The Internal Revenue Service abandoned what might have been a meritorious appeal. Afterwards, the IRS concocted theories that were likely more persuasive than those in the appeal it dismissed.
The district court dismissed a new lawsuit with the IRS’s new theories. In an opinion on August 8, Sixth Circuit Judge Alice M. Batchelder affirmed, explaining how res judicata “exists to prevent such irreconcilable outcomes.”
A corporation had a short sojourn in chapter 11. Before the case was dismissed, the debtor’s professionals received $83,000 to hold in escrow in their firms’ accounts pending final allowances of compensation.
While in chapter 11, the debtor failed to pay the IRS almost $300,000 in wage withholdings. Becoming aware of the failure to pay taxes, the IRS filed a motion to dismiss, which the bankruptcy court granted.
About two weeks after dismissal, the IRS filed a motion demanding that the bankruptcy court compel the professionals to disgorge the $83,000 and apportion the $83,000 between the professionals and the IRS. The IRS reasoned that the professionals and the IRS had administrative claims of the same priority, meaning that the $83,000 should be divided pro rata.
The bankruptcy court denied the disgorgement motion.
The IRS also objected to the professionals’ final fee applications. The bankruptcy court overruled objection and allowed the professionals to pay themselves from the money they held in escrow.
The IRS appealed denial of the disgorgement motion and the fee allowances. The district court upheld both orders. The IRS appealed a second time, but voluntarily dismissed both appeals in the circuit.
After abandoning the appeals, the IRS sued the professionals in district court, based on better theories than those it had advanced unsuccessfully. The IRS contended that the escrowed funds were subject to a constructive trust in favor of the IRS and that the funds in escrow were subject to a federal tax lien.
The district court granted the professionals’ motions to dismiss, saying that the IRS could have advanced the new theories in the bankruptcy case and in the appeals that the IRS abandoned.
The IRS appealed to the Sixth Circuit, contending that res judicata did not apply because the bankruptcy court did not have jurisdiction to rule on its trust and lien claims after dismissal of the bankruptcy case.
Judge Batchelder recited the four requisites for res judicata: (1) a final decision by a court of competent jurisdiction; (2) the same parties or their privies; (3) an issue that was or could have been litigated previously; and (4) an identity of causes of action.
In her nonprecedential opinion, Judge Batchelder recounted how the district court had found “multiple opportunities to raise the trust and lien theories in bankruptcy court.” Or, she said, the IRS could have raised the theories after dismissal in the disgorgement motion or in opposition to the allowances of professional compensation.
Even if the bankruptcy court did not have jurisdiction after confirmation on the trust and lien claims, Judge Batchelder said that the IRS did not raise the issues in bankruptcy court. And even if it were later decided that the bankruptcy court did not have jurisdiction over the IRS’s disgorgement claims, the bankruptcy court had jurisdiction to rule on the fee allowances where the claims could have been raised.
Res judicata “precludes the independent action here,” Judge Batchelder said, because the abandonment of the appeals made the orders “final and binding.”
If the IRS had prevailed in the independent suit in district court, Judge Batchelder said that the result would have been conflicting judgments. “Res judicata exists to prevent such irreconcilable outcomes,” she said.
The Internal Revenue Service abandoned what might have been a meritorious appeal. Afterwards, the IRS concocted theories that were likely more persuasive than those in the appeal it dismissed.
The district court dismissed a new lawsuit with the IRS’s new theories. In an opinion on August 8, Sixth Circuit Judge Alice M. Batchelder affirmed, explaining how res judicata “exists to prevent such irreconcilable outcomes.”
A corporation had a short sojourn in chapter 11. Before the case was dismissed, the debtor’s professionals received $83,000 to hold in escrow in their firms’ accounts pending final allowances of compensation.
While in chapter 11, the debtor failed to pay the IRS almost $300,000 in wage withholdings. Becoming aware of the failure to pay taxes, the IRS filed a motion to dismiss, which the bankruptcy court granted.