Zackim v. Commissioner , 91 T.C. 1001 ( 1988 )

WHITAKER, J.,

concurring:

I agree with the majority that the decisive issue in this case is not whether the statutory notice of deficiency is valid, but whether res judicata bars respondent from relitigating petitioner’s 1979 taxable year. However, we cannot reach the decisive issue without first interpreting section 6212(c)(1) because our jurisdiction to consider res judicata depends upon the validity of the second deficiency notice. As we said in Midland Mortgage Co. v. Commissioner, 73 T.C. 902, 907 (1980), our “jurisdiction exists only if there has been issued a valid statutory notice of deficiency * * * and a timely petition filed therefrom.” (Emphasis supplied.)

Section 6212(c)(1) provides the only statutory authority for issuing a second notice of deficiency. In interpreting that section, the majority appears to hold that a second notice of deficiency can be issued only where fraud is discovered after our prior decision has become final.¹ In this case, the fraud was discovered prior to entry of the stipulated decision in the first case resulting from the first deficiency notice. Under the majority’s interpretation of section 6212(c)(1), there was no authority for the second deficiency notice. Accordingly, the majority should have held that the second notice of deficiency is invalid. In that circumstance, we would lack jurisdiction of the year 1979.

If we lack jurisdiction, our decision must be dismissal of the petition as to the year 1979,² rather than a decision for petitioners. Without jurisdiction, we cannot determine whether the doctrine of res judicata applies nor is there any need to do so. Respondent’s only remedy should have been to amend his answer in the prior case. But in so interpreting section 6212(c)(1), the majority ignores our holdings in Arthur A. Everts Co. v. Commissioner, a Memorandum Opinion of this Court dated July 12, 1949 (8 T.C.M. 707, 18 P-H Memo T.C. par. 49,189), and Breman v. Commissioner, 66 T.C. 61 (1976). Although the facts in Breman comport with the majority’s interpretation of section 6212(c)(1), the discussion of the statute in that opinion is not so limited.

The unqualified language of section 6212(c)(1) provides that respondent may issue a second notice of deficiency “in the case of fraud.” On its face, the statute appears clear and a literal reading of the phrase in question supports the validity of the second notice of deficiency issued in this case. The majority, however, doubts that Congress intended a literal reading of the statute and it searched through the legislative history to confirm its doubt. The majority anchors its narrow interpretation of section 6212(c)(1) in the language of S. Rept. 52, 69th Cong., 1st Sess. 26 (1926), 1939-1 C.B. (Part 2) 332, 353, which reads as follows: “If the fraud is discovered after the Board’s decision, the Commissioner can send notice thereof, on which the taxpayer can appeal to the Board.” I find this statement to be merely illustrative of the intended scope of section 274(f) of the Revenue Act of 1926, Pub. L. 20, 44 Stat. 66, rather than a description of its entire scope. By so limiting section 6212(c)(1), the majority unnecessarily limits respondent’s authority to issue a second notice of deficiency in other situations where a second notice might produce a more orderly procedure.

If a second notice can be issued only where fraud is discovered after our decision in the first case becomes final, in every other case, fraud must be raised by an amended answer. An amended answer would require leave of Court, as respondent complains. If that were the only route available to respondent, we would find ourselves under considerable compulsion to allow the amendment, even though that might mean continuing a case about to be tried or recessing a trial or reopening a record (see Breman v. Commissioner, supra at 69-70 n. 5). None of those choices is necessarily efficient, or economical, either from the viewpoint of the trial court or the parties. Up to this point, we have frequently declined to allow respondent to amend his answer because of prejudice to the taxpayer. See, e.g., Law v. Commissioner, 84 T.C. 985, 990-994 (1985); Sundstrand Corp. and Subsidiaries v. Commissioner, T.C. Memo. 1986-531. Respondent apparently fears we will continue to do so, even though respondent is not dilatory in raising fraud.

I believe that the statute should be interpreted so as to give respondent flexibility either to file a motion for leave to amend his answer or to issue a second notice. When facts showing fraud are discovered so close to the trial date that trial of the fraud issue would be impracticable, respondent should probably call the facts to the trial judge’s attention so that an informed decision can be made as to which procedure to follow, that is, whether to amend the answer or issue a second notice of deficiency. Obviously, where facts showing fraud are known to respondent well in advance of atrial date, respondent must amend his answer, since res judicata would bar relitigating the issue, as the majority holds. Where the trial has been concluded, respondent should be free to exercise administrative discretion as to the course of action to follow. In neither case, however, should the trial judge be placed under any compulsion to allow an amended answer. As in every other case of an amended pleading, we should be free to exercise our sound discretion.

Traditional res judicata rules permit a judge some control over the preclusive effects of a prior decision on a claim made in a subsequent proceeding. Adolph Coors Co. v. Sickler, 608 F. Supp. 1417, 1430 (C.D. Cal. 1985). Thus a trial judge may allow a litigant to split a cause of action where all claims have been timely raised. Nilsen v. City of Moss Point, Miss., 701 F.2d 556, 563 (5th Cir. 1983). Similarly, this Court should retain the discretionary power in appropriate circumstances to deny respondent leave to amend his answer, but to permit him to issue a second notice of deficiency. Section 6212(c)(1) is certainly broad enough in its literal language to permit that. Furthermore, nothing in the legislative history precludes such an interpretation. We should not in this case hold that the statutory authority of section 6212(c)(1) is to the contrary.

While I agree with the majority’s application of res judicata, and hence concur in the result, the majority cannot properly reach that issue in view of itsinterpretation of section 6212(c)(1).

KÓRNER and JACOBS, JJ., agree with this concurring opinion.

1 The majority may not intend such a narrow construction of sec. 6212(c)(1) although in my judgment that is the way the opinion reads and will be interpreted.

2 This Court has jurisdiction to determine jurisdiction or our lack of it. Estate of Young v. Commissioner, 81 T.C. 879, 881 (1983) (Court-reviewed).