)(2).
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
Background
At the time of filing of their petition, petitioners resided in Texas.
On their filed 2006 and 2007 Federal income tax returns, petitioners claimed
business bad debt deductions totaling $497,999. Thereof, $131,342 was claimed
as a carryover on petitioners’ 2008 Federal income tax return.
In a prior proceeding in this Court at docket No. 9481-10, petitioners and
respondent litigated petitioners’ entitlement to the above-claimed business bad
debt deductions for 2006 and 2007 and petitioners’ liability for a late-filing
addition to tax under section 6651(a)(1) for 2007. In an opinion filed on
November 5, 2012, we disallowed petitioners’ claimed business bad debt
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[*3] deductions for 2006 and 2007 and we sustained the late-filing addition to tax.
See Herrera v. Commissioner, T.C. Memo. 2012-308 (Wherry, J.). On November
11, 2013, the U.S. Court of Appeals for the Fifth Circuit in an unpublished opinion
affirmed our disallowance of the claimed business bad debt deductions for 2006
and 2007. Herrera v. Commissioner, 544 F. App’x 592 (5th Cir. 2013).
The $497,999 business bad debt deductions that petitioners claimed for
2006 and 2007 related to a $500,000 debt obligation of a consulting company
(MTI) owned by Juan M. Herrera (petitioner). In 2006 and 2007 a related limited
liability company (HSA), also owned by petitioner, made payments on this debt
totaling $497,999.
The Court of Appeals for the Fifth Circuit affirmed a key and controlling
finding of the Tax Court as follows:
Although we agree with * * * [petitioners’] position that HSA’s
payments were effectively payments of MTI’s debt, they have not
shown that HSA was legally obligated to pay MTI’s debt. Therefore,
we agree with the Tax Court’s ultimate conclusion that the payments
did not give rise to a bad debt deduction.
[Petitioners’] argument ignores a critical difference between
the original $300,000 line of credit and the [$500,000] renewed line
of credit. It is true that HSA was a co-obligor along with MTI on the
original $300,000 line of credit * * * [the bank] extended in 2004.
But when * * * [the bank] renewed and increased the line of credit to
$500,000, only MTI was designated as the borrower. * * * [Peti-
tioner] personally guaranteed * * * [MTI’s] renewed line of credit,
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[*4] but he did not do so on behalf of HSA. Indeed, * * * [petitioners]
have not shown how HSA could have been held liable as a guarantor,
endorser, indemnitor, or other secondary obligor for the renewed and
increased line of credit when it did not sign--and was not even
mentioned--in the applicable loan document. * * *
Moreover, the fact that HSA eventually obtained a loan from
* * * [the bank] in its own name to pay off MTI’s debt does not
change our conclusion. * * * [Petitioner] may have simply caused
HSA to pay off MTI’s debt because he was an individual guarantor
and because * * * [the bank] looked to him for repayment. But most
importantly, * * * [petitioners] cite no authority showing that under
these circumstances HSA’s payment of MTI’s debt was anything
other than voluntary.
Id. at 595-596.
Discussion
Summary judgment is appropriate where there is no genuine dispute as to
any material fact and a decision may be rendered as a matter of law. Rule 121(b);
see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d
965 (7th Cir. 1994).
As explained in Gardner v. Commissioner, 145 T.C. __, __ (slip op. at 26)
(Aug. 26, 2015),
[c]ollateral estoppel is an affirmative defense barring a party
from relitigating an issue determined against the party in an earlier
proceeding, even if the second proceeding differs significantly from
the first action. Black’s Law Dictionary 256. The collateral estoppel
doctrine is also known as issue preclusion. Once an issue of fact or
law is “actually and necessarily determined by a court of competent
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[*5] jurisdiction, that determination is conclusive in subsequent suits
based on a different cause of action involving a party to the prior
litigation.” Montana v. United States, 440 U.S. 147, 153 (1979)
(quoting Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5
(1979). * * * Brotman v. Commissioner, 105 T.C. 141, 148 (1995).
Collateral estoppel applies to a factual issue if the following conditions
are satisfied: (1) the issue in the second proceeding is identical in all respects with
the issue decided in the first proceeding; (2) there is a final judgment rendered by
a court of competent jurisdiction; (3) the party against which collateral estoppel is
asserted is either a party to the prior judgment or the privy of a party to the prior
judgment; (4) the parties actually litigated the issue and the resolution of the issue
was essential to the prior decision; and (5) the controlling facts and applicable
legal rules remain unchanged from those in the prior proceeding. Id., 145 T.C. at
__ (slip op. at 27); Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), aff’d, 904
F.2d 525 (9th Cir. 1990).
Petitioners dispute application of only the fifth condition above. With
regard thereto, an exception to the application of collateral estoppel will apply
where controlling facts have changed or where controlling evidence not available
in the first proceeding is submitted in the second proceeding. Ross v.
Commissioner, T.C. Memo. 1988-283 (citing Dean v. Commissioner, 56 T.C. 895,
898 (1971)).
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[*6] Evidence will be considered to have been unavailable in the first proceeding
if by exercise of due diligence it could not have been produced. Fairmont
Aluminum Co. v. Commissioner, 22 T.C. 1377, 1383 (1954), aff’d, 222 F.2d 622
(4th Cir. 1955); Sidoran v. Commissioner, T.C. Memo. 1982-197.
Petitioners offer a loan billing statement not introduced at the prior Tax
Court proceeding. The statement is dated June 2006. Without any further
explanation petitioners merely state that the bank statement was “not in evidence”
at the trial which occurred in 2010. Indeed, petitioners seem to acknowledge the
billing statement was available to them and could have been offered into evidence
at the trial.
The loan billing statement does not reflect any relevant new fact relating to
the debt in question. On the statement MTI is identified clearly as the debtor.
HSA is referenced on the statement only as having the same office address as
MTI.
We conclude and hold that the doctrine of collateral estoppel applies with
regard to the $131,342 carryover bad debt deduction petitioners claim on their
2008 tax return. Our Court’s prior holding, as affirmed by the Court of Appeals
for the Fifth Circuit, is conclusive.
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[*7] Respondent has established that petitioners are liable for the $48,872 tax
deficiency for 2008, and petitioners have not raised anything that would justify a
trial. See Rule 121(d).
In his motion, respondent states that because the tax deficiency we sustain
against petitioners exceeds the greater of $5,000 or 10% of the tax required to be
shown on their 2008 tax return,1 the understatement of income tax is substantial
under section 6662(d), and the section 6662(a) and (b)(2) penalty mathematically
and automatically applies. Accordingly, respondent moves for summary judgment
against petitioners on the section 6662(a) and (b)(2) penalty.
On the penalty issue for 2008 and in opposition to respondent’s motion for
summary judgment thereon petitioners assert a reasonable basis for claiming the
carryover bad debt deduction and the resulting understatement of income tax. See
sec. 6662(d)(2)(B)(ii)(II). Petitioners correctly note that respondent never
determined a section 6662 penalty against them relating to the tax deficiencies for
2006 and 2007, even though the facts relating to those claimed bad debt
deductions were essentially the same as they are for 2008. Additionally,
1
10% of petitioners’s total $428,095 income tax liability (as determined by
respondent and that we sustain) equals $42,809.
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[*8] petitioners note that their 2008 Federal income tax return was filed before the
Tax Court’s prior opinion was filed on November 5, 2012.
Petitioners argue that respondent’s failure to determine section 6662
penalties for 2006 and 2007 establishes, or at the least provides significant support
for, the reasonableness of their claim of essentially the same bad debt deductions
for 2008.
We will deny respondent’s summary judgment motion with regard to the
$9,774 section 6662(a) and (b)(2) penalty for 2008.
To reflect the foregoing,
An appropriate order will be issued.