The judicial principle of res judicata applies to stipulated Tax Court Decisions. However, if the stipulated decision is opaque, the doctrine does not include elements of a particular underlying theory that one side or the other believed justified settlement.
The U.S. Supreme Court found that res judicata applied in tax litigation. Commiss’r v. Sunnen, 333 U.S. 591, 598 (1948). Established primarily to avoid repetitive litigation and thereby conserve judicial resources, the doctrine of res judicata directs that a prior judgment bars a subsequent action (1) between the same parties or their privies (2) when the claims and the facts surrounding the two causes of action are the same and (3) the prior judgment was a final judgment on the merits entered into by a court of competent jurisdiction. Id. at 597. Where the litigation is based upon a different cause of action but with points that were determined by the prior matter the principal is more accurately referred to as collateral estoppel, and the parties may only litigate the points that were not determined by the prior matter. See id. at 598.
Furthermore, various affirmative equitable defenses including duress, unclean hands, and estoppel, cannot be applied to defeat the res judicata effect of the Tax Court’s judgment. “The doctrine of res judicata serves vital public interests beyond any individual judge’s ad hoc determination of the equities in a particular case. There is simply ‘no principal of law or equity which sanctions the rejection by a federal court of the salutary principle of res judicata.” Federated Dep’t Stores v. Moitie, 452 U.S. 394, 401, 101 S. Ct. 2424, 2529 (1981).
Moreover, the United States Tax Court has been recognized as a court of competent jurisdiction with respect to the application of res judicata. See Russell v. Commiss’r, 678 F.2d 782 (9th Cir. 1982) (holding that the Tax Court is a court of competent jurisdiction such that the doctrine of res judicata applies to that litigation in Tax Court). Furthermore, United States Tax Court decisions entered pursuant to stipulation constitute final judgments for purposes of res judicata. See U.S. v. Int’l Building Co., 345 U.S. 502, 73 S. Ct. 807 (1953); U.S. v. Shanbaum, 10 F.3d 305, 313 (5th Cir., 1994); Trent v. Commiss’r, T.C. Memo 2002-285; Cf. Ariz. v. Cal., 530 U.S. 392, 120 S. Ct. 2304 (2000) (res judicata attaches to a stipulated judgment but does not include elements of a particular underlying theory where the stipulation is opaque).
Daniel W. Layton, the author of this post, is a former IRS trial attorney and former Federal prosecutor who was tasked with handling criminal tax prosecutions and civil litigation including tax refund suits, lien enforcement and foreclosures. As a tax attorney in private practice in Newport Beach, he uses his knowledge of IRS procedures and rules to keep the IRS in check and protect his clients’ rights. He may be contacted at (949) 801-9829.