UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 93-8147
_____________________
IN THE MATTER OF: JAMES CARROLL TEAL,
Debtor.
USA, Internal Revenue Service,
Appellant,
VERSUS
JAMES CARROLL TEAL,
Appellee.
____________________________________________________
Appeal from the United States District Court
for the Western District of Texas
(A-91-CV-863)
_____________________________________________________
(February 9, 1994)
Before GOLDBERG, JOLLY, and BARKSDALE, Circuit Judges.
PER CURIAM:1
The Internal Revenue Service challenges the district court's
holding that James Carroll Teal did not owe penalties or associated
interest arising out of his 1979 income tax year (1979). We
REVERSE.
1
Local Rule 47.5 provides: "The publication of opinions that
have no precedential value and merely decide particular cases on
the basis of well-settled principles of law imposes needless
expense on the public and burdens on the legal profession."
Pursuant to that Rule, the court has determined that this opinion
should not be published.
I.
In 1983, Teal filed an amended return for 1979, claiming that,
because of a tax shelter, he was entitled to a refund of
approximately $13,000. The IRS made the refund, but subsequently
notified Teal (late 1985) that he was liable for it, as well as for
four penalties and interest. Teal contested that decision by
filing a petition in Tax Court in early 1986. Teal and the IRS
agreed to a settlement, under which Teal would pay the $13,000,
only one penalty and part of another, and interest.2 The Tax Court
entered an order and decision reflecting the terms of the
agreement.
In 1990, Teal filed a Chapter 7 petition in bankruptcy court.
He then filed an adversary complaint against the United States,
seeking, among other things, a determination of his liability for
penalties and interest for 1979.3 The bankruptcy court held that
it "lack[ed] jurisdiction to determine [Teal's] 1979 federal income
tax liability, pursuant to 11 U.S.C. § 505(a)(2)(A)." The district
court reversed, holding that neither § 505(a)(2)(A) nor claim
preclusion prohibited relitigation of the issues. It concluded
2
The settlement agreement involved concessions by both sides.
Teal conceded that he owed the tax amount, 100% of the amount of
one penalty, and 75% of another. The IRS, in turn, abandoned two
"negligence penalties" and 25% of the amount of another penalty.
3
Subsequent to the entry of the tax court judgment, this
court's decision in Heasley v. Commissioner, 902 F.2d 380 (5th Cir.
1990), invalidated the application of the valuation overstatement
penalty, 26 U.S.C. § 6659(a) (repealed 1989), under circumstances
similar to those under which the penalty was applied to Teal. On
this basis, Teal sought to relitigate his liabilities for 1979.
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that Teal "does not owe nor does he have to pay the disputed
penalties, and the associated interest thereon, for" 1979.
II.
The IRS asserts that the district court erred in two respects:
in holding that § 505(a)(2)(A) did not deprive the bankruptcy court
of jurisdiction; and, assuming jurisdiction, in refusing to find
that, under principles of claim preclusion, the tax court judgment
barred relitigation.4
A.
Section 505(a)(2)(A) provides that a bankruptcy court may not
determine
the amount or legality of a tax, fine, penalty, or
addition to tax if such amount or legality was
contested before and adjudicated by a judicial or
administrative tribunal of competent jurisdiction
before the commencement of the case under this
title ....
11 U.S.C. § 505(a)(2)(A) (emphasis added). The district court
recognized that the tax court decision addressed the amount owed
for 1979, and that it was a court of competent jurisdiction. It
found, however, that the tax court's decision assessing the amount
of taxes and penalties owed did not adjudicate the legality of
4
These issues are closely related, if not identical. As the
IRS states, with citation to the Congressional Record: "At bottom,
Section 505(a)(2) expresses in jurisdictional terms, traditional
principles of res judicata, or claim preclusion." (Citation
omitted.) Teal agrees, stating that "[a]lthough Section 505 is
jurisdictional in nature, it appears to encompass the same
considerations sought to be protected by the judicially created
doctrines of res judicata and collateral estoppel." And, the
district court did not distinguish between its discussion of res
judicata and § 505.
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those items; therefore, it held that the bankruptcy court was free
to inquire as to their legality.
We disagree. An assessment by the tax court of the amount of
penalty or tax owed presupposes the legality of that assessment.
Indeed, the district court recognized that "the amount of the
penalties was assessed based upon the agreed stipulation that the
tax was legal." It is of no moment that the tax court, in entering
the agreed judgment, did not expressly address the legality of what
it was adjudicating.
Needless to say, the fact that the tax court's judgment was
reached by agreement does not undercut this conclusion; the taxes
were still "contested before and adjudicated by" the tax court.
See § 505(a)(2)(A). In bankruptcy court, Teal's counsel
"stipulate[d] that the Tax Court decision was an adjudication"; he
cannot contend otherwise here. In any event, "adjudicate" is
"[s]ynonymous with adjudge in its strictest sense". Black's Law
Dictionary 42 (6th ed. 1990). Thus, a matter has been
"adjudicated" when a "[j]udgment of a court of competent
jurisdiction" has been decreed. Id. The judgment entered by the
tax court, pursuant to the parties' settlement, satisfies §
505(a)(2)(A).5
5
Although not necessary to our understanding of the plain
meaning of § 505(a)(2)(A), the comments of the House and Senate
sponsors of § 505, which are identical, reflect Congress' meaning
of the phrase "contested before and adjudicated by":
[T]he bankruptcy court will not have jurisdiction
to rule on the merits of any tax claim which has
been previously adjudicated, in a contested
proceeding, before a court of competent
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B.
1.
This conclusion is buttressed by reference to traditional
principles of res judicata; "[s]imply because the Tax Court
decision[] [was] reached by agreement does not mean that [Teal's]
income tax ... [was] not resolved by a final judgment[] on the
merits for the purposes of res judicata. An agreed judgment is
entitled to full res judicata effect." See United States v.
Shanbaum, 10 F.3d 305, 313 (5th Cir. 1994) (citing United States v.
International Building Co., 345 U.S. 502, 505-06 (1953), Jones v.
Texas Tech Univ., 656 F.2d 1137, 1144 (5th Cir. 1981), and Kaspar
jurisdiction. For this purpose, a proceeding of
the U. S. Tax Court is to be considered "contested"
if the debtor filed a petition in the Tax Court by
the commencement of the case and the Internal
Revenue Service had filed an answer to the
petition. Therefore, if a petition and answer were
filed in the Tax Court ..., and if the debtor later
defaults in the Tax Court, then, under res judicata
principles, the bankruptcy court could not then
rule on the debtor's or the estate's liability for
the same taxes.
124 Cong. Rec. 32250, 32413 (Sept. 28, 1978) (statement of Rep.
Edwards); 124 Cong. Rec. 33989, 34013 (Oct. 5, 1978) (statement of
Sen. DeConcini). It is not disputed that Teal's petition in the
tax court was contested.
The Supreme Court has recognized:
Because of the absence of a conference and the
key roles played by Representative Edwards and his
counterpart floor manager Senator DeConcini, we
have treated their floor statements on the
Bankruptcy Reform Act of 1978 as persuasive
evidence of congressional intent.
Begier v. IRS, 496 U.S. 53, 64 n.5 (1990) (emphasis added;
citations omitted).
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Wire Works, Inc. v. Leco Engineering & Mach. Inc., 575 F.2d 530,
538-39 (5th Cir. 1978)); see also Matter of West Texas Marketing
Corp., ___ F.3d ___, No. 92-9061, slip op. 2408, 2412 (5th Cir.
Jan. 31, 1994) (recognizing that a settlement agreement between IRS
and taxpayer embodied in a judgment is entitled to full res
judicata effect).
2.
It appears that the district court ruled as it did because of
its concerns about the equities of the case.6 A bankruptcy court,
however, is barred by § 505(a)(2)(A) from "employ[ing] its
equitable powers to look behind the judgment[]" of the tax court.
See Matter of Hammers, 988 F.2d 32, 34 (5th Cir. 1993).7 Simply
stated, § 505(a)(2)(A), a jurisdictional statute, is mandatory;
Congress did not leave bankruptcy courts the discretion to
disregard tax court adjudications and concomitantly seize
jurisdiction out of equitable concerns.8
6
The district court made a number of statements suggesting that
it could not abide by § 505 under the facts of this case, e.g.,
"the courts must be more protective of the rights and liabilities
of individual, unrepresented taxpayers, than of the Internal
Revenue Service."
7
This conclusion comports with the well-known rule that a
federal court may not abrogate principles of res judicata out of
equitable concerns. Federated Dept. Stores, Inc. v. Moitie, 452
U.S. 394, 401 (1981). Indeed, it must give res judicata effect to
a prior judgment even if it would be voidable on appeal because of
legal error. Id. at 398-99.
8
The district court also looked to this court's decision in
Logan Lumber Co. v. Commissioner, 365 F.2d 846 (5th Cir. 1966),
which allowed a stipulated tax court judgment to be set aside
because of a subsequent change in the law; however, the change
occurred while the case was on direct review. Id. at 847, 854-55.
Unlike the instant case, Logan did not involve a collateral attack
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III.
As the district court recognized, "Teal had the full and fair
opportunity to contest the assessed penalties in the Tax Court
litigation." Pursuant to § 505(a)(2)(A), the bankruptcy court
lacked jurisdiction to entertain claims regarding his 1979 tax year
liabilities. Accordingly, the judgment of the district court is
REVERSED.
on a judgment, and neither res judicata nor § 505(a)(2)(A) was at
issue.
The district court also relied on Brast v. Winding Gulf
Colliery Co., 94 F.2d 179 (4th Cir. 1938), where the Fourth Circuit
allowed a taxpayer to undo a prior stipulated judgment of the Board
of Tax Appeals because of a subsequent change in the law. Id. at
180. Of course, this case preceded enactment of § 505. And, we
agree with the government that Brast is distinguishable because it
was not clear, at the time Brast was decided, whether a decision of
the Board of Tax Appeals was res judicata as to a refund action.
See George S. Colton Elastic Web Co. v. White, 16 F. Supp. 726,
727-28 (D. Mass 1936). In contrast, § 505(a)(2)(A) makes clear
that a tax court adjudication precludes a bankruptcy court from
having jurisdiction over the same issues. Finally, if Brast is
read as implying that stipulated judgments entered by the current
tax court may be vitiated by subsequent collateral attack, it has
been effectively overruled. See International Building Co., 345
U.S. at 506 (agreed tax court judgments entitled to res judicata
effect); Federated Dept. Stores, 452 U.S. at 398 (erroneous legal
conclusions do not alter the res judicata effect of a final
judgment).
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