Living Care Alternatives v. United States

NOT RECOMMENDED FOR PUBLICATION
File Name: 07a0658n.06
Filed: September 5, 2007
Nos. 05-4418, 06-3163 and 06-3166
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
LIVING CARE ALTERNATIVES OF )
KIRKERSVILLE, INC. (05-4418), )
)
and )
) ON APPEAL FROM THE UNITED
LIVING CARE ALTERNATIVES OF ) STATES DISTRICT COURT FOR THE
UTICA, INC. (06-3163 and 06-3166), ) SOUTHERN DISTRICT OF OHIO
)
Plaintiffs-Appellants, )
) OPINION
v. )
)
UNITED STATES OF AMERICA, )
)
Defendant-Appellee. )
)
Before: GIBBONS and McKEAGUE, Circuit Judges; and BUNNING, District Judge.*
DAVID L. BUNNING, District Judge. In these consolidated appeals, Plaintiffs-
Appellants Living Care Alternatives of Kirkersville, Inc. (“Living Care Kirkersville”) and
Living Care Alternatives of Utica, Inc. (“Living Care Utica”) appeal the district courts’
summary affirmances of the Internal Revenue Service (“IRS”) Appeals Officers’
administrative decisions upholding the filing of tax levy and/or lien notices against them.
The Government argues the district courts properly concluded that the matters raised by
Living Care Kirkersville and Living Care Utica were previously litigated in Living Care
*
The Honorable David L. Bunning, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
Alternatives of Utica, Inc. v. United States, 411 F.3d 621 (6th Cir. 2005), and are, therefore,
barred by collateral estoppel. In the alternative, the Government argues that the Appeals
Officers did not abuse their discretion in concluding that the need for the efficient collection
of taxes outweighs Appellants’ concern that the collection action be no more intrusive than
necessary.
Appellants, on the other hand, offer that the doctrine of collateral estoppel does not
apply because the facts and issues in these consolidated cases are different from those
in Living Care Alternatives of Utica. Moreover, Appellant Living Care Kirkersville maintains
that privity between it and Living Care Utica to collaterally estop its challenges is lacking.
Absent application of collateral estoppel, they contend the IRS Appeals Officers abused
their discretion by confirming a tax collection method that would destroy their businesses,
yet yield nothing in tax collections.
For the reasons that follow, this Court AFFIRMS the respective district court
decisions.
I. BACKGROUND
Living Care Kirkersville and Living Care Utica are Ohio corporations. Each operates
long-term nursing care facilities in Licking County, Ohio. The sole shareholder and officer
of both corporate entities is Thomas J. Rosser (“Rosser”). Medicaid payments are the
primary funding source for each facility. According to Appellants, each facility is struggling
financially, due in large part to the substantial government regulation of nursing homes and
insufficient government payment under Medicaid to maintain regulatory compliance and
also generate a profit.
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A. The Living Care Utica Proceedings
Living Care Utica has initiated four district court actions challenging tax liens and
levies for unpaid employment taxes and unemployment tax liabilities.1 The first two district
court cases were consolidated by this Court. Case No. 04-3194 (Living Care Utica I)
involved annual payments for tax year 1999 and quarterly payments in 1999 and 2001.
Case No. 04-3554 (Living Care Utica II) involved annual payments for tax years 1995,
1998, and 2000, and quarterly taxes for various quarters in 1995, 1996, 1999, 2000 and
2001. That consolidated appeal culminated in this Court’s decision in Living Care
Alternatives of Utica v. United States, 411 F.3d 621 (6th Cir. 2005).
The later two district court appeals, Case No. 06-3163 (Living Care Utica III) and
Case No. 06-3166 (Living Care Utica IV), were consolidated by both the district court and
this Court. Living Care Utica III involves quarterly employment taxes for fourth quarter
2001 and first quarter 2002 and annual unemployment taxes for 2001. Living Care Utica
IV involves quarterly employment taxes for the second quarter of 2002.
On July 31, 2002, the IRS, in Living Care Utica III, sent Living Care Utica a final
notice of intent to levy with respect to certain taxes, with a notice of federal tax lien filing
for these liabilities subsequently sent on August 15, 2002. The IRS on September 25,
2002, sent Living Care Utica a final notice of intent to levy with respect to the remaining
taxes at issue in that case, with a notice of federal tax lien filing for these liabilities
subsequently sent on October 4, 2002.
1
There was a fifth Living Care Utica district court case, but that action was voluntarily
dismissed upon recognition that it challenged an IRS notice duplicating that issued in Sixth Circuit
Case No. 06-3163.
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On April 17, 2003, the IRS, in Living Care Utica IV, sent Living Care Utica a notice
of federal tax lien with respect to the taxes at issue in that case.
Pursuant to 26 U.S.C. § 6320, each of the various IRS notices advised Living Care
Utica of its right to a collection due process (“CDP”) hearing with respect to the proposed
levy and/or federal tax lien filings identified in the notices. Living Care Utica timely
submitted forms requesting CDP hearings in both Living Care Utica III and Living Care
Utica IV. In submitting those forms, Living Care Utica also identified by attachment the
grounds upon which it was seeking further review.
In Living Care Utica III, the Appeals Officer conducted the CDP hearing on
March 13, 2003, via telephone, after which on June 18, 2003, he issued a Summary and
Recommendation addressing the various challenges raised by Living Care Utica and
concluding that the levy and federal tax lien filings should be sustained. (Utica J.A. 280-85).
His Summary and Recommendation was attached to the July 9, 2003, Notice of
Determination sent by the IRS to Living Care Utica. (J.A. 279).
More particularly, Living Care Utica protested that its failure to pay payroll taxes was
the result of decreased funding from government sources with no corresponding decrease
in operating expenses. The Appeals Officer concluded that this calculated business
decision to pay other debts instead of turning over withheld taxes was neither justification
nor reasonable cause. Living Care Utica pointed to prior dealings with the IRS wherein an
installment agreement was reached. However, the Officer concluded the prior dealings did
not involve the tax periods at hand and were therefore not relevant to providing a basis for
present relief. Living Care Utica pointed out various factors contributing to its overall
negative cash flow and consequent lack of funds to cover operating expenses. The Officer
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concluded these circumstances merely evidenced that an installment agreement was not
a viable collection alternative, rather than providing a basis to grant Living Care Utica relief
from the liens.
Living Care Utica also complained that the existing IRS liens prevent it from
refinancing its real and personal property, the funds from which could be used to pay the
taxes. But the Officer concluded that none of the circumstances of 26 U.S.C. § 6323(j)
were present to sustain withdrawing the liens, and that since Living Care Utica reported
there were other liens senior to those of the IRS, leaving its liens in place was reasonable
to ensure preserving the Service’s claim in the event of private sale. Living Care Utica also
suggested that its Medicare and Medicaid payments may be exempt from levy. The Officer
disagreed.
Finally, the Summary and Recommendation noted that, at hearing, Living Care Utica
proposed filing an offer in compromise or private sale of the business as collection
alternatives. But the Officer concluded that private sale was not a viable alternative, since
the business had been for sale over two years at that point with no buyers. And as to the
offer in compromise, the Officer concluded this was not a realistic alternative, since the
required forms had been sent to Living Care Utica with no specific follow up by either the
designated submission deadline or the time thereafter within which Living Care Utica stated
that a formal offer would be forthcoming. The report concluded with the Officer’s brief
discussion of whether the need for efficient tax collection had been balanced with Living
Care Utica’s concern that the proposed collection action be no more intrusive than
necessary. He found this requirement met, since Living Care Utica had not provided
proper documentation to evaluate proposed collection alternatives.
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In Living Care Utica IV, the Appeals Officer conducted the CDP hearing on
October 16, 2003, via telephone, after which she issued a report recommending that the
subject federal tax lien filing be sustained. Her report and recommendation was attached
to the November 24, 2003, Notice of Determination sent by the IRS to Living Care Utica.
The Officer’s report concluded Living Care Utica raised no relevant challenges to
the collection action and that none of the grounds for withdrawal of the lien pursuant to
§ 6323(j) had been shown. Although not outlined in the same detail as the Officer’s report
in Living Care Utica III, the challenges raised by Living Care Utica and rejected mirror those
it raised in the prior proceeding. Namely, its attachment to its CDP hearing request
identified it intended to propose an offer in compromise or sale or refinance as a collection
alternative; that the lien was obstructing it from procuring refinancing; that the IRS would
receive no revenue due to senior lienholders; and that it was unable to meet its tax
obligations due to financial problems from over-regulation and under-funding by the
government. In balancing the need for efficient collection with Living Care Utica’s concern
that the collection action be no more intrusive than necessary, the Appeals Officer noted
that the lien was filed because Living Care Utica’s tax liability was accruing, and therefore
protection of the tax liability was necessary. She noted that Living Care Utica had failed
to submit sufficient documentation to establish that withdrawing the lien would facilitate a
viable collection alternative nor was it compliant with current tax filing and deposit
requirements to qualify to submit an offer in compromise. The Officer’s report reflects that
she attempted but was unsuccessful in reaching Living Care Utica to discuss the fact that
an offer in compromise was not processable.
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Following the IRS’s issuance of Notices of Determination in Living Care Utica III and
IV, Living Care Utica appealed each of these determinations to the district court for the
Southern District of Ohio, challenging the IRS Appeals Office determinations. The district
court consolidated the two appeals and stayed a ruling pending this Court’s decision in
Living Care Alternatives of Utica. Living Care Utica did not object to this stay.
This Court subsequently held in Living Care Alternatives of Utica v. United States
that Living Care Utica failed to challenge its underlying tax liability at the collection due
process hearing, and therefore, the standard of review was abuse of discretion; the
Appeals Officer did not violate his statutory duty to balance the equities; the IRS did not
have a duty to investigate existing liens on property prior to a collection due process
hearing; the Appeals Officer’s Notice of Determination provided sufficient notice for an
abuse of discretion standard; and the Appeals Officer did not abuse his discretion in
rejecting Living Care Utica’s offer of compromise. 411 F.3d 621. Following the issuance
of that decision, the Southern District of Ohio on November 14, 2005, entered its
Memorandum and Order in Living Care Utica III/IV. The district court found that all nine
of the claims raised by Living Care Utica in Living Care Utica III/IV were barred by collateral
estoppel because they had been raised, litigated, and decided in Living Care Alternatives
of Utica, with the exception of claim two regarding Living Care Utica’s purported inability
to refinance due to the presence of the IRS liens. And as to the second claim, the district
court found that the Appeals Officers did not abuse their discretion in rejecting Appellant’s
contention, when there was nothing in the record to support a finding that removing the
liens and refinancing the property would have facilitated the collection of the tax liability.
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The Government’s motions for summary affirmance in Living Care Utica III and IV were
therefore granted by the district court. Appeals 06-3163 and 06-3166 followed.
B. The Living Care Kirkersville Proceedings
The Living Care Kirkersville case arises from its failure to pay quarterly employment
taxes for March 2000 through March 2001 and its annual unemployment tax liabilities for
the year 2000. On August 11, 2003, the IRS sent Living Care Kirkersville a final notice of
federal tax lien filing, which notice also advised of the right to a CDP hearing. Living Care
Kirkersville timely submitted a CDP hearing request on September 12, 2003, identifying its
grounds for challenging the tax lien filing against it. A hearing officer with the Office of
Appeals conducted the CDP hearing and subsequently issued a Summary and
Recommendation to continue the subject federal tax lien filing. (Kirkersville J.A. 35-38).
This Summary and Recommendation was attached to a March 18, 2004, Notice of
Determination letter sent by the IRS to Living Care Kirkersville informing it that the notice
of federal tax lien was being upheld with respect to its tax liability. (Kirkersville J.A. 33-34).
Living Care Kirkersville’s attachment of purported relevant considerations is
substantially similar to that attached to the hearing requests in Living Care Utica III/IV.
(Compare Kirkersville J.A. 40-45 with Utica J.A. 272-75). The points presented by Living
Care Kirkersville can be summarized as inability to meet tax obligations because of over-
regulation and inadequate funding by the government; existence of senior lienholders,
resulting in no leftover revenue for this tax lien; inability to obtain refinancing and
consequent closure of the nursing home by continued imposition of the lien; and a
proposed offer in compromise, sale, or refinancing as an alternative to the collection action.
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The Appeals Officer’s Summary and Recommendation rejected each of Living Care
Kirkersville’s challenges. As to the proposed collection alternative of an offer in
compromise, Living Care Kirkersville had not evidenced a definite intention to submit an
offer in compromise and the related financial information. As to the alternative of
refinancing, the summary reflected Living Care Kirkersville had not evidenced how
refinancing would result in funds to pay the IRS. The Appeals Officer also concluded that
withdrawing the lien to facilitate refinancing was not warranted, because Living Care
Kirkersville had failed to provide a specific refinancing arrangement rather than a general
assertion, and because it could apply for a certification of subordination of the tax lien and
had not done so. Nor did the Appeals Officer agree that withdrawing or removing the lien
was warranted due to the existence of senior lienholders that rendered the tax lien
valueless, since the presence of such senior lienholders, if documented, actually supported
the conclusion that the notice of lien was necessary to protect the government’s interest
pending payment of the taxes. And while Living Care Kirkersville advocated that its status
as operator of a nursing home should afford it special consideration under the tax laws, the
Appeals Officer concluded no lawful authority for affording special rights to such a taxpayer
had been identified. Finally, the Appeals Officer noted that Living Care Kirkersville had not
offered an alternative that would provide for the efficient collection of the outstanding taxes
and also be less intrusive on it. Moreover, withdrawing the notice of federal tax lien would
not serve to balance efficient tax collection against intrusiveness since there were other
prior notices that would remain, and removing all of these notices would place the
Government in a precarious position vis-à-vis other creditors and effectuating collection.
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On April 16, 2004, Living Care Kirkersville filed a complaint with the district court,
challenging this IRS Appeals Office determination. On November 8, 2004, the
Government filed a Motion and Supporting Memorandum of Law for Summary Affirmance
of the IRS Administrative Decision. In an Opinion and Order dated August 29, 2005, the
district court found in favor of the IRS. (Kirkersville J.A. 74-80). The district court
concluded that Living Care Kirkersville is in privity with Living Care Utica and that the
issues raised by Living Care Kirkersville were the same as those raised by Living Care
Utica in Living Care Alternatives of Utica. In the alternative, the district court found that
even if the doctrine of collateral estoppel did not apply, the Appeals Officer’s decision to
uphold the IRS collection action was not an abuse of discretion because removal of the lien
would place the Government in a precarious situation with respect to competing creditors.
Appeal 05-4418 followed.
II. ANALYSIS
A. Standard of Review
In cases involving CDP hearings, courts conduct a de novo review of IRS Appeals
Office determinations when the underlying tax liability is at issue. However, when the
underlying tax liability is not at issue, such decisions are reviewed for abuse of discretion.
Living Care Alternatives of Utica, 411 F.3d at 625. In these consolidated appeals, Living
Care Utica and Living Care Kirkersville do not challenge liability for the actual tax.
Therefore, the IRS Appeals Office determinations in contest are reviewed under an abuse
of discretion standard.
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These appeals differ from this Court’s earlier decision in Living Care Alternatives of
Utica in that each raises questions as to the proper scope of collateral estoppel. A lower
court’s decision on whether collateral estoppel applies is reviewed de novo. Heyliger v.
State Univ. & Cmty. Coll. Sys. of Tenn., 126 F.3d 849, 851 (6th Cir. 1997). This includes
appellate review of a tax court’s decision on the doctrine. Hickman v. Comm’r, 183 F.3d
535, 537 (6th Cir. 1999). Embodied within consideration of the conditions giving rise to
collateral estoppel is the requirement of privity – that the party to be estopped was the
party in the prior litigation, or in privity with such prior party. Montana v. United States, 440
U.S. 147, 153 (1979). Whether privity exists in a particular case is a question of fact, and
questions of fact are reviewed for clear error. Vulcan, Inc. v. Fordees Corp., 658 F.2d
1106, 1109 (6th Cir. 1981).
B. Collateral Estoppel
Since collateral estoppel would render merits consideration a nullity on any issues
so barred, its application is considered first. Its invocation dictates that a “‘right, question
or fact distinctly put in issue and directly determined by a court of competent jurisdiction
. . . cannot be disputed in a subsequent suit between the same parties or their privies . .
. .’” Montana, 440 U.S. at 153 (quoting Southern Pacific R. Co. v. United States, 168 U.S.
1, 48-49 (1897)). While res judicata acts to bar a party’s later claims based on the same
cause of action, collateral estoppel serves to bar the relitigation, on a different cause of
action, of issues actually and necessarily determined by a prior court. Id.
Collateral estoppel applies where the following conditions are met: (1) the issue in
the subsequent litigation is identical to that resolved in the earlier litigation; (2) the issue
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must have been actually litigated and decided in the prior action; (3) the issue must have
been necessary and essential to a judgment on the merits in the prior litigation; (4) the
party to be estopped was a party to the prior litigation, or in privity with such a party; and
(5) the party to be estopped had a full and fair opportunity to litigate. Santana-Albarran v.
Ashcroft, 393 F.3d 699, 704 (6th Cir. 2005); United States v. Real Property Known and
Numbered as 415 E. Mitchell Ave., 149 F.3d 472, 476 (6th Cir. 1998). Moreover, “[t]he
doctrine applies to tax proceedings to the same extent it applies to proceedings in federal
district court.” Hickman, 183 F.3d at 537.
1. Living Care Utica
In Living Care Utica III/IV, Living Care Utica is the same party as in Living Care Utica
I/II, and therefore privity is not in issue or contested. Nevertheless, Living Care Utica does
protest that the issues in Living Care Alternatives of Utica that were necessary and
essential to a judgment on the merits and that were actually litigated and decided after full
and fair opportunity are not identical to those raised by it in the instant consolidated
appeals.
In Commissioner v. Sunnen, the United States Supreme Court cautioned that
[w]here two cases involve income taxes in different taxable years, collateral
estoppel must be used with its limitations carefully in mind so as to avoid
injustice. It must be confined to situations where the matter raised in the
second suit is identical in all respects with that decided in the first proceeding
and where the controlling facts and applicable legal rules remain unchanged.
333 U.S. 591, 599-600 (1948); see also Kennedy v. Comm’r, 876 F.2d 1251, 1257 (6th Cir.
1989). Living Care Utica submits that its issues are not “identical in all respects” to those
presented in Living Care Alternatives of Utica because the cases involve different tax
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years, different facts, and different hearing officers conducting different analyses.
However, Sunnen refers to an identity in the matter raised, without change in controlling
facts, rather than identity of each and every fact. Nor must the presiding decision maker
be the same in order to invoke collateral estoppel. Under Appellant’s theory, neither
collateral estoppel nor res judicata would virtually ever apply in tax proceedings. And as
to Appellant Living Care Utica’s belief that appeals officers’ analyses are “different” unless
each nuance considered in its later tax challenges replicates those from Living Care
Alternatives of Utica, no authority is put forth for such proposition. If such identity were
required, it would be particularly problematic in establishing collateral estoppel in collection
due process proceedings such as these, because of the deferential review Congress
contemplated would be given to tax appeals versus other agency decisions. Living Care
Alternatives of Utica, 411 F.3d at 625 (“Judicial review of collection due process hearings”
historically “involved very little judicial oversight,” consequently resulting in “a surprisingly
scant record.”).
The Supreme Court has established a three-part test to determine if applying
collateral estoppel is also appropriate: (1) “whether the issues presented by [the subject]
litigation are in substance the same as those resolved [in the prior case]”; (2) “whether
controlling facts or legal principles have changed significantly since the [prior] judgment”;
and (3) “whether other special circumstances warrant an exception to the normal rules of
preclusion.” Montana, 440 U.S. at 155.
As noted, the district court presiding over Living Care Utica III/IV identified nine
claims presented by Living Care Utica in those consolidated administrative appeals. The
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district court summarized the claims presented by Living Care Utica on appeal as: (1)
because there are senior lienholders, the IRS would not realize any tax revenue from the
levy or liens; (2) the liens have harmed Living Care Utica by preventing refinancing; (3)
Medicaid and Medicare funds are exempt from levy; (4) Living Care Utica’s inability to pay
the taxes is the result of extensive government regulation in the field; (5) the IRS wrongly
rejected an offer in compromise; (6) the IRS should have accepted Living Care Utica’s plan
to maintain the business and sell it as an ongoing concern; (7) the IRS abused its
discretion in making a determination to sustain the levy and liens; (8) Living Care Utica’s
plan to sell the business as an ongoing concern will net more tax revenue; and (9) Living
Care Utica contests the underlying tax liability. (Utica J.A. 205-06). As the district court
correctly identified, all of the claims presented to it by Living Care Utica, with the exception
of the second claim, at least nominally were resolved in Living Care Alternatives of Utica,
thus satisfying Montana’s first requirement. Even though the tax years in these appeals
differ from those at issue in Living Care Utica I/II, the tax circumstances which faced Living
Care Utica, and the points and defenses raised by Rosser on behalf of it in anticipation of
the hearing and pursuant to the statutory provision to raise “any other relevant issue
relating to the unpaid tax,” 26 U.S.C. § 6330(c)(2)(A), are all matters that are “in substance”
the same as those raised in Living Care Utica I/II.
As to the first, third, and fourth claims, courts in the prior Living Care I/II litigation
determined that Living Care Utica’s claims failed as a matter of law. See Living Care
Alternatives of Utica, 411 F.3d at 626, 628 (holding that even if the inability to pay was the
result of government regulation, it would not excuse the tax liability and that there is no
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requirement that the United States consider whether it will receive any revenue from the
levy); Living Care Alternatives of Utica, Inc. v. United States, No. 03-0359, 2003 WL
23311523, *4 (S.D. Ohio Dec. 12, 2003) (holding that Medicaid and Medicare funds are
subject to levy and that even if the inability to pay was the result of government regulation,
it would not excuse the tax liability). Therefore, as to the second part of Montana’s three-
part test, no controlling facts are relevant and collateral estoppel is appropriate for these
claims.2
As to the fifth, sixth, and eighth claims, this Court previously held that the Appeals
Officer had not abused his discretion by refusing the alternatives presented by Living Care
Utica because it had previously defaulted under an installment payment plan and it had an
escalating amount of unpaid tax liability. See Living Care Alternatives of Utica, 411 F.3d
at 631. The facts that justified the Officer’s prior decision remain unchanged. Therefore,
part two of Montana’s three-part test is satisfied and so collateral estoppel is also
appropriate for these claims.
Living Care Utica’s ninth claim in the district court challenged its underlying tax
liability. However, Living Care Utica no longer presents this as a direct challenge or issue
on appeal to this Court.
2
As to the third consideration, “whether other special circumstances warrant an exception
to the normal rules of preclusion,” Montana, 440 U.S. at 155, Living Care Utica points to no special
circumstance aside from its general contention that poor congressional public policy in the
regulation of nursing homes when balanced with the imposition of tax obligations upon such homes
constitutes special circumstances to overlook this Court’s prior judgment. This legislative
conundrum is not so much presented by Appellant as a special circumstance to except the
application of collateral estoppel as it is a basis for asking this Court to legislate specialized tax
laws for the nursing home industry, which of course we will not do.
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As to Living Care Utica’s seventh claim – that the IRS abused its discretion in
making a determination to sustain the levy and liens – the judgment in Living Care
Alternatives of Utica arguably relied on different facts than those presented in this case.
That is, in previously deciding that the IRS did not abuse its discretion in making the
determination to sustain the levy and liens, this Court reviewed the reasoning of that
appeals officer’s decision. See id. at 630. On the one hand, this case presents different
decisions rendered by appeals officers not involved in the prior judgment. Whether the
appeals officers in Living Care Utica III/IV abused their discretion depends upon the
reasoning of these particular officers. In other words, even though the appeals officers
arrived at the same ultimate conclusion as the appeals officer in the prior litigation, it is
possible that the appeals officers abused their discretion in the reasoning justifying that
conclusion. Therefore, in this sense it is inappropriate to apply collateral estoppel.
On the other hand, and as previously discussed, the same decision maker or
identity in reasoning (as opposed to identity in the controlling facts or legal principles) is not
a required condition to invoke collateral estoppel. Essentially this seventh claim is an all-
encompassing one, sweeping within it the various other challenges to the administrative
decision raised by Appellant Living Care Utica. Blanket rejection of collateral estoppel
amounts to an end run around applying the doctrine to particularized arguments. As a
practical matter, in this appeal Living Care Utica has already been collaterally estopped
from relitigating arguments upon which it now relies to argue why the appeals officers
abused their discretion in determining to sustain the levy and liens. The one exception is
that of claim two concerning the refinancing. The district court correctly observed that this
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claim was not presented in Living Care Utica I/II, and so collateral estoppel does not apply.
Merits consideration of this claim is set forth below in this decision.
In summary, all but the second claim raised by Living Care Utica are issues that
were litigated in Living Care Utica I/II and decided by this Court in Living Care Alternatives
of Utica. They are in substance the same as issues raised presently by Living Care Utica
in Living Care Utica III/IV. The controlling facts and/or applicable legal rules remain
unchanged, with no special circumstances having been shown to except imposing upon
Living Care Utica the determinations for these issues from the prior judgment. Therefore,
Living Care Utica’s claims on appeal, with the exception of its challenge concerning the
refinancing, are barred by the doctrine of collateral estoppel.
2. Living Care Kirkersville
Analyzing whether Living Care Kirkersville is bound by the courts’ prior adjudications
in Living Care Utica I/II gives rise to considerations different from those for Living Care
Utica. Living Care Kirkersville presents an identical set of claims in challenging the IRS
Appeals Office decision as did Living Care Utica. (Kirkersville J.A. 6-11). In adjudicating
Living Care Kirkersville’s appeal of the decision, the district court concluded that it was in
privity with Living Care Utica. The judge noted, and it is undisputed, that Rosser is the sole
shareholder and officer of both Living Care Kirkersville and Living Care Utica and that
Rosser represented both companies in the CDP hearings. But Living Care Kirkersville
maintains that the district court erred in finding that it was in privity with Living Care Utica
and thereby proceeding to apply collateral estoppel principles. And, unlike the district court
in Living Care Utica III/IV, the district court in Living Care Kirkersville applied collateral
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estoppel to all of the claims, including the second claim concerning the refinancing. This
issue was not presented in the prior litigation, and collateral estoppel should not be applied,
as noted by the district court in Living Care Utica III/IV. (Utica J.A. 208).
Collateral estoppel is
“not generally applicable unless there exists either identity or privity between
the parties to the relevant litigation. The person being estopped from
relitigating an issue must have been either a party to the prior lawsuit or have
been so closely related to the interest of the party to be fairly considered to
have had his day in court.”
Mitchell Inv. Co. v. Fed. Sav. & Loan Ins. Corp., 741 F.2d 107, 110 n.9 (6th Cir. 1984)
(citing In re Gottheiner, 703 F.2d 1136, 1140 (9th Cir. 1983)).
Montana suggests that whether one is in “privity” with a prior party so as to be
collaterally estopped from relitigating issues is driven by that person’s involvement in the
prior litigation. In particular, can the interests of common-law adjudication fairly be said to
be implicated as to that person; namely, protecting adversaries from the inconvenience and
expense of multiple suits, conserving judicial resources, and minimizing the possibility of
inconsistent decisions thereby fostering reliance on judicial action, where a party has had
a full and fair opportunity to litigate. Montana, 440 U.S. at 153-54.
These interests are similarly implicated when nonparties assume
control over litigation in which they have a direct financial or proprietary
interest and then seek to redetermine issues previously resolved. . . . [T]he
persons for whose benefit and at whose direction a cause of action is
litigated cannot be said to be “strangers to the cause. . . . [O]ne who
prosecutes or defends a suit in the name of another to establish and protect
his own right, or who assists in the prosecution or defense of an action in aid
of some interest of his own . . . is as much bound . . . as he would be if he
had been a party to the record.”
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Id. at 154 (quoting Souffront v. Compagnie des Sucreries, 217 U.S. 475, 487 (1910)). As
this Court has previously noted, “‘Privity’ is an ambiguous term, a shorthand designation
for those persons who have a sufficiently close relationship with the record parties to be
bound by the judgment.” Vulcan, 658 F.2d at 1109 (internal quotation and citation
omitted).
There are three categories of privity recognized in this Circuit: (1) “successors in
interest to a party will be bound by a judgment against that party”; (2) “a nonparty who
controlled the original suit will be bound by the resulting judgment”; or (3) “a nonparty who
is adequately represented by a party will also be precluded from relitigating the same
issues.” Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 193 F.3d 415, 422 (6th
Cir. 1999). The first category does not apply in this case. The Government argues that
Living Care Kirkersville’s claims are barred by the doctrine of collateral estoppel because
it and Living Care Utica are in privity with one another via their shared sole shareholder and
officer, Rosser. This basis, which was accepted by the district court in finding privity and
applying collateral estoppel, would seem to be based upon privity under categories two or
three.
Under the second category, collateral estoppel is applied to nonparties that
“assume[d] control over [the prior] litigation in which they ha[d] a direct financial or propriety
interest.” Montana, 440 U.S. at 154. “Privity exists when there is ‘substantial identity’
between parties, that is, when there is sufficient commonality of interest. When a person
owns most or all of the shares in a corporation and controls the affairs of the corporation,
it is presumed that in any litigation involving that corporation the individual has sufficient
commonality of interest.” In re Gottheiner, 703 F.2d at 1140.
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In understanding how the second category is applied, this Court in Becherer
explained that “‘[t]o have control of litigation requires that a person have effective choice
as to the legal theories and proofs to be advanced in behalf of the party to the action. He
must also have control over the opportunity to obtain review.’” Becherer, 193 F.3d at 423
(quoting Benson and Ford, Inc. v. Wanda Petroleum Co., 833 F.2d 1172, 1174 (5th Cir.
1987) (citation omitted)). Examples of relationships providing such sufficient control
include “president/sole shareholder and his or her company, a parent corporation and its
subsidiary, an indemnitor and its indemnitee, or a liability insurer and an insured.” Id.
The Government relies upon cases that have held that the owner of a corporation
is in privity with the corporation for purposes of collateral estoppel when the owner
exercises complete ownership and control of the corporation. Mitchell Inv. Co. v. Fed. Sav.
& Loan Ins. Corp., 741 F.2d at 110 n.9 (referencing In re Gottheiner, 703 F.2d at 1139);
Kreager v. Gen. Elec. Co., 497 F.2d 468, 472 (2d Cir. 1974) (finding sole shareholder and
officer who controlled action involving corporation “had an identity of interest with [the
company] and was bound by judgment against it”). But these authorities offered by
Appellee do not support the expansion of the concept of privity posed by the Government
here. The Government fails to cite authority from this Court or elsewhere that applies
collateral estoppel to a legally distinct, nonparty corporation because of a judgment against
another similar corporation with which it shares a common sole shareholder/officer. While
Rosser may have had sufficient interest in and “control” over the prior Living Care Utica
litigation due to his status as its sole shareholder and officer such as to find him in privity
with Living Care Utica, that is not the extension of privity that Appellee seeks here. It seeks
to extend privity to Living Care Kirkersville, but this separate corporation did not have a
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direct financial or proprietary interest in nor control over the prior Living Care Utica litigation
as is necessary in order to impose privity under the second category.
The other manner of seeking to establish that Living Care Kirkersville is in privity
with Living Care Utica is by virtue of their “sister” corporate relationship – mirror business
operations via the same owner. This arguably implicates Becherer’s third category; that
is, binding a nonparty who is adequately represented by a party to the prior litigation,
sometimes referred to as “virtual” representation. See Becherer, 193 F.3d at 423. This
presents the question of whether privity should be found between corporate entities with
similar purposes and common ownership, by posing that the nonparty corporation’s
interest, via its common ownership and business purposes, was adequately represented
in prior litigation by a sister corporation presenting identical issues. Because Living Care
Kirkersville was not an uninvolved curious observer of the outcome of the Living Care Utica
tax proceedings, application of this third category arguably has some appeal. Living Care
Kirkersville is a corporation that owns and operates a mirror image business through the
direct, personal efforts of shared sole owner and officer Rosser. The issues and concerns
identified and articulated by Rosser on behalf of each corporation are virtually identical.
Becherer describes this third privity category of adequate or virtual representation
as requiring “‘an express or implied legal relationship in which parties to the first suit are
accountable to non-parties who file a subsequent suit raising identical issues.’ [Benson and
Ford, 833 F.2d at 1175 (emphasis added) (citation omitted). This third category may also
be established by a nonparty’s express agreement to be bound by or acquiescence to a
party’s representation. See, e.g., RESTATEMENT (SECOND) OF JUDGMENTS § 40
(1980).” Becherer, 193 F.3d at 423. In this case, while Rosser serves as the sole owner
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and officer of both corporations, this fact alone creates neither an express nor an implied
legal relationship making Living Care Utica accountable to Living Care Kirkersville. Nor is
there any evidence that Living Care Kirkersville expressly agreed to be bound by or
acquiesced in Living Care Utica’s representation. Certainly, corporate entities may have
an interest in the same legal issue or in proving or disproving similar facts, but this should
not be and is not sufficient to establish privity between them, even where they may have
common ownership. We will not view the mere fact of common corporate ownership as
amounting to an express agreement, particularly given Becherer’s caution that “absent an
express agreement to be bound, an agreement should not be inferred “‘except upon the
plainest circumstances.’” Becherer, 193 F.3d at 423 ((quoting Bittinger v. Tecumseh Prods.
Co., 123 F.3d 877, 882 (6th Cir. 1997) (emphasis in original) (quoting RESTATEMENT
(SECOND) OF JUDGMENTS § 40 cmt. b)). To extend privity to the common ownership
of sister corporations present here, without more, also raises due process concerns.
Applying privity between commonly-owned corporations requires proof that the nonparty
must have been “so closely related to the interest of the party to be fairly considered to
have had his day in court.” Mitchell, 741 F.2d at 110 n.9. It is not reasonable to conclude
from this record that this has occurred. The Government would have the court extend
privity to Living Care Kirkersville and thereby estop it from having its day in court on the
basis that its owner also owns and operates other similar corporations. To do so, without
more, is surely an overly broad extension of the concept of privity that could unfairly subject
business owners to legal obligations or obstacles without due process, something this
Court will not do.
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In summary, the Court finds that Living Care Kirkersville lacks sufficient privity with
Living Care Utica to apply collateral estoppel from the prior litigation. Although it is possible
that a more careful examination of the interests involved in this case could have
demonstrated sufficient commonality of interests, that evidence is lacking in this record.
Therefore, in the absence of a presumption of commonality of interest, the fact that Living
Care Kirkersville’s sole shareholder can be collaterally estopped by prior litigation is
insufficient to bind Living Care Kirkersville.
C. Merits Review
The CDP hearing procedure requires that the Appeals Officer verify the IRS has
satisfied (1) all legal and procedural requirements to proceed with a levy/lien, (2) consider
any defenses and collection alternatives offered, and (3) determine whether the “proposed
collection action balances the need for the efficient collection of taxes with the legitimate
concern of the person that any collection action be no more intrusive than necessary.” 26
U.S.C. § 6330(c)(3) (the “balancing test”).
Living Care Utica and Living Care Kirkersville both argue that the Appeals Officers
abused their discretion in upholding the collection actions against them. As analyzed
hereinabove, Living Care Utica is collaterally estopped from presenting all its claims except
the claim concerning its ability to refinance. Collateral estoppel does not apply to Living
Care Kirkersville’s claims, which include the same ability to refinance argument. On appeal
to this Court, Living Care Kirkersville also protests that the Appeals Officer, in affirming the
tax lien, abused his discretion in conducting the balancing test. It maintains that the Officer
failed to give appropriate weight to the fact that there were other, senior liens to the IRS
lien that exceeded receivables, meaning that the IRS would take nothing, and that
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imposing the lien would essentially close the business, with no resulting funds for the IRS.
Living Care Kirkersville further argued on appeal that viable collection alternatives,
including sale of the business, refinancing, or an offer in compromise, do exist and were
proposed yet not appropriately considered. Finally, it submits that the collection due
process hearing system is inherently flawed because there is no recording required, which
results in a lack of an adequate administrative record below for effective appellate review.
Living Care Kirkersville’s last argument – regarding the informal nature of the
proceedings and the lack of a sufficient administrative record – relates to the first factor of
the CDP Appeals Officer’s duties to ensure all legal and procedural requirements are met.3
This same argument was also posed by Living Care Utica in cases Living Care Utica I/II
and rejected by this Court in Living Care Alternatives of Utica. Appellant’s reliance upon
Mesa Oil, Inc. v. United States, 86 A.F.T.R.2d (RIA) 7312 (D. Colo. 2000) is misplaced, given the
distinctions in the notice of determination in that case compared with those in these
appeals. The notice in Mesa Oil contained no factual details, legal analysis, or discussion
of the balancing test. Id. at 7315-16. As this Court previously noted, “Mesa Oil’s remand
is an exception to the general practice of reviewing courts showing deference to the
Appeals Officers’ conclusions regarding the balancing analysis.” Living Care Alternatives
of Utica, 411 F.3d at 627-28. While the lack of a formal administrative record could make
abuse of discretion review problematic, given the historically broad discretion in tax
collection proceedings, appropriate due process is afforded unless the reviewing court is
3
Arguably also included as part of this first factor is Living Care Kirkersville’s argument on
appeal that courts have rendered meaningless Congress’s intent in enacting the Tax Reform Act;
that is, to curb the excesses of the IRS. This policy argument is more appropriately left for
Congress to consider, not us. See footnote 2.
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“convinced that the type of taxpayer abuse that Congress sought to remedy has occurred
in the case.” Id. at 629. As in Living Care Alternatives of Utica, the Notices of
Determination here fall short of the exceptional circumstances presented in Mesa Oil and
“provide a sufficient basis for an abuse of discretion review, as that standard is applied in
tax levy and lien appeals.” Id.
The second and third factors addressed by the Appeals Officer can be reviewed
together, given that the assessment and viability of proposed collection alternatives
dovetails into consideration of whether the collection action is no more intrusive than
necessary. Living Care Kirkersville argues that the Appeals Officer abused his discretion
because he did not include the existence of senior lienholders in the balancing analysis
and failed to consider that the net effect of the lien would be to shut down the business
without generating any tax revenue for the Service. The Government counters that the
district court properly concluded that the Appeals Officers did not abuse their discretion
because the IRS is not required to consider whether it will receive revenue from the
collection or whether the collection will negatively impact the taxpayer’s business.
As this Court has noted, there is little about this requirement in Sixth Circuit case law
and, in most cases, a reviewing court affirms the Appeals Officer’s determination that the
balancing test was correctly applied. Living Care Alternatives of Utica, 411 F.3d at 627.
Current case law supports the Government’s argument that the IRS is not required to
include in its balancing analysis whether it “will receive any revenue from a levy or sale, or
whether the business will have to close down due to the levy and sale.” Living Care
Alternatives of Utica, 411 F.3d at 628; Medlock v. United States, 325 F. Supp. 2d 1064,
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1079 (C.D. Cal. 2003) (holding that the appeals officer was not required to consider the
impact of a levy on the taxpayer’s customers).
Appellants also complain that the Appeals Officers abused their discretion by
preventing them from refinancing so as to pay the taxes, not allowing them to conduct a
private sale to maximize proceeds, or refusing to accept an offer in compromise. The
Appeals Officers reviewed each of these contentions, and it cannot be said that their
rejection of each as a collection alternative was irrational or unreasonable. Each proposed
alternative was presented by Appellants in general terms only, lacking the requisite
specificity to permit the Appeals Officers to give informed consideration. Offers in
compromise require specific, detailed submissions, which was not done by Appellants.
Withdrawing liens as a prerequisite to refinancing was only presented by Appellants as
being required by their particular bank, with no details about the rate and return to the IRS
if the refinancing were provided. Nor did Appellants address whether refinancing was
actually available, given that other liens would still be in place. Any expected increased
revenue and return to the IRS from permitting a private sale were also not provided. As
the Appeals Office noted, if the tax liens were to be withdrawn, given the particular
circumstances of these taxpayers, the IRS would be placed in a precarious situation with
respect to competing creditors and collection of any of the unpaid taxes.
The aforementioned consideration, deliberation, and conclusions by the Appeals
Officers do not evidence the “abuse of discretion in the sense of clear taxpayer abuse and
unfairness by the IRS.” Living Care Alternatives of Utica, 411 F.3d at 631. That Appellants
disagree with the results from the exercise of the Appeals Officers’ discretion does not
correlate with that discretion thereby being abused. To second-guess the considerations
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and rationale articulated by the Officers necessitates delving into the details of tax
enforcement that reviewing courts should not do, as explained by this Court in Living Care
Alternatives of Utica.
III. CONCLUSION
For the reasons stated, the decisions of the district courts upholding the Appeals
Office’s Notices of Determination are AFFIRMED.
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