Old tax liabilities cannot be relitigated

Married taxpayers who had already challenged the IRS’s determinations regarding their tax liabilities for the 1989 and 1990 tax years in Tax Court could not contest the tax liabilities again in a refund suit in district court in 2018.

Background

Charles and Mary Ann Garavaglia were a married couple. Charles was convicted of mail fraud and filing false tax returns in the 1990s. As part of his convictions, he was obligated to pay certain income taxes that were past due to the government, and the plea agreement in his case specified that he remained liable for any additional taxes that the government might find that he owed. During the investigation of his and his company’s misdeeds, the IRS seized over 100 boxes of documents and did not return them.

In December 2000, the IRS audited the Garavaglias for the 1989 and 1990 tax years. In September 2002, however, it informed the couple that there would be no change to their 1989 and 1990 tax liabilities. Having apparently finished its audit of those years, the IRS informed the Garavaglias that it was going to destroy the records that had been seized during the earlier criminal investigation of Charles if they did not come pick them up. The Garavaglias’ lawyer received about 25 boxes of the records at this time.

While it had seemed the IRS was done with the Garavaglias for 1989 and 1990, it was not. It did not formally close the audit, and, in 2006, the IRS informed the Garavaglias that they owed significant deficiencies for those years. The Garavaglias took the IRS to Tax Court over its determination, but, unfortunately for them, the court affirmed the IRS’s findings.

The Garavaglias appealed the Tax Court’s decision to the Sixth Circuit. Besides contesting the deficiencies, the Garavaglias asked the court for spoliation sanctions for its earlier destruction of documents. The court affirmed the Tax Court’s deficiency judgment and rejected the Garavaglias’ claim for spoliation sanctions. The Garavaglias then asked the Supreme Court to hear their case, but it declined to do so.

Despite these decisions against them, the Garavaglias continued their quest in the courts to avoid paying their tax liabilities for 1989 and 1990. They later brought a Bivens claim in district court against the United States, the IRS, and unknown IRS agents. In that claim, they alleged that they had needed the boxes of records earlier destroyed to defend effectively against the notice of deficiency in their Tax Court case and that the IRS’s destruction of the records therefore violated their due-process rights. The district court dismissed the complaint against all parties, and a court of appeals affirmed its decision. However, in the proceedings, it came to light that 15 of the boxes of records the IRS said had been destroyed still existed.

This relit the fire under the Garavaglias, who in 2017 filed a Freedom of Information Act (FOIA) suit to compel production by the IRS of the rediscovered boxes of records. The IRS agreed to produce the documents. The Garavaglias filed a second FOIA request in 2018 for any records related to the audit of their 1989 and 1990 tax years and any additional boxes of their financial records that had not been disclosed but were still in IRS possession, which resulted in a similar agreement with the IRS.

Having had some success on the document production front, the Garavaglias decided to take another dip in the 1989 and 1990 tax liability pool. In 2019, they filed amended returns for 1989 and 1990, seeking refunds of $603,515 for tax year 1989 and $637,639 for 1990. The IRS did not respond to the amended returns. Consequently, the Garavaglias filed a refund suit in district court.

In lieu of an answer to the Garavaglias’ complaint in the suit, the IRS filed a motion to dismiss. The IRS argued that the case must be dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure because Sec. 6512(a) bars any suit to relitigate the tax liability for a particular tax year for which a petition was filed in Tax Court. The IRS also argued that this action was barred by res judicata because the Tax Court had held that the Garavaglias were not entitled to a refund for tax years 1989 and 1990 in the prior suit, and that ruling had become final.

The district court’s decision

The district court granted the IRS’s motion to dismiss the case, agreeing with the IRS it did not have subject matter jurisdiction under Rule 12(b)(1) of the Federal Rules of Civil Procedure.

Sec. 6512(a) provides: “If the [IRS] has mailed to the taxpayer a notice of deficiency … and if the taxpayer files a petition with the Tax Court … no suit by the taxpayer for the recovery of any part of the tax shall be instituted in any court.” Thus, the court found that according to the clear text of Sec. 6512(a), it lacked subject matter jurisdiction over the Garavaglias’ claims, because they sought a redetermination of their 1989 and 1990 tax liabilities, which had been the subject of a petition in Tax Court, and that court’s decision had been affirmed on appeal.

The court found that it was plain from “even a casual reading” of the Garavaglias’ complaint that the entire substance of their suit was a claim for refund of the taxes they allegedly overpaid for the 1989 and 1990 tax years. Based on Sixth Circuit precedent, any such suit is barred regardless of the fact that it purports to arise from “new evidence” or postjudgment circumstances allegedly developed after the entry of judgment in the Tax Court. Further, the Garavaglias did not suggest that any of the enumerated exceptions to the jurisdictional bar in Sec. 6512(a) could apply in this case (e.g., a suit is allowed regarding overpayments determined by a decision of the Tax Court that has become final by Sec. 6512(a)(1)).

To avoid this problem, the Garavaglias in their pleadings attempted to reframe the case as one seeking to compel the IRS to “process the amended returns,” which they claimed the IRS had ignored. However, the district court found that when a court analyzes the scope of a statutory bar to suit, “the Supreme Court consistently has held that the focus must be on the gravamen of the complaint as a whole, not on particular labels or terms of art affixed to the claims as attempts at artful pleading.”

According to the court, the Garavaglias did not attempt to frame their claims as anything other than a demand for specific amounts of taxes allegedly improperly assessed and collected. Thus, the gravamen of their pleadings clearly was an attempt to reopen the dispute over the IRS’s assessment of their tax liabilities for 1989 and 1990.

Moreover, the court explained, to the extent that the Garavaglias contended that they were seeking to have the district court issue an order to the IRS to “process the amended returns,” this relief would be barred by the Anti- Injunction Act, which prevents a court from issuing an injunction to restrain an assessment of taxes, and by the carveout for federal taxes in the Declaratory Judgment Act, which prohibits a court from issuing declaratory relief in any form that would interfere with the administration of tax collection. Citing the Sixth Circuit in Dickens, 671 F.2d 969 (6th Cir. 1982), the district court said that claims seeking relief from actions to collect taxes may not proceed merely because the taxpayer recasts them as prayers for injunctive or declaratory relief.

With regard to res judicata, the IRS also contended that the Garavaglias failed to state a viable claim because the res judicata effect of the prior Tax Court judgment bars their case. However, when a court concludes that the defendants’ argument that it lacks jurisdiction has merit, the Supreme Court has held in Brownback v. King, 141 S. Ct. 740, 750 (2021), that the court “need not — and ought not — address the merits argument about whether the complaint states a cognizable claim for relief.” The dismissal must be without prejudice because by definition the court lacks power to reach the merits of the case.

Reflections

As the court notes in its opinion, the Garavaglias (and other taxpayers in similar situations) are not without an avenue to press claims based on newfound evidence from the records withheld by the IRS. If new information is revealed in district court litigation and a party believes that it should be relieved of the obligation of a judgment, relief may be found under Federal Rule of Civil Procedure 60(b), and the Tax Court has an analogous rule in its rules of procedure. Also, the Tax Court rules of procedure permit application of analogous Federal Rules of Civil Procedure where the circumstances warrant.

Garavaglia, No. 2:21-cv-12740 (E.D. Mich. 12/29/22)