Opinion
Case No. CV01-395-C-EJL
July 8, 2002
ORDER
Pending before the Court are the following motions: (1) Defendant's Motion to Dismiss (Docket No. 7); (2) Plaintiff's Motion for Judgment on the Pleadings (Docket No. 11); and (3) Plaintiff's Motion for Summary Judgment (Docket No. 15).
Having fully reviewed the pleadings and evidence before it, the Court finds that the parties have adequately presented the facts and legal arguments in their briefs and that the decisional process would not be significantly aided by oral argument. Therefore, in the interest of avoiding further delay, the Court shall decide the outstanding motions based on the pleadings without oral argument. Local Rule 7.1(b).
I. BACKGROUND
The tax issues set forth in the Plaintiff's Complaint arose when they failed to file tax returns for the years 1976 through 1979. After Plaintiffs, Paul and Angela Palmer, failed to meet with Internal Revenue Service (IRS) agents, the IRS conducted an investigation regarding income information for the unreported years. IRS agents discovered income information for the years 1976 and 1979. The agents also learned that Mr. Palmer may have generated income through self-employment as an electrician during these years. Ultimately, the IRS reconstructed income for the Palmers during these years based on national median household income statistics. See Palmer v. United States Internal Revenue Service, 116 F.3d 1309, 1310 (9th Cir. 1997).
The IRS sent deficiency notices to the Palmers, listing deficiencies in the amount of $16,558 for Paul Palmer and $3,610 for Angela Palmer, plus penalties in the amount of $5,042. Plaintiffs did not respond to the deficiency notices. The IRS prepared assessments against the Plaintiffs and eventually filed liens against a parcel of real property held in the name of the Paul B. Palmer, Jr. Family Preservation Trust. Angela Palmer was the trustee of the trust. Angela Palmer filed a wrongful levy action in this Court, alleging that the property belonged to the trust, rater than to the Plaintiffs, Palmer, 116 F.3d at 1311. The government filed a counterclaim to enforce the liens and a third-party complaint against Plaintiffs in their individual capacities in order to reduce the assessments to a judgment. The government moved for partial summary judgment on the unpaid assessed taxes, penalties, and interest. The motion was granted, and the parties later entered into a stipulated settlement of all remaining issues not included in the Court's summary judgment ruling. Plaintiffs paid $68,000.00 as part of the stipulated settlement agreement, and a final judgment was entered in the case, reflecting $10,284.87 as the outstanding balance. Id.
Plaintiffs appealed the Court's partial summary judgment order, and the Ninth Circuit affirmed the Court's ruling in favor of the IRS on the third party complaint. Plaintiffs claimed on appeal that summary judgment was wrongly granted because the IRS tax calculations were not entitled to a presumption of correctness and also due to alleged procedural errors. The Ninth Circuit ruling stated that the IRS did not provide an explanation for its reliance upon national median household income statistics to reconstruct the Palmer's income. Neither did the IRS explain why this method of calculating the Palmer's income was a rational method. The court then stated: "We would therefore be inclined to agree with the Palmers that simply attributing median national income statistics to the tax payers is not a rational method for reconstructing the Palmers' income, were the question properly before us." Palmer, 116 F.3d at 1312. The court then determined that "the Palmers have waived their right to appeal the district court's conclusion that the deficiency determination was entitled to the presumption of correctness." Id. Accordingly, the court of appeals did not consider the Palmer's challenge to the method used to reconstruct their income.
The Palmers also argued on appeal that the government had failed to offer sufficient evidence linking tern to income-generating activities. In regard to this issue, the court stated that when a deficiency determination "rests on the reasonable inference that the taxpayers must have had sufficient income to support themselves for years when no income was reported, and statistics are used to reconstruct income, the evidentiary foundation necessary for the presumption of correctness to attach is minimal." Palmer, 116 F.3d at 1313. The court held that when the reasonable inference of sufficient income is combined with evidence linking Paul Palmer to wages for part of the four-year deficiency period, then there is a sufficient evidentiary foundation to support the presumption of correctness, Id. The Palmers could then rebut this evidence through evidence that the inference was unreasonable, but the district court did not find their evidence sufficient to overcome the inference.
The Palmer's also argued on appeal that the case must be dismissed for lack of jurisdiction because the IRS based the deficiency determination on statistics, rather than on actual evidence of their concealed income. In response to this argument, the court stated: "Were the Palmers correct, the IRS would never by able to collect taxes owed by those who, like them, illegally hide their income to avoid paying taxes, all the while taking advantage of the many privileges enjoyed by law-abiding citizens." Palmer, 116 F.3d at 1314.
Plaintiff's allege in their Complaint that they are entitled to a refund of the $68,000.00 paid pursuant to the stipulated judgment and the Court's partial summary judgment order. Plaintiff's also appear to believe they are entitled to have the judgment set aside in their case, thereby relieving them of the obligation to pay the outstanding tax liability balance.
II. DISCUSSION
Plaintiff's Complaint alleges that they are not bound by the Court's judgment in their tax liability case. This mistaken belief is based on a statement found in the Ninth Circuit's opinion affirming the District Court's summary judgment ruling in this case. Therefore, the judgment in the case, consisting of an order in favor of the government on their motion for partial summary judgment and a stipulated agreement regarding the amount of tax liability the Palmer's would pay to the IRS, serves as a final determination on all issues arising in the Palmer's case. Because there was a final determination in the previous case which has been affirmed on appeal, the Palmer's present lawsuit is barred by the principle of res judicata.
Once a final judgment on the merits of a case has been entered, the parties are precluded from relitigating all issues connected with the action. Rein v. Providian Financial Corp., 252 F.3d 1095, 1098 (9th Cir. 2001). The res judicata principle precludes subsequent claims where: "(1) the parties are identical or in privity; (2) the judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior action was concluded to a final judgment on the merits; and (4) the same claim or cause of action was involved in both suits." Id. "[I]f a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and same tax year." Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 598, 68 S.Ct. 715, 719-20 (1948); see also Baker v. Internal Revenue Service, 74 F.3d 906, 910 (9th Cir. 1996). Also, a stipulated judgment between the parties is a judgment on the merits for purposes of the res judicata principle. Baker, 74 F.3d at 910.
In Plaintiff's case, the Court entered a partial summary judgment on the government's motion to reduce the Palmer's outstanding tax liability to a judgment. The parties then agreed to a stipulated judgment on all issues in the tax liability case. A final judgment was entered in February 1995. It is obvious that the principle of res judicata precludes Plaintiffs from bringing this lawsuit to overturn the judgment in their previous case. If Plaintiffs disagreed with the Ninth Circuit's decision to affirm the judgment in their case, then their remedy was to appeal the ruling to the Supreme Court of the United States. Plaintiffs are attempting to relitigate the tax liability assessments against them for the same four-year period for which a judgment has been entered. Accordingly, their lawsuit is subject to dismissal for failure to state a claim upon which relief can be granted.
III. PLAINTIFFS' MOTIONS
Plaintiffs filed a motion requesting judgment on the pleadings in the case. Plaintiffs also filed a motion requesting entry of summary judgment. Based on the principle of res judicata, their lawsuit is subject to dismissal. Therefore, Plaintiffs' motions requesting a judgment in their favor are denied.
ORDER
NOW THEREFORE IT IS HEREBY ORDERED that Defendant's Motion to Dismiss (Docket No. 7) is GRANTED. Plaintiffs' Complaint is dismissed with prejudice for failure to state a claim upon which relief can be granted.
IT IS FURTHER HEREBY ORDERED that Plaintiffs' Motion for Judgment on the Pleadings (Docket No. 11) is DENIED.
IT IS FURTHER HEREBY ORDERED that Plaintiffs' Motion for Summary Judgment (Docket No. 15) is DENIED.