UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

        The court recently granted partial summary judgment to the Internal Revenue Service⁽¹⁾ supported by a memorandum,⁽²⁾ in connection with 1976-1978 taxes and interest. I relied on the fact that the tax court had previously ruled on those issues,⁽³⁾ and in the memorandum I said:⁽⁴⁾

In the tax court case filed by McCubbins, the tax court judge found that his 1976 tax return was fraudulent in many respects, and that he did not file 1977 or 1978 tax returns. The determination is binding on me in the present proceeding [footnotes omitted].

        In Palmer, the IRS had mailed a notice of deficiency to Mr. Palmer, who filed a timely petition for redetermination of his tax liability in the U.S. Tax Court. Palmer claimed he was not liable for any taxes or penalties. The IRS answered and affirmatively alleged tax fraud against Palmer. Palmer did not respond to the IRS's answer and affirmative allegations. The allegations were deemed admitted pursuant to tax court discovery rules.⁽⁶⁾

        The IRS filed a summary judgment motion against Palmer in tax court, who did not participate in any respect in the proceeding after petitioning for redetermination. The tax court, in light of Palmer's admissions, found Palmer engaged in tax fraud.

        After that, Palmer filed for relief under chapter 7, and brought an adversary proceeding against the IRS seeking to establish the discharge of the same federal income taxes that were involved in tax court. The IRS moved for summary judgment in the adversary proceeding on the basis that Palmer was collaterally estopped from denying fraud and nondischargeability under 11 USC § 523(a)(1)(C) because of the prior tax court judgment against him involving the same taxes. The bankruptcy court agreed, but the Bankruptcy Appellate Panel reversed on the grounds that fraud had never been litigated.

        6 ABR 367          The 9^th Circuit affirmed the decision by the BAP, and held that Palmer's nonparticipation in the tax court proceeding, except for his original petition, was akin to a default. Therefore, the tax court judgment could not be used as a basis for collateral estoppel purposes. The court said:

        Collateral estoppel is appropriate when the following elements are met:

(1) there was a full and fair opportunity to litigate the issue in the previous action;

(2) the issue was actually litigated in that action;

(3) the issue was lost as a result of a final judgment in that action; and

(4) the person against whom collateral estoppel is asserted in the present action was a party or in privity with a party in the previous action. [citations omitted]

        The only question in Palmer was whether the issue had been actually litigated. Although Palmer did not technically default, the appellate court treated him as if he had, saying:

        We begin with the proposition that a default judgment is generally not entitled to collateral estoppel effect because there is no actual litigation of issues. . . . . For all practical purposes, Palmer's adverse fraud ruling in the Tax Court was the product of a default. Palmer petitioned pro se for a redetermination of his tax liability in the Tax Court. He did nothing after that. He did not substantially participate in the proceedings. The government introduced no evidence of fraud; it simply made allegations of fraud in its answer to the petition. Palmer made no reply. He did not respond to the Commissioner's motion to deem the uncontroverted assertions admitted pursuant to Tax Court Rule 37(c). He participated in no discovery. He ignored the Commissioner's motion for summary judgment. [citations omitted]

        6 ABR 368 
        Although Palmer's behavior may not amount to a classic default, because he initiated the Tax Court proceeding, it is close enough for present purposes. Once Palmer filed his Tax Court petition to contest the deficiency, he did nothing else. The government's fraud assertions placed him in a defensive position, which he totally abandoned. In these circumstances, we agree with the Bankruptcy Appellate Panel that the issue of fraud was not "actually litigated" in the Tax Court.

        The court held that, even though Palmer lost a summary judgment in tax court for failing to controvert the government's affidavits, his lack of active participation left him in the position more akin to someone he had defaulted than someone who had participated and lost.

        I will enter an order requiring the IRS to show that McCubbins participated in the 1989 tax court case⁽⁷⁾ to a greater degree than did Palmer in his case. If he did not, I will reverse the grant of summary judgment on collateral estoppel grounds. Since 1976 was the only year based on fraud, that may be the only year affected in the practical sense. If he did not file tax returns for 1977 and 1978, the IRS can easily establish nondischargeability for those years for failure to file a return.⁽⁸⁾

DATED: March 22, 2000

HERBERT A. ROSS
U.S. Bankruptcy Judge

N O T E S:

        6 ABR 365  1. Order Granting Partial Summary Judgment to the Internal Revenue Service, Docket Entry 24, filed March 6, 2000.

        6 ABR 365  2. Memorandum Granting Partial Summary Judgment to the Internal Revenue Service, 6 ABR 343 filed March 6, 2000.

        6 ABR 365  3. Lawrence R. McCubbins v Commissioner of Internal Revenue, 57 TCM (CCH) 481, TCM (P-H) 89,245 (1989).

        6 ABR 365  4. See, Part 4.1.2 of the Memorandum (erroneously omitting the tax year 1978 from the subtitle), at 6 ABR 343.

        6 ABR 366  5. United States Internal Revenue Service v Palmer (In re Palmer), F3d , 2000 WL 286931 (9^th Cir 2000).

        6 ABR 366  6. Tax Court Rule 37(c).

        6 ABR 368  7. Lawrence R. McCubbins v Commissioner of Internal Revenue, 57 TCM (CCH) 481, TCM (P-H) 89,245 (1989).

        6 ABR 368  8. See, 11 USC § 523(a)(1)(B)(i).