T.C. Memo. 2016-137
UNITED STATES TAX COURT
BOHDAN SENYSZYN AND KELLY L. SENYSZYN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 9721-11. Filed July 21, 2016.
In Senyszyn v. Commissioner (Senyszyn II), 146 T.C. __ (Mar.
31, 2016), we declined to apply the doctrine of collateral estoppel to
uphold whatever minimum deficiency would be consistent with PH's
prior conviction for tax evasion. We found that the evidence
presented at trial showed that Ps were not liable for any deficiency
and concluded that the purposes of collateral estoppel did not support
its application. R filed a motion for reconsideration of Senyszyn II on
the grounds that, because the legal requirements for applying the
doctrine were met, its application was mandatory.
Held: The discretion we exercised in Senyszyn II not to apply
collateral estoppel to uphold a minimum deficiency was squarely
within applicable precedent; R's motion for reconsideration will be
denied.
*
This opinion supplements our prior Opinion Senyszyn v. Commissioner
(Senyszyn II), 146 T.C. __ (Mar. 31, 2016).
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[*2] Bohdan Senyszyn and Kelly L. Senyszyn, pro sese.
Marco Franco and Lydia A. Branche, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
HALPERN, Judge: This case is before us on respondent's motion under
Rule 1611 that we reconsider our Opinion Senyszyn v. Commissioner (Senyszyn
II), 146 T.C. __ (Mar. 31, 2016). For the reasons explained below, we will deny
respondent's motion.
Background
Mr. Senyszyn's Tax Evasion Conviction
In May 2004, David Hook, a former business associate of Mr. Senyszyn,
filed a civil fraud suit against petitioners alleging that they had embezzled funds
from him between 2002 and 2004. Mr. Hook's civil suit led to a Federal criminal
investigation of Mr. Senyszyn. As part of that investigation, Internal Revenue
Agent Carmine DeGrazio was asked to determine the amount of income that Mr.
Senyszyn had received in 2003 but had failed to report on petitioners' 2003 Form
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code for the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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[*3] 1040, U.S. Individual Income Tax Return. Agent DeGrazio examined records
of accounts belonging to petitioners, to Mr. Hook, or to related entities to
determine the flow of funds between Mr. Hook's accounts and Mr. Senyszyn's
accounts. Agent DeGrazio compared the transfers made from Mr. Hook's
accounts to Mr. Senyszyn's accounts with the transfers in the opposite direction
and concluded that Mr. Senyszyn had received $252,726 of net "benefits" from
Mr. Hook that petitioners did not report on their 2003 Form 1040.
In September 2007, the U.S. Attorney for the District of New Jersey filed a
four-count information in a criminal case against Mr. Senyszyn that included a
charge of tax evasion in violation of section 7201. In support of the tax evasion
charge, the information alleged that Mr. Senyszyn embezzled approximately
$252,726 from Mr. Hook during 2003 and failed to include that amount in the
income reported on petitioners' 2003 Form 1040.
Contemporaneous with the U.S. attorney's filing of charges against him, Mr.
Senyszyn signed an agreement to plead guilty to all four counts with which he was
charged. Mr. Senyszyn agreed to stipulate at sentencing that he had knowingly
and willfully failed to report $252,726 in taxable income for 2003. After Mr.
Senyszyn entered a plea of guilty in accordance with his plea agreement, the U.S.
District Court for the District of New Jersey entered judgment pursuant to Mr.
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[*4] Senyszyn's plea. Upon the conclusion of further proceedings in the District
Court and the U.S. Court of Appeals for the Third Circuit, the District Court's
judgment became final.
The Determined Deficiency
Following Mr. Senyszyn's criminal conviction, respondent examined
petitioners' 2003 Federal income tax return for the purpose of determining any
deficiency in tax. After that examination, respondent determined a deficiency in
petitioners' 2003 Federal income tax, together with fraud and accuracy-related
penalties. The deficiency in tax resulted primarily from respondent's adjustment
increasing petitioners' 2003 gross income on account of $252,726 of income that
petitioners allegedly failed to report.
Senyszyn I
Before trial in this case, respondent moved for partial summary adjudication
that (1) petitioners were collaterally estopped from denying that during 2003 Mr.
Senyszyn received unreported income of $252,726 or that the fraud penalty
applied for 2003 and (2) the period of limitations on assessment and collection of
tax remained open.
Under the doctrine of collateral estoppel, or 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). "Collateral estoppel * * * has the dual
purpose of protecting litigants from the burden of relitigating an identical issue
with the same party or his privy and of promoting judicial economy by preventing
needless litigation." Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). It
also "fosters reliance on judicial action by minimizing the possibility of
inconsistent decisions." Montana, 440 U.S. at 154.
In our initial report in this case, Senyszyn v. Commissioner (Senyszyn I),
T.C. Memo. 2013-274, we granted respondent's motion for summary judgment in
regard to the fraud penalty and the statute of limitations but denied his motion for
summary judgment that petitioners were estopped from disputing that Mr.
Senyszyn received unreported income of $252,726 in 2003. As we explained in
that report: "Although the existence of an underpayment in tax is a necessary
element of tax evasion under section 7201, the determination of an exact liability
evaded is not." Id. at *9. "Even where the taxpayer has stipulated a specific
amount of underpayment in a guilty plea," we continued, "such stipulation--though
strong evidence of the deficiency amount--does not collaterally estop the taxpayer
from challenging that amount in a subsequent civil proceeding." Id. at *9-*10.
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[*6] Therefore, we denied respondent's motion to the extent it sought
determination of the amount of petitioners' unreported income for 2003. "The
issues of the amounts of the deficiency in tax and the penalties for 2003", we
concluded, "remain[ed] for trial." Id. at *15.
Nonetheless, the existence of some underpayment was a necessary element
of the offense for which Mr. Senyszyn was convicted. See Sansone v. United
States, 380 U.S. 343, 351 (1965) (listing "the existence of a tax deficiency" among
"the elements of § 7201"). Therefore, we accepted that Mr. Senyszyn's criminal
conviction established the existence of an underpayment by petitioners for 2003
but not its exact amount. Senyszyn I, at *12-*13.
Senyszyn II
On the basis of the evidence presented at trial, we found that Mr. Senyszyn
repaid to Mr. Hook during 2003 more than he took. Senyszyn II, 146 T.C. at __
(slip op. at 21). Thus, correction of the error reflected in Agent DeGrazio's
understatement of the amount that Mr. Senyszyn repaid to Mr. Hook during 2003
eliminated the deficiency respondent determined. See James v. United States, 366
U.S. 213, 220 (1961) (quoting with approval Government's observation on brief
that victim's recovery of misappropriated funds reduces embezzler's income);
Chumbrook v. Commissioner, T.C. Memo. 1977-108, 1977 Tax Ct. Memo LEXIS
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[*7] 330, at *14 ("Where restitution of wrongfully converted property is made
prior to the close of the year of the wrongful conversion, the restitution offsets
what would otherwise be income, so that no income results from the wrongful
conversion.").
Having determined in Senyszyn II, 146 T.C. at __ (slip op. 22), that "the
evidence presented * * * [did] not support the amount of the deficiency that
respondent asserted--or, indeed, any deficiency at all", we then considered whether
to apply the doctrine of collateral estoppel "to uphold a deficiency in whatever
minimum amount would justify Mr. Senyszyn's conviction under section 7201."
We recognized that prior cases had not established a minimum amount necessary
to support a conviction for tax evasion. Id. at __ (slip op. at 24). We read
Parklane Hosiery Co. as having granted trial courts discretion to decline to apply
collateral estoppel when the purposes of the doctrine do not support its
application. Id. at __ (slip op. at 25-26). Thus, we considered "whether the
purposes of collateral estoppel support[ed] applying the doctrine to uphold a
deficiency in petitioners' 2003 Federal income tax" and concluded that they would
not. Id. at __ (slip op. at 26, 27). We explained that conclusion as follows:
Upholding a minimum deficiency would not promote judicial
economy: Even after Mr. Senyszyn's conviction under section 7201,
we were required to hear this case to determine the amount of
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[*8] petitioner's deficiency. And any inconsistency between Mr.
Senyszyn's prior criminal conviction and a decision that petitioners
are not liable for any deficiency would not undermine "reliance on
judicial action", cf. Montana, 440 U.S. at 154, because the
inconsistency would result not from conflicting findings by different
courts but instead from Mr. Senyszyn's entry of a guilty plea to a
charge that the evidence--at least as presented to us--would not
support. * * *
Id. at __ (slip op. at 27). Therefore, we declined to apply the doctrine of collateral
estoppel to uphold whatever minimum deficiency would be consistent with Mr.
Senyszyn's conviction under section 7201. Id. at __ (slip op. at 27-28). Instead,
we concluded that petitioners were not liable for any deficiency in their Federal
income tax for 2003. Id. at __ (slip op. at 29).
Respondent's Motion for Reconsideration
On May 2, 2016, respondent filed his motion asking us to reconsider
Senyszyn II.2 In that motion, respondent alleges that, in Senyszyn II, we "did not
properly apply the standard for collateral estoppel." In particular, respondent
argues that our claim of "broad discretion in the application of collateral estoppel"
was a substantial error of law because it "contradicts previous holdings of the
Court of Appeals for the Third Circuit, the court to which any appeal in this case
2
Although a motion for reconsideration of an opinion must be filed within
30 days after service of the opinion, respondent's motion that we reconsider the
Opinion we issued on March 31, 2016, was timely because April 30, 2016, fell on
a Saturday. See Rule 25(a)(2).
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[*9] would lie." Finally, respondent alleges that proper application of the standard
for collateral estoppel would result in "a substantial tax deficiency for petitioners."
According to respondent, that Court of Appeals allows trial courts
discretion in the application of collateral estoppel only when the doctrine is
asserted by a claimant who was not a party to the prior litigation (i.e., cases of
"non-mutual" collateral estoppel). By contrast, in cases involving "mutual"
collateral estoppel, in which the doctrine is asserted by a party to the prior
litigation, courts must apply the doctrine whenever the legal conditions to its
application are met.
Respondent rests his interpretation of Third Circuit law on a single case:
that court's opinion in Jean Alexander Cosmetics, Inc. v. L'Oreal USA Inc., 458
F.3d 244 (3d Cir. 2006). Respondent focuses in particular on the court's
discussion of the appropriate standard of appellate review of a trial court's
decision whether to apply collateral estoppel. The Court of Appeals
acknowledged in Jean Alexander that its prior decisions on that point had been
inconsistent: "In some cases we have reviewed the application or nonapplication
of issue preclusion for abuse of discretion, while in others we have applied plenary
review." Id. at 247-248. The court sought to reconcile its prior cases on the basis
of the circumstances in which the doctrine had been invoked. It had engaged in
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[*10] more limited, abuse-of-discretion review only in cases "in which a nonparty
to a previous proceeding ha[d] asserted issue preclusion against a defendant, that
is, in cases involving 'non-mutual offensive collateral estoppel.'" Id. at 248.
Those cases, the court suggested, established a limited exception to the "general
rule" requiring "plenary review over the application of issue preclusion." Id.
The Court of Appeals justified the differing standards of appellate review
according to the significance of equitable considerations in the determination of
whether to apply collateral estoppel. The more the question turned on legal rather
than equitable considerations, the court reasoned, the greater the justification for
plenary review. Thus, plenary review of a lower court's decision in a case
involving defensive or mutual collateral estoppel "makes sense", the court
decided, because "[t]he predominant question" in those cases "is whether the basic
requirements for issue preclusion are satisfied." Id. (citing Nat'l R.R. Passenger
Corp. v. Pa. Pub. Util. Comm'n, 288 F.3d 519, 525 (3d Cir. 2002)).
Relying on Jean Alexander, respondent argues that our claim of "broad
discretion" to apply collateral estoppel or not "contradicts the Third Circuit's
standard of review." Respondent apparently reasons that, because that Court of
Appeals reviews a lower court's application of collateral estoppel for abuse of
discretion only in cases involving nonmutual collateral estoppel, those are the only
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[*11] cases in which it allows a trial court any discretion in the application of the
doctrine.
Respondent also suggests we "consider the breadth of * * * [our] opinion."
He worries that the discretion we have claimed in the application of collateral
estoppel might encourage "many more challenges to clear-cut cases" that will
"waste judicial resources and the resources of the parties, thereby frustrating the
entire purpose of collateral estoppel." He also professes concern that our Opinion
"might be used to challenge prior criminal convictions." Finally, respondent
suggests that applying collateral estoppel would "save[] the Court from having to
confront the question of a requirement to arbitrarily determine some 'substantial
tax deficiency' in order to afford the District Court the comity to which it is due, in
a case where this Court's factual analysis shows there really is no deficiency at
all." "The better course", respondent recommends, "is to accept via collateral
estoppel the liability to which Mr. Senyszyn stipulated in his guilty plea as a
minimum deficiency."
Discussion
In asking us to reconsider Senyszyn II, respondent leaves largely
unchallenged our determination that the purposes of collateral estoppel do not
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[*12] support its application in the present case.3 Instead, respondent relies on
Jean Alexander for the proposition that collateral estoppel, when invoked by a
party to the prior litigation, must be applied whenever the basic requirements for
its application are met, regardless of whether doing so would further the doctrine's
underlying purposes. Respondent offers no explanation for the surprising view
that courts are hamstrung in the application of a doctrine they created largely for
their own benefit.
Jean Alexander does not stand for the proposition for which respondent
cites it. Respondent focuses on the Court of Appeals' observation that "[t]he
predominant question in preclusion cases involving defensive or mutual collateral
estoppel is whether the basic requirements for issue preclusion are satisfied." Jean
Alexander, 458 F.3d at 248 (citing Nat'l R.R. Passenger Corp., 288 F.3d at 525).
The Court of Appeals offered that observation not in a discussion of the standards
3
We see no merit in respondent's argument that the need to consider
challenges to collateral estoppel by "future petitioners" in cases "similar to the
present case" "will waste judicial resources and the resources of the parties,
thereby frustrating the entire purpose of collateral estoppel." As we explained in
both of our prior opinions in this case, because a defendant's conviction under sec.
7201 establishes only the existence of a deficiency, but not its amount, the
Commissioner's efforts to collect any tax owed will necessarily require subsequent
civil litigation. We are also not persuaded by respondent's professed concern that
our decision might somehow give Mr. Senyszyn, or others similarly situated,
grounds to have a final criminal conviction overturned.
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[*13] governing the application of the doctrine on the merits but instead in
addressing the appropriate standard of appellate review. The statement respondent
seized on cannot be read to mean that courts are bound to apply collateral estoppel
when invoked by a prior party whenever "the basic requirements for issue
preclusion are satisfied." Cf. id. The question of whether those requirements are
satisfied may be "[t]he predominant question in preclusion cases involving
defensive or mutual collateral estoppel", see id., but "predominant" does not mean
"sole".
The Court of Appeals' opinion in Nat'l R.R. Passenger Corp. demonstrates
that, even if equitable considerations are less prevalent in cases involving
nonmutual or defensive collateral estoppel, the application of the doctrine in those
circumstances does not turn entirely on satisfaction of the legal requirements.4 In
any case that raises an issue of collateral estoppel, a court must consider equitable
factors "to assure that the doctrine is applied in a manner that will serve the twin
goals of fairness and efficient use of private and public litigation resources." Nat'l
4
Thus, respondent not only misinterpreted the Court of Appeals' observation
in Jean Alexander Cosmetics, Inc. v. L'Oreal USA, Inc., 458 F.3d 244, 248 (3d
Cir. 2006), regarding the relative importance of legal and equitable considerations
in preclusion cases involving defensive or mutual collateral estoppel; he also
failed to read (or appreciate the import of) the case the court cited in Jean
Alexander in support of that observation. See id. (citing Nat'l R.R. Passenger
Corp. v. Pa. Pub. Util. Comm'n, 288 F.3d 519, 525 (3d Cir. 2002)).
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[*14] R.R. Passenger Corp., 288 F.3d at 525. The equitable factors relevant in a
particular case depend on whether estoppel is being asserted by a prior party (i.e.,
whether "mutuality" exists) and whether its use is offensive or defensive. Id. But
even in a case of mutual offensive collateral estoppel, like Nat'l R.R. Passenger
Corp., application of the doctrine does not depend solely on the satisfaction of the
applicable legal requirements. "Even when the requirements of the general rule of
collateral estoppel are satisfied, the Court must consider whether there are special
circumstances present which make it inequitable or inappropriate to foreclose
relitigation of a previously determined issue." Id. at 528. On the facts before it,
the Nat'l R.R. Passenger Corp. court found no special circumstances that would
justify relitigation. It did not, however, resolve to apply collateral estoppel merely
because the legal requirements had been satisfied.
Thus, Jean Alexander establishes only that, were respondent to appeal our
decision in the Third Circuit, the Court of Appeals would conduct plenary, or de
novo, review of our determination not to apply collateral estoppel. See Salve
Regina Coll. v. Russell, 499 U.S. 225, 231 (1991) (using interchangeably the
terms "plenary", "de novo", and "independent" review). Jean Alexander does not
establish that, because the basic requirements for issue preclusion are satisfied in
the present case, it necessarily follows that the doctrine must be applied, even
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[*15] though doing so would not further the doctrine's underlying purposes.
Respondent's argument thus conflates the substantive issue of when collateral
estoppel properly applies and the procedural issue of the scope of an appellate
court's review of a lower court's decision to apply the doctrine or not. An
appellate court's choice to exercise plenary review of a lower court's decision,
rather than more limited abuse-of-discretion review, does not mean that the lower
court necessarily lacked any discretion to take into account relevant equitable
considerations, as well as applicable legal requirements, in reaching its decision.
The appellate court's exercise of plenary review simply means that that court will
make its own weighing of any relevant equitable considerations instead of
deferring to the lower court's judgment. E.g., Salve Regina Coll., 499 U.S. at 238
("When de novo review is compelled, no form of appellate deference is
acceptable."). See generally 19 James Wm. Moore, Moore's Federal Practice, sec.
206.04[1], at 206-23 (3d ed. 2016) ("[A] circuit court [employing de novo review]
may substitute its own judgment regarding a conclusion of law made by the trial
court.").
Even if we were to apply collateral estoppel in this case, the doctrine would
not support upholding the deficiency respondent asserts. For the reasons
explained in Senyszyn I, collateral estoppel, even if applicable, would not
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[*16] establish the amount of any income petitioners failed to report for 2003.
Were we to apply collateral estoppel, we would have to determine a deficiency in
whatever minimum amount would justify Mr. Senyszyn's conviction under section
7201. Because prior cases do not establish a minimum amount necessary to
support a conviction, the determination respondent requests of us would
necessarily be not only arbitrary but also nominal.
We remain convinced that no purpose would be served by upholding a
nominal deficiency--one that respondent apparently concedes would be contrary to
the evidence5--merely because the legal preconditions for the application of
collateral estoppel are satisfied. We see nothing in the Court of Appeals' opinion
in Jean Alexander, or in its jurisprudence generally, that requires us to make such
a seemingly pointless determination. Instead, that court's opinions confirm that, in
any case raising the possible application of collateral estoppel--whether offensive
5
Rule 161 allows a party to request our reconsideration of either an opinion
or findings of fact. Although respondent's motion asks only that we reconsider
Senyszyn II on the grounds that it reflected a substantial error of law, the
memorandum he submitted in support of his motion refers to "substantial errors of
fact" as well. But the errors of fact to which respondent refers appear to derive
from our alleged errors of law. Respondent argues that Senyszyn II "contains
clear errors of law that led the Court to find facts inconsistent with a prior final
decision made by a court of competent jurisdiction in a case concerning the same
parties." Nowhere in his memorandum does respondent challenge our evaluation
of the evidence presented in Senyszyn II.
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[*17] or defensive, mutual or nonmutual--a court must consider relevant equitable
factors to assure that the doctrine is applied in a manner consistent with its
underlying objectives. Because the discretion we exercised in Senyszyn II is
squarely within the scope of Third Circuit precedent, we will deny respondent's
motion.
An appropriate order will be issued.