                              T.C. Memo. 2015-251



                        UNITED STATES TAX COURT



       JUAN M. HERRERA AND SUSANA M. HERRERA, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 25093-12.                        Filed December 29, 2015.



      John Edward Leeper, for petitioners.

      Jeffrey D. Heiderscheit, for respondent.



                          MEMORANDUM OPINION


      SWIFT, Judge: This matter is before us on respondent’s motion for

summary judgment. Respondent determined a $48,872 deficiency in petitioners’

2008 Federal income tax and a $9,774 penalty for an underpayment attributable to

a substantial understatement of income tax under section 6662(a) and (b)(2).
                                         -2-

[*2] The issues before us on respondent’s motion for summary judgment are

whether (1) collateral estoppel applies to disallow a claimed $131,342 carryover to

2008 of business bad debt deductions originating in and claimed by petitioners for

2006 and 2007 and (2) whether summary judgment should be rendered to sustain

respondent’s determination of the penalty for an underpayment attributable to a

substantial understatement of income tax under section 6662(a) and (b)(2).

      Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

                                    Background

      At the time of filing of their petition, petitioners resided in Texas.

      On their filed 2006 and 2007 Federal income tax returns, petitioners claimed

business bad debt deductions totaling $497,999. Thereof, $131,342 was claimed

as a carryover on petitioners’ 2008 Federal income tax return.

      In a prior proceeding in this Court at docket No. 9481-10, petitioners and

respondent litigated petitioners’ entitlement to the above-claimed business bad

debt deductions for 2006 and 2007 and petitioners’ liability for a late-filing

addition to tax under section 6651(a)(1) for 2007. In an opinion filed on

November 5, 2012, we disallowed petitioners’ claimed business bad debt
                                       -3-

[*3] deductions for 2006 and 2007 and we sustained the late-filing addition to tax.

See Herrera v. Commissioner, T.C. Memo. 2012-308 (Wherry, J.). On November

11, 2013, the U.S. Court of Appeals for the Fifth Circuit in an unpublished opinion

affirmed our disallowance of the claimed business bad debt deductions for 2006

and 2007. Herrera v. Commissioner, 544 F. App’x 592 (5th Cir. 2013).

      The $497,999 business bad debt deductions that petitioners claimed for

2006 and 2007 related to a $500,000 debt obligation of a consulting company

(MTI) owned by Juan M. Herrera (petitioner). In 2006 and 2007 a related limited

liability company (HSA), also owned by petitioner, made payments on this debt

totaling $497,999.

      The Court of Appeals for the Fifth Circuit affirmed a key and controlling

finding of the Tax Court as follows:

            Although we agree with * * * [petitioners’] position that HSA’s
      payments were effectively payments of MTI’s debt, they have not
      shown that HSA was legally obligated to pay MTI’s debt. Therefore,
      we agree with the Tax Court’s ultimate conclusion that the payments
      did not give rise to a bad debt deduction.

             [Petitioners’] argument ignores a critical difference between
      the original $300,000 line of credit and the [$500,000] renewed line
      of credit. It is true that HSA was a co-obligor along with MTI on the
      original $300,000 line of credit * * * [the bank] extended in 2004.
      But when * * * [the bank] renewed and increased the line of credit to
      $500,000, only MTI was designated as the borrower. * * * [Peti-
      tioner] personally guaranteed * * * [MTI’s] renewed line of credit,
                                       -4-

[*4] but he did not do so on behalf of HSA. Indeed, * * * [petitioners]
     have not shown how HSA could have been held liable as a guarantor,
     endorser, indemnitor, or other secondary obligor for the renewed and
     increased line of credit when it did not sign--and was not even
     mentioned--in the applicable loan document. * * *

             Moreover, the fact that HSA eventually obtained a loan from
      * * * [the bank] in its own name to pay off MTI’s debt does not
      change our conclusion. * * * [Petitioner] may have simply caused
      HSA to pay off MTI’s debt because he was an individual guarantor
      and because * * * [the bank] looked to him for repayment. But most
      importantly, * * * [petitioners] cite no authority showing that under
      these circumstances HSA’s payment of MTI’s debt was anything
      other than voluntary.

Id. at 595-596.

                                   Discussion

      Summary judgment is appropriate where there is no genuine dispute as to

any material fact and a decision may be rendered as a matter of law. Rule 121(b);

see Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d

965 (7th Cir. 1994).

      As explained in Gardner v. Commissioner, 145 T.C. __, __ (slip op. at 26)

(Aug. 26, 2015),

             [c]ollateral estoppel is an affirmative defense barring a party
      from relitigating an issue determined against the party in an earlier
      proceeding, even if the second proceeding differs significantly from
      the first action. Black’s Law Dictionary 256. The collateral estoppel
      doctrine is also known as issue preclusion. Once an issue of fact or
      law is “actually and necessarily determined by a court of competent
                                         -5-

[*5] jurisdiction, that determination is conclusive in subsequent suits
     based on a different cause of action involving a party to the prior
     litigation.” Montana v. United States, 440 U.S. 147, 153 (1979)
     (quoting Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n.5
     (1979). * * * Brotman v. Commissioner, 105 T.C. 141, 148 (1995).

      Collateral estoppel applies to a factual issue if the following conditions

are satisfied: (1) the issue in the second proceeding is identical in all respects with

the issue decided in the first proceeding; (2) there is a final judgment rendered by

a court of competent jurisdiction; (3) the party against which collateral estoppel is

asserted is either a party to the prior judgment or the privy of a party to the prior

judgment; (4) the parties actually litigated the issue and the resolution of the issue

was essential to the prior decision; and (5) the controlling facts and applicable

legal rules remain unchanged from those in the prior proceeding. Id., 145 T.C. at

__ (slip op. at 27); Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), aff’d, 904

F.2d 525 (9th Cir. 1990).

      Petitioners dispute application of only the fifth condition above. With

regard thereto, an exception to the application of collateral estoppel will apply

where controlling facts have changed or where controlling evidence not available

in the first proceeding is submitted in the second proceeding. Ross v.

Commissioner, T.C. Memo. 1988-283 (citing Dean v. Commissioner, 56 T.C. 895,

898 (1971)).
                                         -6-

[*6] Evidence will be considered to have been unavailable in the first proceeding

if by exercise of due diligence it could not have been produced. Fairmont

Aluminum Co. v. Commissioner, 22 T.C. 1377, 1383 (1954), aff’d, 222 F.2d 622

(4th Cir. 1955); Sidoran v. Commissioner, T.C. Memo. 1982-197.

       Petitioners offer a loan billing statement not introduced at the prior Tax

Court proceeding. The statement is dated June 2006. Without any further

explanation petitioners merely state that the bank statement was “not in evidence”

at the trial which occurred in 2010. Indeed, petitioners seem to acknowledge the

billing statement was available to them and could have been offered into evidence

at the trial.

       The loan billing statement does not reflect any relevant new fact relating to

the debt in question. On the statement MTI is identified clearly as the debtor.

HSA is referenced on the statement only as having the same office address as

MTI.

       We conclude and hold that the doctrine of collateral estoppel applies with

regard to the $131,342 carryover bad debt deduction petitioners claim on their

2008 tax return. Our Court’s prior holding, as affirmed by the Court of Appeals

for the Fifth Circuit, is conclusive.
                                        -7-

[*7] Respondent has established that petitioners are liable for the $48,872 tax

deficiency for 2008, and petitioners have not raised anything that would justify a

trial. See Rule 121(d).

      In his motion, respondent states that because the tax deficiency we sustain

against petitioners exceeds the greater of $5,000 or 10% of the tax required to be

shown on their 2008 tax return,1 the understatement of income tax is substantial

under section 6662(d), and the section 6662(a) and (b)(2) penalty mathematically

and automatically applies. Accordingly, respondent moves for summary judgment

against petitioners on the section 6662(a) and (b)(2) penalty.

      On the penalty issue for 2008 and in opposition to respondent’s motion for

summary judgment thereon petitioners assert a reasonable basis for claiming the

carryover bad debt deduction and the resulting understatement of income tax. See

sec. 6662(d)(2)(B)(ii)(II). Petitioners correctly note that respondent never

determined a section 6662 penalty against them relating to the tax deficiencies for

2006 and 2007, even though the facts relating to those claimed bad debt

deductions were essentially the same as they are for 2008. Additionally,




      1
      10% of petitioners’s total $428,095 income tax liability (as determined by
respondent and that we sustain) equals $42,809.
                                        -8-

[*8] petitioners note that their 2008 Federal income tax return was filed before the

Tax Court’s prior opinion was filed on November 5, 2012.

      Petitioners argue that respondent’s failure to determine section 6662

penalties for 2006 and 2007 establishes, or at the least provides significant support

for, the reasonableness of their claim of essentially the same bad debt deductions

for 2008.

      We will deny respondent’s summary judgment motion with regard to the

$9,774 section 6662(a) and (b)(2) penalty for 2008.

      To reflect the foregoing,


                                              An appropriate order will be issued.
