                             T.C. Memo. 2016-137



                       UNITED STATES TAX COURT



      BOHDAN SENYSZYN AND KELLY L. SENYSZYN, Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 9721-11.                          Filed July 21, 2016.



            In Senyszyn v. Commissioner (Senyszyn II), 146 T.C. __ (Mar.
     31, 2016), we declined to apply the doctrine of collateral estoppel to
     uphold whatever minimum deficiency would be consistent with PH's
     prior conviction for tax evasion. We found that the evidence
     presented at trial showed that Ps were not liable for any deficiency
     and concluded that the purposes of collateral estoppel did not support
     its application. R filed a motion for reconsideration of Senyszyn II on
     the grounds that, because the legal requirements for applying the
     doctrine were met, its application was mandatory.

            Held: The discretion we exercised in Senyszyn II not to apply
     collateral estoppel to uphold a minimum deficiency was squarely
     within applicable precedent; R's motion for reconsideration will be
     denied.


     *
      This opinion supplements our prior Opinion Senyszyn v. Commissioner
(Senyszyn II), 146 T.C. __ (Mar. 31, 2016).
                                        -2-

[*2] Bohdan Senyszyn and Kelly L. Senyszyn, pro sese.

      Marco Franco and Lydia A. Branche, for respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


      HALPERN, Judge: This case is before us on respondent's motion under

Rule 1611 that we reconsider our Opinion Senyszyn v. Commissioner (Senyszyn

II), 146 T.C. __ (Mar. 31, 2016). For the reasons explained below, we will deny

respondent's motion.

                                    Background

Mr. Senyszyn's Tax Evasion Conviction

      In May 2004, David Hook, a former business associate of Mr. Senyszyn,

filed a civil fraud suit against petitioners alleging that they had embezzled funds

from him between 2002 and 2004. Mr. Hook's civil suit led to a Federal criminal

investigation of Mr. Senyszyn. As part of that investigation, Internal Revenue

Agent Carmine DeGrazio was asked to determine the amount of income that Mr.

Senyszyn had received in 2003 but had failed to report on petitioners' 2003 Form


      1
       Unless otherwise indicated, all section references are to the Internal
Revenue Code for the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                        -3-

[*3] 1040, U.S. Individual Income Tax Return. Agent DeGrazio examined records

of accounts belonging to petitioners, to Mr. Hook, or to related entities to

determine the flow of funds between Mr. Hook's accounts and Mr. Senyszyn's

accounts. Agent DeGrazio compared the transfers made from Mr. Hook's

accounts to Mr. Senyszyn's accounts with the transfers in the opposite direction

and concluded that Mr. Senyszyn had received $252,726 of net "benefits" from

Mr. Hook that petitioners did not report on their 2003 Form 1040.

      In September 2007, the U.S. Attorney for the District of New Jersey filed a

four-count information in a criminal case against Mr. Senyszyn that included a

charge of tax evasion in violation of section 7201. In support of the tax evasion

charge, the information alleged that Mr. Senyszyn embezzled approximately

$252,726 from Mr. Hook during 2003 and failed to include that amount in the

income reported on petitioners' 2003 Form 1040.

      Contemporaneous with the U.S. attorney's filing of charges against him, Mr.

Senyszyn signed an agreement to plead guilty to all four counts with which he was

charged. Mr. Senyszyn agreed to stipulate at sentencing that he had knowingly

and willfully failed to report $252,726 in taxable income for 2003. After Mr.

Senyszyn entered a plea of guilty in accordance with his plea agreement, the U.S.

District Court for the District of New Jersey entered judgment pursuant to Mr.
                                          -4-

[*4] Senyszyn's plea. Upon the conclusion of further proceedings in the District

Court and the U.S. Court of Appeals for the Third Circuit, the District Court's

judgment became final.

The Determined Deficiency

      Following Mr. Senyszyn's criminal conviction, respondent examined

petitioners' 2003 Federal income tax return for the purpose of determining any

deficiency in tax. After that examination, respondent determined a deficiency in

petitioners' 2003 Federal income tax, together with fraud and accuracy-related

penalties. The deficiency in tax resulted primarily from respondent's adjustment

increasing petitioners' 2003 gross income on account of $252,726 of income that

petitioners allegedly failed to report.

Senyszyn I

      Before trial in this case, respondent moved for partial summary adjudication

that (1) petitioners were collaterally estopped from denying that during 2003 Mr.

Senyszyn received unreported income of $252,726 or that the fraud penalty

applied for 2003 and (2) the period of limitations on assessment and collection of

tax remained open.

      Under the doctrine of collateral estoppel, or 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). "Collateral estoppel * * * has the dual

purpose of protecting litigants from the burden of relitigating an identical issue

with the same party or his privy and of promoting judicial economy by preventing

needless litigation." Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). It

also "fosters reliance on judicial action by minimizing the possibility of

inconsistent decisions." Montana, 440 U.S. at 154.

      In our initial report in this case, Senyszyn v. Commissioner (Senyszyn I),

T.C. Memo. 2013-274, we granted respondent's motion for summary judgment in

regard to the fraud penalty and the statute of limitations but denied his motion for

summary judgment that petitioners were estopped from disputing that Mr.

Senyszyn received unreported income of $252,726 in 2003. As we explained in

that report: "Although the existence of an underpayment in tax is a necessary

element of tax evasion under section 7201, the determination of an exact liability

evaded is not." Id. at *9. "Even where the taxpayer has stipulated a specific

amount of underpayment in a guilty plea," we continued, "such stipulation--though

strong evidence of the deficiency amount--does not collaterally estop the taxpayer

from challenging that amount in a subsequent civil proceeding." Id. at *9-*10.
                                        -6-

[*6] Therefore, we denied respondent's motion to the extent it sought

determination of the amount of petitioners' unreported income for 2003. "The

issues of the amounts of the deficiency in tax and the penalties for 2003", we

concluded, "remain[ed] for trial." Id. at *15.

      Nonetheless, the existence of some underpayment was a necessary element

of the offense for which Mr. Senyszyn was convicted. See Sansone v. United

States, 380 U.S. 343, 351 (1965) (listing "the existence of a tax deficiency" among

"the elements of § 7201"). Therefore, we accepted that Mr. Senyszyn's criminal

conviction established the existence of an underpayment by petitioners for 2003

but not its exact amount. Senyszyn I, at *12-*13.

Senyszyn II

      On the basis of the evidence presented at trial, we found that Mr. Senyszyn

repaid to Mr. Hook during 2003 more than he took. Senyszyn II, 146 T.C. at __

(slip op. at 21). Thus, correction of the error reflected in Agent DeGrazio's

understatement of the amount that Mr. Senyszyn repaid to Mr. Hook during 2003

eliminated the deficiency respondent determined. See James v. United States, 366

U.S. 213, 220 (1961) (quoting with approval Government's observation on brief

that victim's recovery of misappropriated funds reduces embezzler's income);

Chumbrook v. Commissioner, T.C. Memo. 1977-108, 1977 Tax Ct. Memo LEXIS
                                         -7-

[*7] 330, at *14 ("Where restitution of wrongfully converted property is made

prior to the close of the year of the wrongful conversion, the restitution offsets

what would otherwise be income, so that no income results from the wrongful

conversion.").

      Having determined in Senyszyn II, 146 T.C. at __ (slip op. 22), that "the

evidence presented * * * [did] not support the amount of the deficiency that

respondent asserted--or, indeed, any deficiency at all", we then considered whether

to apply the doctrine of collateral estoppel "to uphold a deficiency in whatever

minimum amount would justify Mr. Senyszyn's conviction under section 7201."

We recognized that prior cases had not established a minimum amount necessary

to support a conviction for tax evasion. Id. at __ (slip op. at 24). We read

Parklane Hosiery Co. as having granted trial courts discretion to decline to apply

collateral estoppel when the purposes of the doctrine do not support its

application. Id. at __ (slip op. at 25-26). Thus, we considered "whether the

purposes of collateral estoppel support[ed] applying the doctrine to uphold a

deficiency in petitioners' 2003 Federal income tax" and concluded that they would

not. Id. at __ (slip op. at 26, 27). We explained that conclusion as follows:

      Upholding a minimum deficiency would not promote judicial
      economy: Even after Mr. Senyszyn's conviction under section 7201,
      we were required to hear this case to determine the amount of
                                         -8-

      [*8] petitioner's deficiency. And any inconsistency between Mr.
      Senyszyn's prior criminal conviction and a decision that petitioners
      are not liable for any deficiency would not undermine "reliance on
      judicial action", cf. Montana, 440 U.S. at 154, because the
      inconsistency would result not from conflicting findings by different
      courts but instead from Mr. Senyszyn's entry of a guilty plea to a
      charge that the evidence--at least as presented to us--would not
      support. * * *

Id. at __ (slip op. at 27). Therefore, we declined to apply the doctrine of collateral

estoppel to uphold whatever minimum deficiency would be consistent with Mr.

Senyszyn's conviction under section 7201. Id. at __ (slip op. at 27-28). Instead,

we concluded that petitioners were not liable for any deficiency in their Federal

income tax for 2003. Id. at __ (slip op. at 29).

Respondent's Motion for Reconsideration

      On May 2, 2016, respondent filed his motion asking us to reconsider

Senyszyn II.2 In that motion, respondent alleges that, in Senyszyn II, we "did not

properly apply the standard for collateral estoppel." In particular, respondent

argues that our claim of "broad discretion in the application of collateral estoppel"

was a substantial error of law because it "contradicts previous holdings of the

Court of Appeals for the Third Circuit, the court to which any appeal in this case

      2
       Although a motion for reconsideration of an opinion must be filed within
30 days after service of the opinion, respondent's motion that we reconsider the
Opinion we issued on March 31, 2016, was timely because April 30, 2016, fell on
a Saturday. See Rule 25(a)(2).
                                         -9-

[*9] would lie." Finally, respondent alleges that proper application of the standard

for collateral estoppel would result in "a substantial tax deficiency for petitioners."

      According to respondent, that Court of Appeals allows trial courts

discretion in the application of collateral estoppel only when the doctrine is

asserted by a claimant who was not a party to the prior litigation (i.e., cases of

"non-mutual" collateral estoppel). By contrast, in cases involving "mutual"

collateral estoppel, in which the doctrine is asserted by a party to the prior

litigation, courts must apply the doctrine whenever the legal conditions to its

application are met.

      Respondent rests his interpretation of Third Circuit law on a single case:

that court's opinion in Jean Alexander Cosmetics, Inc. v. L'Oreal USA Inc., 458

F.3d 244 (3d Cir. 2006). Respondent focuses in particular on the court's

discussion of the appropriate standard of appellate review of a trial court's

decision whether to apply collateral estoppel. The Court of Appeals

acknowledged in Jean Alexander that its prior decisions on that point had been

inconsistent: "In some cases we have reviewed the application or nonapplication

of issue preclusion for abuse of discretion, while in others we have applied plenary

review." Id. at 247-248. The court sought to reconcile its prior cases on the basis

of the circumstances in which the doctrine had been invoked. It had engaged in
                                        - 10 -

[*10] more limited, abuse-of-discretion review only in cases "in which a nonparty

to a previous proceeding ha[d] asserted issue preclusion against a defendant, that

is, in cases involving 'non-mutual offensive collateral estoppel.'" Id. at 248.

Those cases, the court suggested, established a limited exception to the "general

rule" requiring "plenary review over the application of issue preclusion." Id.

      The Court of Appeals justified the differing standards of appellate review

according to the significance of equitable considerations in the determination of

whether to apply collateral estoppel. The more the question turned on legal rather

than equitable considerations, the court reasoned, the greater the justification for

plenary review. Thus, plenary review of a lower court's decision in a case

involving defensive or mutual collateral estoppel "makes sense", the court

decided, because "[t]he predominant question" in those cases "is whether the basic

requirements for issue preclusion are satisfied." Id. (citing Nat'l R.R. Passenger

Corp. v. Pa. Pub. Util. Comm'n, 288 F.3d 519, 525 (3d Cir. 2002)).

      Relying on Jean Alexander, respondent argues that our claim of "broad

discretion" to apply collateral estoppel or not "contradicts the Third Circuit's

standard of review." Respondent apparently reasons that, because that Court of

Appeals reviews a lower court's application of collateral estoppel for abuse of

discretion only in cases involving nonmutual collateral estoppel, those are the only
                                        - 11 -

[*11] cases in which it allows a trial court any discretion in the application of the

doctrine.

      Respondent also suggests we "consider the breadth of * * * [our] opinion."

He worries that the discretion we have claimed in the application of collateral

estoppel might encourage "many more challenges to clear-cut cases" that will

"waste judicial resources and the resources of the parties, thereby frustrating the

entire purpose of collateral estoppel." He also professes concern that our Opinion

"might be used to challenge prior criminal convictions." Finally, respondent

suggests that applying collateral estoppel would "save[] the Court from having to

confront the question of a requirement to arbitrarily determine some 'substantial

tax deficiency' in order to afford the District Court the comity to which it is due, in

a case where this Court's factual analysis shows there really is no deficiency at

all." "The better course", respondent recommends, "is to accept via collateral

estoppel the liability to which Mr. Senyszyn stipulated in his guilty plea as a

minimum deficiency."

                                     Discussion

      In asking us to reconsider Senyszyn II, respondent leaves largely

unchallenged our determination that the purposes of collateral estoppel do not
                                        - 12 -

[*12] support its application in the present case.3 Instead, respondent relies on

Jean Alexander for the proposition that collateral estoppel, when invoked by a

party to the prior litigation, must be applied whenever the basic requirements for

its application are met, regardless of whether doing so would further the doctrine's

underlying purposes. Respondent offers no explanation for the surprising view

that courts are hamstrung in the application of a doctrine they created largely for

their own benefit.

      Jean Alexander does not stand for the proposition for which respondent

cites it. Respondent focuses on the Court of Appeals' observation that "[t]he

predominant question in preclusion cases involving defensive or mutual collateral

estoppel is whether the basic requirements for issue preclusion are satisfied." Jean

Alexander, 458 F.3d at 248 (citing Nat'l R.R. Passenger Corp., 288 F.3d at 525).

The Court of Appeals offered that observation not in a discussion of the standards


      3
         We see no merit in respondent's argument that the need to consider
challenges to collateral estoppel by "future petitioners" in cases "similar to the
present case" "will waste judicial resources and the resources of the parties,
thereby frustrating the entire purpose of collateral estoppel." As we explained in
both of our prior opinions in this case, because a defendant's conviction under sec.
7201 establishes only the existence of a deficiency, but not its amount, the
Commissioner's efforts to collect any tax owed will necessarily require subsequent
civil litigation. We are also not persuaded by respondent's professed concern that
our decision might somehow give Mr. Senyszyn, or others similarly situated,
grounds to have a final criminal conviction overturned.
                                        - 13 -

[*13] governing the application of the doctrine on the merits but instead in

addressing the appropriate standard of appellate review. The statement respondent

seized on cannot be read to mean that courts are bound to apply collateral estoppel

when invoked by a prior party whenever "the basic requirements for issue

preclusion are satisfied." Cf. id. The question of whether those requirements are

satisfied may be "[t]he predominant question in preclusion cases involving

defensive or mutual collateral estoppel", see id., but "predominant" does not mean

"sole".

      The Court of Appeals' opinion in Nat'l R.R. Passenger Corp. demonstrates

that, even if equitable considerations are less prevalent in cases involving

nonmutual or defensive collateral estoppel, the application of the doctrine in those

circumstances does not turn entirely on satisfaction of the legal requirements.4 In

any case that raises an issue of collateral estoppel, a court must consider equitable

factors "to assure that the doctrine is applied in a manner that will serve the twin

goals of fairness and efficient use of private and public litigation resources." Nat'l

      4
        Thus, respondent not only misinterpreted the Court of Appeals' observation
in Jean Alexander Cosmetics, Inc. v. L'Oreal USA, Inc., 458 F.3d 244, 248 (3d
Cir. 2006), regarding the relative importance of legal and equitable considerations
in preclusion cases involving defensive or mutual collateral estoppel; he also
failed to read (or appreciate the import of) the case the court cited in Jean
Alexander in support of that observation. See id. (citing Nat'l R.R. Passenger
Corp. v. Pa. Pub. Util. Comm'n, 288 F.3d 519, 525 (3d Cir. 2002)).
                                        - 14 -

[*14] R.R. Passenger Corp., 288 F.3d at 525. The equitable factors relevant in a

particular case depend on whether estoppel is being asserted by a prior party (i.e.,

whether "mutuality" exists) and whether its use is offensive or defensive. Id. But

even in a case of mutual offensive collateral estoppel, like Nat'l R.R. Passenger

Corp., application of the doctrine does not depend solely on the satisfaction of the

applicable legal requirements. "Even when the requirements of the general rule of

collateral estoppel are satisfied, the Court must consider whether there are special

circumstances present which make it inequitable or inappropriate to foreclose

relitigation of a previously determined issue." Id. at 528. On the facts before it,

the Nat'l R.R. Passenger Corp. court found no special circumstances that would

justify relitigation. It did not, however, resolve to apply collateral estoppel merely

because the legal requirements had been satisfied.

      Thus, Jean Alexander establishes only that, were respondent to appeal our

decision in the Third Circuit, the Court of Appeals would conduct plenary, or de

novo, review of our determination not to apply collateral estoppel. See Salve

Regina Coll. v. Russell, 499 U.S. 225, 231 (1991) (using interchangeably the

terms "plenary", "de novo", and "independent" review). Jean Alexander does not

establish that, because the basic requirements for issue preclusion are satisfied in

the present case, it necessarily follows that the doctrine must be applied, even
                                        - 15 -

[*15] though doing so would not further the doctrine's underlying purposes.

Respondent's argument thus conflates the substantive issue of when collateral

estoppel properly applies and the procedural issue of the scope of an appellate

court's review of a lower court's decision to apply the doctrine or not. An

appellate court's choice to exercise plenary review of a lower court's decision,

rather than more limited abuse-of-discretion review, does not mean that the lower

court necessarily lacked any discretion to take into account relevant equitable

considerations, as well as applicable legal requirements, in reaching its decision.

The appellate court's exercise of plenary review simply means that that court will

make its own weighing of any relevant equitable considerations instead of

deferring to the lower court's judgment. E.g., Salve Regina Coll., 499 U.S. at 238

("When de novo review is compelled, no form of appellate deference is

acceptable."). See generally 19 James Wm. Moore, Moore's Federal Practice, sec.

206.04[1], at 206-23 (3d ed. 2016) ("[A] circuit court [employing de novo review]

may substitute its own judgment regarding a conclusion of law made by the trial

court.").

      Even if we were to apply collateral estoppel in this case, the doctrine would

not support upholding the deficiency respondent asserts. For the reasons

explained in Senyszyn I, collateral estoppel, even if applicable, would not
                                       - 16 -

[*16] establish the amount of any income petitioners failed to report for 2003.

Were we to apply collateral estoppel, we would have to determine a deficiency in

whatever minimum amount would justify Mr. Senyszyn's conviction under section

7201. Because prior cases do not establish a minimum amount necessary to

support a conviction, the determination respondent requests of us would

necessarily be not only arbitrary but also nominal.

      We remain convinced that no purpose would be served by upholding a

nominal deficiency--one that respondent apparently concedes would be contrary to

the evidence5--merely because the legal preconditions for the application of

collateral estoppel are satisfied. We see nothing in the Court of Appeals' opinion

in Jean Alexander, or in its jurisprudence generally, that requires us to make such

a seemingly pointless determination. Instead, that court's opinions confirm that, in

any case raising the possible application of collateral estoppel--whether offensive


      5
        Rule 161 allows a party to request our reconsideration of either an opinion
or findings of fact. Although respondent's motion asks only that we reconsider
Senyszyn II on the grounds that it reflected a substantial error of law, the
memorandum he submitted in support of his motion refers to "substantial errors of
fact" as well. But the errors of fact to which respondent refers appear to derive
from our alleged errors of law. Respondent argues that Senyszyn II "contains
clear errors of law that led the Court to find facts inconsistent with a prior final
decision made by a court of competent jurisdiction in a case concerning the same
parties." Nowhere in his memorandum does respondent challenge our evaluation
of the evidence presented in Senyszyn II.
                                        - 17 -

[*17] or defensive, mutual or nonmutual--a court must consider relevant equitable

factors to assure that the doctrine is applied in a manner consistent with its

underlying objectives. Because the discretion we exercised in Senyszyn II is

squarely within the scope of Third Circuit precedent, we will deny respondent's

motion.


                                                 An appropriate order will be issued.
