                     T.C. Memo. 2001-103



                  UNITED STATES TAX COURT



          GERALD DENNIS STRONG, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 582-99.                         Filed April 30, 2001.



     P and his spouse were separated but legally married
when P prepared and filed a document as their joint 1994
income tax return, which P signed on behalf of his spouse.
Later, P filed a petition for bankruptcy. R filed a proof
of claim in P’s bankruptcy case alleging, inter alia, a
deficiency for 1994 arising largely from P’s failure to
include income P received under a settlement agreement
between P and P’s former employer. P objected and contended
that the amounts received under the settlement agreement
were excludable from gross income under sec. 104(a)(2),
I.R.C. 1986. The bankruptcy court overruled P’s objection
and allowed R’s claim for P’s 1994 tax liability. In the
instant case, R raises the affirmative defense of res
judicata, but not as to whether the 1994 tax return was a
joint tax return or was P’s separate tax return.

     1.   Held:   R sustained as to res judicata.

     2. Held, further, the income tax return filed for 1994
was intended by P and his spouse to be their joint income
                                 - 2 -

     tax return; it constitutes their joint income tax return
     even though P’s spouse did not sign it. See sec. 6013,
     I.R.C. 1986.



     Gerald Dennis Strong, pro se.

     Innessa Glazman, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

     CHABOT, Judge:     Respondent determined a deficiency in

individual income tax and an addition to tax under section

6651(a)(1)1 (failure to timely file tax return) against

petitioner for 1994 in the amounts of $108,941 and $5,573.85,

respectively.

     After a concession by respondent,2 the issues for decision

are as follows:

          (1)     Whether under the doctrine of res judicata

     petitioner is barred by the order in In re Strong, No. 97-2-

     4433-DK (Bankr. D. Md., Aug. 25, 1998) from contesting his

     tax liability for 1994, except as that may be affected by

     the filing status of his 1994 tax return.




     1
      Unless indicated otherwise, all subtitle and section
references are to subtitles and sections of the Internal Revenue
Code of 1986 as in effect for 1994.
     2
      Respondent concedes the sec. 6651(a)(1) addition to tax.
See infra note 4.
                                  - 3 -

          (2) If not so barred, then whether:

                  (a)   Petitioner is collaterally estopped by the

          order from asserting that the amount of compensation he

          received in 1994 is excludable from gross income under

          section 104(a)(2).

                  (b)   The discharge of indebtedness income

          petitioner received in 1994 is excludable from gross

          income under section 108(a)(1)(B).

                  (c)   The income petitioner realized from the sale

          of stock in 1994 should be taxed at capital gains

          rates.

                  (d)   Respondent erroneously calculated the amount

          of disability insurance benefits petitioner received in

          1994.

                  (e)   Respondent erroneously included loan proceeds

          in petitioner’s gross income for 1994.

          (3)   Whether petitioner is entitled to the filing

     status of married filing jointly.

                             FINDINGS OF FACT

     Some of the facts have been stipulated; the stipulations and

the stipulated exhibits are incorporated herein by this

reference.

     Petitioner resided in Sterling, Virginia, when he filed the

petition in the instant case.
                                 - 4 -

A.   Petitioner’s Background and Employment History

      Petitioner is a certified public accountant with an

extensive educational background.     He holds bachelor’s and

master’s degrees in accounting.     Petitioner also earned graduate

credits toward, but did not complete, a Ph.D. degree in

economics.

      Petitioner began to work as a financial statement auditor

for the accounting firm of Lybrand, Ross Brothers, Montgomery3 in

1966.     Petitioner became a partner in the firm; he had that

status during the period 1988-1991.

      In August of 1991, the National Corporation for Housing

Partnerships (hereinafter sometimes referred to as NHP) offered

to petitioner the positions of executive vice president and chief

financial officer.     In 1991, NHP was engaged in the business of

building and developing subsidized housing in the United States.

As part of its inducement to petitioner, NHP offered to him the

right to participate in its stock option program, pursuant to

which petitioner initially could receive up to 3,000 shares of

NHP common stock.

      Petitioner accepted NHP’s offer and left the accounting

firm.     At some point, petitioner also became treasurer of NHP.



      3
      Through various transactions, the accounting firm of
Lybrand, Ross Brothers, Montgomery has since become part of the
accounting firm of PricewaterhouseCoopers.
                                 - 5 -

     Petitioner suffered a stroke in or about August of 1993.       He

was in rehabilitation from the effects of the stroke until

December 31, 1994.

     On September 20, 1994, petitioner and NHP executed a

separation agreement pursuant to which petitioner (1) resigned

his positions as executive vice president, chief financial

officer, and treasurer, and (2) assumed the position of special

assistant to the chairman for financial affairs.     Petitioner’s

resignation was deemed effective as of March 31, 1994.     The

separation agreement further provided that petitioner’s

employment by NHP would end on December 31, 1994.

     The separation agreement obligated NHP to compensate

petitioner in the following manner:      Through September of 1994,

petitioner was to receive his full monthly salary, $19,500; for

October through December of 1994, petitioner was to receive half

of his monthly salary, $9,750.

     The separation agreement provided that up to $6,000 of the

monthly compensation petitioner was to receive could come in the

form of disability benefits paid by NHP’s insurer, Metro-Life

Insurance Co. (hereinafter sometimes referred to as Metro-Life).

NHP’s obligation to compensate petitioner was offset, dollar for

dollar, by the amount of disability benefits Metro-Life paid to

petitioner.   If the combination of the disability benefits Metro-

Life paid and the compensation NHP paid to petitioner exceeded
                                 - 6 -

the amount of compensation petitioner was entitled to under the

separation agreement, then petitioner was required to return the

excess to NHP.

     As part of its August 1991 job offer to petitioner, NHP

agreed to lend $60,000 to petitioner at 10 percent annual

interest, repayable over 3 years.    Pursuant to the separation

agreement, NHP forgave the outstanding principal balances and all

accrued and unpaid interest on the loans, which totaled about

$44,000.

     The separation agreement also required NHP to lend $15,000

(hereinafter sometimes referred to as the new loan) to petitioner

at 10 percent annual interest.    The new loan was to be repaid

through payroll withholdings in the principal amount of $1,000

per payroll period together with interest thereon, beginning with

the payroll check issued on September 23, 1994.    The proceeds of

the new loan were to be used principally to pay petitioner’s

medical bills.   The separation agreement further provided that on

the date petitioner exercised any or all of his option for NHP

common stock, petitioner would immediately resell to NHP “at

least the number of such shares equal in value to the outstanding

principal balance and accrued interest on the New Loan.”    The

separation agreement further provided that petitioner’s option

for 1,200 shares of NHP common stock had vested as of March 1,

1994.   It required petitioner to exercise this option at $264.05
                               - 7 -

per share by September 30, 1994, and to resell to NHP the

necessary number of shares (to pay off the new loan) at $300 per

share.   The separation agreement then states that this would

result in “a net aggregate price of $43,200 if all 1,200 shares

are resold.”

     By executing the separation agreement, petitioner also

agreed to execute a release and waiver of claims, hereinafter

sometimes referred to as the release agreement.   Under the

release agreement, petitioner promised to waive any and all

claims he may have had against NHP whether or not connected with

his employment by NHP.   The release agreement recites that

petitioner’s agreements thereunder are in consideration for NHP’s

providing to him “certain payments and other valuable

consideration, to which the Employee [petitioner] is not

otherwise entitled, as set forth in the Separation Agreement.”

Petitioner executed the release agreement on September 20, 1994.

     Petitioner’s 1994 tax return includes a Form W-2c, Statement

of Corrected Income and Tax Amounts, from NHP to petitioner,

which provides the information set forth in table 1.
                                           - 8 -

                                          Table 1
                      (a) As previously     (b) Correct              (c) Increase
Form W-2 box                reported             information              (decrease)

1    Wages, tips,          188,990.49                   .00            -188,990.49
      other comp.
2    Federal income tax     52,193.23           52,193.23                       .00
      withheld
3    Social security        60,600.00                   .00              -60,600.00
      wages
4    Social security         3,757.20              3,757.20                    .00
      tax withheld
5    Medicare wages        188,990.49                   .00             -188,990.49
      and tips
6    Medicare tax            2,740.36              2,740.36                     .00
      withheld
17   State wages, tips,     96,983.70                   .00              -96,983.70
      etc. MD
18   State income tax               6,647.34              6,647.34                     .00
17   State wages, tips,     64,967.70                   .00              -64,967.70
      etc. VA
18   State income tax               3,507.47              3,507.47                     .00

        The information reported on petitioner’s tax return is

consistent with the information in the “Correct information”

column of table 1.

B. Petitioner’s and Mary’s Financial Arrangements

        Petitioner and Mary J. Strong (hereinafter sometimes

referred to as Mary) married in 1966; they remained married to

each other during all of 1994.

        By mutual agreement, petitioner managed all of their

financial arrangements from the outset of the marriage.                           Without

objection from Mary, petitioner did not consult her with respect

to their financial arrangements.

        From 1966 through 1997, petitioner prepared and filed their

income tax returns.         Each of these tax returns shows the filing

status of married filing jointly.               Petitioner customarily

completed preparing their tax return on the last day for timely
                               - 9 -

filing.   If Mary was present when petitioner completed the tax

return for the year, then Mary signed it.   If Mary was not

present, then petitioner signed the tax return on Mary’s behalf.

Petitioner did not discuss with Mary either the contents or the

substance of any of their tax returns.

     Petitioner and Mary separated on or about July 5, 1990.

Petitioner continued to manage Mary’s financial arrangements

while they were separated.   The separation did not alter the

manner in which petitioner managed their financial arrangements.

Petitioner also continued to prepare and file their tax returns

in the same manner as he had before the separation.   Petitioner

and Mary continued to elect the filing status of married filing

jointly for the tax returns filed during their separation.     The

tax returns for 1990 through 1994 include Mary’s income from her

teaching job.   Petitioner managed Mary’s financial arrangements

until August of 1997.

     At some time before October 16, 1995, Mary gave her 1994

Form W-2 to petitioner.   Petitioner prepared and signed a 1994

joint tax return for himself and Mary.   On this tax return,

petitioner reported $28,685 of Form W-2 income, consistent with

Mary’s Form W-2 from her teaching job, and did not report income

from NHP, consistent with his Form W-2c.    See supra table 1.    On

this tax return, petitioner claimed $54,729 withholding

($52,193.23 from his Form W-2c, plus $2,535.72 from Mary’s Form
                               - 10 -

W-2), claimed the entire withholding as an overpayment, and

directed that the entire overpayment be “Applied to Prior Taxes”.

Petitioner filed this tax return on October 16, 1995.4   As of

that date, petitioner and Mary were separated, but still legally

married.   Petitioner signed Mary’s name on the tax return.   Mary

did not prepare a separate tax return for 1994 at that time

because she understood that petitioner was preparing a joint tax

return for them in accordance with the way their joint tax

returns had been prepared up to that time.   This pattern

continued until August 1997.

     Sometime during 1993, petitioner met with agents of the

Criminal Investigation Division of the Internal Revenue Service

to discuss his income tax liability.    In July of 1996, petitioner

was tried and convicted of failing to file Federal income tax

returns for 1989, 1990, and 1991, in violation of section 7203.5

     In August of 1997, respondent was in the process of

conducting a civil audit of the joint tax returns petitioner and

Mary filed for 1988, 1989, 1990, 1991, and 1994.    Mary learned of

     4
      Petitioner received an automatic 4-month extension for
filing the 1994 tax return; he then requested and received an
additional 2-month extension. Oct. 15, 1995, was a Sunday. The
1994 joint tax return was timely filed. See supra note 2.
     5
      Mary testified that petitioner filed joint tax returns for
the two of them, generally, and specifically for 1988, 1989,
1990, 1991, and 1994. The record does not indicate when these
joint tax returns were filed, except for the 1994 tax return. As
to the joint tax returns for 1988 through 1991, we gather that
they were filed at some point before August 1997.
                               - 11 -

the severity of the investigation and the civil audit in August

of 1997, after which she contacted Robert Beatson II (hereinafter

sometimes referred to as Beatson), an accountant and attorney.

Beatson immediately filed a power of attorney authorizing him to

serve as Mary’s representative with respect to the investigation

and the audit.

     Beatson represented to respondent that Mary (1) did not sign

the returns, (2) did not authorize petitioner to sign the returns

on her behalf, and (3) wanted to file separate returns for 1988

through 1991 and for 1994.    Before August of 1997, Mary did not

manifest an intention to file a separate return for 1994.

Respondent’s revenue agent, Howard Bell (hereinafter sometimes

referred to as Bell), represented to Beatson that Mary could not

file separate returns until the civil audit was concluded.

     By a letter dated June 2, 1998, Bell informed Beatson that

the civil audit was “essentially complete”.   Beatson then

prepared married-filing-separately tax returns for Mary for 1988,

1989, 1990, 1991, and 1994.   Beatson did not prepare separate

returns for Mary for 1992 and 1993 because respondent (1)

determined that there was no outstanding tax liability for those

years, and (2) represented that the filing of separate returns

for 1992 and 1993 would be administratively inconvenient.

Beatson believed that Mary’s interests vis-a-vis the statute of

limitations as to 1992 and 1993 were adequately protected by the
                                - 12 -

1992 and 1993 tax returns and Bell’s June 2, 1998, letter to

Beatson in which Bell stated:    “No audit was made of joint tax

returns filed for 1992, 1993 and, [sic] 1995.”

     Mary’s separate 1994 tax return was filed on or after July

12, 1998.   Mary did not file a 1994 separate tax return before

that date, even though her withholding was not enough to cover

what would have been her 1994 tax liability on a married-filing-

separately basis.   On her separate 1994 tax return, Mary reported

her Form W-2 income (rounded to $28,685) and taxable interest

income ($184), for an adjusted gross income of $28,869.    These

are the same amounts that appear on the joint tax return, which

also shows a breakdown on Schedule B, Interest and Dividend

Income, of income by payor.    On the separate 1994 tax return,

Mary claimed the standard deduction for married filing

separately--$3,175.    The joint tax return shows $57,099 on

Schedule A, Itemized Deductions, after applying the 7.5-percent

floor for medical expenses and the 2-percent floor for

miscellaneous deductions.    Mary’s separate 1994 tax return shows

a $4,033 liability and, after a $2,536 credit for withholding

(rounded from the Form W-2 amount), a $1,497 amount owed.      The

record does not indicate whether (1) Mary paid the amount owed,

or any interest thereon, or any late filing addition to tax, or

(2) respondent disallowed Mary’s standard deduction because of

section 63(c)(6)(A).
                                 - 13 -

      When petitioner filed the 1994 joint tax return, on October

16, 1995, both petitioner and Mary intended to file a 1994 joint

tax return.

C.   The Bankruptcy Proceeding

      On December 18, 1997, petitioner filed a petition for

bankruptcy under chapter 13 of the Bankruptcy Code in the U.S.

Bankruptcy Court for the District of Maryland, Southern Division.

Petitioner’s case was later converted to a case under chapter 7.

Laura J. Margulies (hereinafter sometimes referred to as

Margulies), a bankruptcy attorney, represented petitioner in that

bankruptcy case.

      Respondent6 filed claims for taxes, including claims for

income taxes for 1988, 1989, 1990, 1991, and 1994, in

petitioner’s Bankruptcy Court proceeding.

      Petitioner objected to respondent’s claim.   As to 1994, he

contended that he did not have any tax liability, that he had

overpaid his 1994 taxes by $54,729, and that this overpayment had

already been applied to his 1988 tax liability.    Petitioner

argued in the bankruptcy case that income received from NHP in

1994 and the disability payments from Metro-Life were excludable

from gross income under the provisions of section 104(a)(2).     The

Bankruptcy Court conducted a hearing on respondent’s claims and

      6
      For simplicity and ease, we use the term respondent to
include the U.S. Government, which was the party in the
bankruptcy action.
                                - 14 -

petitioner’s objections.    On August 13, 1998, the Bankruptcy

Court ruled from the bench that (1) respondent’s claims as to

1988 through 1991 were not dischargeable under section

523(a)(1)(C) of the Bankruptcy Code, and (2) respondent’s claim

as to 1994 was allowed.    In the course of this bench ruling, the

Bankruptcy Court made the following observations:

     Turning to the second problem, the objection to the
     claim for 1994 tax liabilities, which proof of claim
     has been filed by the Internal Revenue Service.

          The claim, of course, enjoys a prima facia
     validity under 502 [of the Bankruptcy Code], the debtor
     [petitioner] then came forward and introduced evidence
     which if concluded by the trier of fact to be a
     scenario which was proven, would in fact defeat the
     claim. The debtor’s theory is, of course, that these
     monies were received not as income which is taxable but
     as damages under settlement agreement of what the
     debtor asserts is a cause of action that would be
     included under 26 U.S.C. 104(a)(2).

          The burden then of establishing the entitlement
     falls back to the claim holder. The facts are that the
     debtor had a stroke which for some period of time
     disabled the debtor and that while he was recuperating,
     his employer decided to terminate his employment, that
     there was a negotiated separation agreement which is in
     evidence as Government Exhibit 21, a part of which was
     a release and waiver of claims in evidence as Debtor’s
     Exhibit 1 and pursuant to which, the debtor was paid
     certain funds.

          The IRS would categorize these funds as, in
     effect, severance pay which is a taxable income. The
     debtor would categorize these funds as damages received
     by agreement on account of personal physical injuries
     or physical sickness, excludable from taxable income
     under 26 U.S.C. 104(a)(2).

              *     *       *     *      *    *     *
                               - 15 -

          If this was found to be a payment to settle a
     claim under the ADA, the Court is not convinced that
     such payment would be, by law, excludable from income
     under 104(a)(2). Neither counsel has provided to this
     Court any decision dealing with an ADA settlement and
     the Court has not been able to find one by itself.

               *     *     *     *      *     *   *

[The Bankruptcy Court thereupon analyzed Commissioner v.

Schleier, 515 U.S. 323 (1995), and United States v. Burke, 504

U.S. 229 (1992).]

          And so, under the facts of the instant case before
     this Court, the compensation is not excludable as a
     matter of law under 104(a)(2). For these reasons, the
     Court denies the objection to claim filed and allows
     the claim of the IRS for the 1994 tax debt. Mr.
     Wilkinson, you will draw the orders.

           (Whereupon, the case was concluded.)

     The Bankruptcy Court memorialized this ruling by an order

entered August 25, 1998, which provides, in pertinent part, as

follows:

          ORDERED that the debtor’s tax liabilities for the
     years 1988, 1989, 1990, and 1991 are non-dischargeable
     under 11 U.S.C. § 523(a)(1)(C);

          ORDERED that the debtor’s objection to the
     Internal Revenue Service’s claim for 1994 income tax is
     overruled, and that the claim is ALLOWED;

Petitioner did not appeal the order, which has become final.

     U.S. Department of Justice attorney James J. Wilkinson

(hereinafter sometimes referred to as Wilkinson) represented

respondent in petitioner’s bankruptcy case.
                              - 16 -

     Petitioner met with Wilkinson during his bankruptcy case on

two occasions:   Once when Wilkinson took petitioner’s deposition,

and once on the day of the hearing.     Other than the exchange of

personal introductions at petitioner’s deposition, Wilkinson did

not meet with petitioner outside the presence of Margulies.

Wilkinson did not represent to either Margulies or petitioner

that (1) petitioner’s 1994 tax liability was dischargeable, or

(2) petitioner could contest his 1994 tax liability in a

proceeding before this Court if the Bankruptcy Court overruled

petitioner’s objection.

     The notice of deficiency in the instant case was mailed to

petitioner on October 14, 1998.

                              OPINION

     Petitioner contends that (1) the compensation he received

under the settlement agreement is excludable from gross income

under section 104(a)(2), (2) the discharge of indebtedness income

he received under the settlement agreement is excludable from

gross income under section 108(a)(1)(B), (3) the income he

received from the sale of his NHP stock should have been taxed at

capital gains rates, (4) respondent erroneously included loan

proceeds in petitioner’s gross income, (5) respondent erroneously

computed the amount of disability insurance benefits he received,

and (6) he is entitled to the filing status of married filing

jointly.
                              - 17 -

     Respondent contends that (1) the doctrine of res judicata

precludes petitioner from litigating every issue petitioner

raised other than the filing status issue, (2) the doctrine of

collateral estoppel precludes petitioner from litigating the

section 104 issue, and (3) petitioner’s filing status for 1994 is

married filing separate.   Respondent also raises alternative

contentions with respect to every issue other than the filing

status issue.

     Without objection from petitioner, respondent filed an

amended answer, the amendment raising the affirmative defense of

collateral estoppel as to the section 104(a)(2) issue.

Respondent then filed a motion for partial summary judgment that

“Petitioner should be precluded from relitigating the identical

issue previously adjudicated in the Bankruptcy Court pursuant to

the applicable doctrine of res judicata, to wit:   collateral

estoppel (issue preclusion), or claim preclusion.”   The motion

states that “if this motion is granted, there remains only one

genuine issue of material fact for trial: whether or not

petitioner is entitled to a filing status of married, filing

jointly.”   Petitioner’s memorandum in opposition to the motion

states as follows:

     I. ISSUE

     Whether the doctrine of res judicata can be applied to
     a situation where petitioner was deliberately misled by
     the respondent into a course of action solely to
     achieve respondent’s goal of tax maximization while
                              - 18 -

     respondent’s representative stated there were
     alternatives available to petitioner which, in fact, it
     now states now are not available due to, among other
     matters, res judicata.

Oral argument on respondent’s motion was held at the calendar

call for the Court’s trial session on which the instant case had

previously been set for trial.   The proceedings on respondent’s

motion ended with the following:

          THE COURT: Would your attorney be able to -- your
     attorney in you[r] bankruptcy case be able to back up your
     contention that you were misled?

           MR. STRONG: She would and the expert witnesses we had
     at the bankruptcy hearing would otherwise be able to do
     that.

          THE COURT: At this point, the Court could not conclude
     that there is no substantial dispute about a material fact,
     and so Respondent’s motion for partial summary judgment is
     denied. However, Respondent’s contention that -- I guess
     it’s res judicata rather than collateral estoppel.

          MS. GLAZMAN:   Yes, Your Honor.

          THE COURT: Respondent’s contention that res judicata
     precludes a determination of those issues in Petitioner’s
     favor in this case is never -- nevertheless has been
     properly raised and is still before the Court.

     We consider first the matters involved in respondent’s

contentions as to preclusion, see Rules 39 and 41(b)(1),7 and

then we consider the parties’ dispute as to petitioner’s filing

status.




     7
      Unless indicated otherwise, all Rule references are to the
Tax Court Rules of Practice and Procedure.
                              - 19 -

     As a preliminary matter, we note that respondent’s

determinations as to matters of fact in the notice of deficiency

are presumed to be correct, and petitioner has the burden of

proving otherwise.   See Rule 142(a); Welch v. Helvering, 290 U.S.

111 (1933).   However, respondent has the burden of proof with

respect to respondent’s claim of res judicata because it is an

affirmative defense.   See Rules 39, 142(a); Calcutt v.

Commissioner, 91 T.C. 14, 20-21 (1988).

I.   Res Judicata

      Respondent contends that the doctrine of res judicata

precludes petitioner from litigating the 1994 tax liability,

except insofar as it is affected by petitioner’s tax filing

status.   Petitioner contends that res judicata does not apply,

because special circumstances exist which warrant an exception to

the normal rules of preclusion.   Respondent denies that the

claimed special circumstances events occurred.

      We agree with respondent.

      Under the doctrine of res judicata--

      when a court of competent jurisdiction has entered a final
      judgment on the merits of a cause of action, the parties to
      the suit and their privies are thereafter bound “not only as
      to every matter which was offered and received to sustain or
      defeat the claim or demand, but as to any other admissible
      matter which might have been offered for that purpose.”

Commissioner v. Sunnen, 333 U.S. 591, 597 (1948)(citing Cromwell

v. County of Sac, 94 U.S. 351, 352 (1877)); see Kroh v.

Commissioner, 98 T.C. 383, 398 (1992).    The judgment in the first
                                - 20 -

action thus puts an end to the cause of action, which the parties

cannot later litigate upon any ground whatever, absent a showing

of fraud or some other factor which would invalidate the

judgment.    See Commissioner v. Sunnen, 333 U.S. at 597; Kroh v.

Commissioner, 98 T.C. at 398.

     Three requirements must be satisfied for the doctrine of res

judicata to apply:   (1) The parties in the second case are the

same as or in privity with the parties in the first case; (2) the

cause of action in the second case is in substance the same as

that in the first case; and (3) the first case resulted in a

final judgment on the merits by a court of competent

jurisdiction.   See Nevada v. United States, 463 U.S. 110, 129-130

(1983); Federated Department Stores, Inc. v. Moitie, 452 U.S.

394, 398 (1981); Commissioner v. Sunnen, 333 U.S. at 597.

     Petitioner and respondent were parties in petitioner’s

bankruptcy case.   Thus, the first element of res judicata is

satisfied.    See, e.g., Florida Peach Corp. v. Commissioner, 90

T.C. 678, 682 (1988).

     The second element of res judicata requires that the cause

of action in the second case be in substance the same as the

cause of action in the first case.       Each taxable year “is the

origin of a new liability and of a separate cause of action.”

Commissioner v. Sunnen, 333 U.S. at 598.       If a claim of liability

or nonliability for a particular tax year is litigated, then a
                                - 21 -

judgment on the merits “is res judicata as to any subsequent

proceeding involving the same claim and the same tax year.”        Id.

Petitioner and respondent litigated petitioner’s 1994 tax

liability in the bankruptcy case, and petitioner now is

attempting to relitigate his 1994 tax liability in the instant

case.    Petitioner is thus attempting to litigate the same cause

of action in the instant case as he litigated in the bankruptcy

case.    The fact that petitioner raises different theories of

relief in the instant case does not make the cause of action in

the instant case different from the cause of action in his

bankruptcy case.    It is well settled that the preclusive effect

of a prior judgment extends not only to claims or defenses

actually presented in the first case, but also to “any other

admissible matter which might have been offered for that

purpose.”    Cromwell v. County of Sac, 94 U.S. at 352.   Each of

the contentions petitioner asserts in the instant case was

available to him during his bankruptcy proceeding.     Accordingly,

the second requirement for res judicata is satisfied.

        The third requirement of res judicata is that a court of

competent jurisdiction enter a final judgment on the merits.

Bankruptcy courts have jurisdiction to determine the tax

liabilities of persons proceeding in bankruptcy court.     See

United States v. Wilson, 974 F.2d 514, 518 (4th Cir. 1992);

Freytag v. Commissioner, 110 T.C. 35, 40 (1998).     Thus, the
                              - 22 -

Bankruptcy Court which issued the order in petitioner’s

bankruptcy case is a court of competent jurisdiction.

     The Bankruptcy Court’s order also constitutes a final

judgment on the merits.   After conducting a hearing on the

merits, the Bankruptcy Court allowed respondent’s claim in a

final order which petitioner did not appeal.   On these facts, we

conclude that the Bankruptcy Court’s order constitutes a final

judgment on the merits.   See Turshen v. Chapman, 823 F.2d 836,

839-840 (4th Cir. 1987); Florida Peach Corp. v. Commissioner, 90

T.C. at 682-684; Holywell Corp. v. United States, 82 AFTR 2d 98-

6313, 98-2 USTC par. 50,734 (W.D. Va. 1998), affd. without

published opinion 229 F.3d 1142 (4th Cir. 2000).   Accordingly,

the third requirement for res judicata is satisfied.      As noted

above, the presence of fraud or some other factor which

invalidates the judgment in the first action will prevent the

application of res judicata even though the requirements therefor

have otherwise been satisfied.   Petitioner contends that (1)

Wilkinson “set out on a deliberate course of misinformation and

deceit” to entice petitioner into permitting the Bankruptcy Court

to determine his tax liability for 1994, and (2) Wilkinson’s

alleged misrepresentations warrant an exception to the doctrine

of res judicata.   Petitioner contends that Wilkinson represented

that (1) even if the Bankruptcy Court allowed respondent’s claim

for 1994, then petitioner’s 1994 tax liability would be
                               - 23 -

discharged, (2) proceeding in the Bankruptcy Court would not

prevent petitioner from relitigating the taxability of the

amounts he received under the settlement agreement in a

proceeding before this Court, and (3) permitting the Bankruptcy

Court to determine petitioner’s tax liability for 1994 would be

quicker than permitting this Court to make the determination.

     We disagree with petitioner for the following reasons.

     Firstly, petitioner claims that, if he were not misled into

inadvertently giving up his rights, he would have been able to

have this Court rule on the merits of his tax contentions.    At

the time that, petitioner asserts, he was being lured into

agreeing to allow the Bankruptcy Court to deal with his 1994 tax

liability, (1) petitioner was already in the Bankruptcy Court

because he filed a bankruptcy petition, (2) respondent had

submitted in the Bankruptcy Court a claim for petitioner’s 1994

tax liability, (3) the notice of deficiency had not yet been

issued, and (4), of course, petitioner had not yet filed a

petition with the Tax Court.   Petitioner has not explained what

practical course he would otherwise have followed in order to

have the Tax Court rule on his tax contentions before the

Bankruptcy Court ruled on respondent’s claim, and thereby avoid

res judicata.   See, e.g., secs. 6503(h), 6213(f); McClamma v.

Commissioner, 76 T.C. 754 (1981).   Accordingly, we conclude that
                               - 24 -

petitioner failed to show that he lost anything even if we were

to credit his claim that he was misled.

     Secondly, we do not credit petitioner’s claim that Wilkinson

misled petitioner.    On the basis of our observations of Wilkinson

at trial, we believe he is a credible witness.   Wilkinson

testified, and we found, that he did not represent to petitioner

or Margulies that petitioner’s tax liability for 1994 would be

discharged, or that petitioner could relitigate the issue of his

1994 tax liability in a proceeding before this Court.

     Also, petitioner did not call Margulies as a witness to

corroborate his contentions as to Wilkinson’s alleged

misrepresentations.   With the exception of the exchange of

introductions between petitioner and Wilkinson before

petitioner’s deposition in the Bankruptcy Court proceeding,

Margulies was present for every conversation between petitioner

and Wilkinson.   Thus, if Wilkinson made the representations of

which petitioner now complains, then Margulies would be able to

confirm petitioner’s allegations.   Given these circumstances,

petitioner’s failure to call Margulies is suspect.

     The absence of Margulies from the trial is even more suspect

in light of petitioner’s representation to the Court that

Margulies and the expert witnesses petitioner called at his

bankruptcy trial could corroborate his assertion that Wilkinson

misled him as to the effects of permitting the Bankruptcy Court
                              - 25 -

to determine his tax liabilities.   From petitioner’s failure to

call Margulies to testify about this critical issue, we infer

that if Margulies had testified, then her testimony would have

been harmful to petitioner.   See O’Dwyer v. Commissioner, 266

F.2d 575, 584 (4th Cir. 1959), affg. 28 T.C. 698, 703 (1957);

Stoumen v. Commissioner, 208 F.2d 903, 907 (3d Cir. 1953), affg.

a Memorandum Opinion of this Court dated March 13, 1953; Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),

affd. 162 F.2d 513 (10th Cir. 1947).

      On the basis of the foregoing, we conclude that there are no

special circumstances present in the instant case which warrant

an exception to the normal rules of res judicata preclusion.

      We hold for respondent on this issue.8

II.   Petitioner’s Tax Filing Status

      Respondent contends that petitioner filed a separate 1994

tax return, not a joint tax return, and relies on the following:

(1) Mary did not sign the tax return that petitioner filed, and

(2) Mary filed a separate tax return for 1994.   Respondent argues

that Mary neither authorized petitioner to sign the 1994 tax

return on her behalf, nor consented to the filing of a joint tax

return for 1994.   Petitioner contends that he is entitled to the



      8
      Accordingly, we do not consider (1) respondent’s
alternative contentions as to collateral estoppel, and (2) the
parties’ contentions as to the proper tax treatment of each
category of petitioner’s income or receipts from NHP.
                                  - 26 -

filing status of married filing jointly because he and Mary had a

continuing tradition of filing joint tax returns from the 1966

tax return through the 1994 tax return.

     We agree with petitioner.

     Spouses may file a joint tax return combining their income,

deductions, and credits.      See subsecs. (a) and (d)(3) of sec.

6013.9   Numerous statutory provisions apply differently to

married taxpayers depending on whether they have filed a joint

tax return.   For purposes of the instant case, the major

difference is in the tax rate schedules of subsections (a) and

(d) of section 1, relating to joint tax returns and separate tax

returns, respectively.      Under these provisions, the joint tax

return tax rate brackets are twice as wide as the separate tax

return brackets.


     9
      Sec. 6013 provides, in pertinent part, as follows:

     SEC. 6013.      JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE.

          (a) Joint Returns.--A husband and wife may make a
     single return jointly of income taxes under subtitle A
     [relating to income taxes], even though one of the spouses
     has neither gross income nor deductions, except as provided
     below:

                 *      *     *     *      *    *     *

           (d)    Special Rules.--For purposes of this section--

                 *      *     *     *      *    *     *

                (3) if a joint return is made, the tax shall be
           computed on the aggregate income and the liability with
           respect to the tax shall be joint and several.
                              - 27 -

     Under section 6061 and section 1.6013-1(a)(2), Income Tax

Regs., a joint tax return must be signed by both spouses unless

one spouse signs as agent of the other.    Notwithstanding the

mandatory language of the regulation, a tax return may be a joint

tax return even though the signature of one spouse is missing, if

both spouses intended that the return be a joint tax return.     See

Estate of Campbell v. Commissioner, 56 T.C. 1, 12-14 (1971);

Federbush v. Commissioner, 34 T.C. 740, 757-758 (1960), affd. 325

F.2d 1, 2 (2d Cir. 1963); Heim v. Commissioner, 27 T.C. 270, 273

(1956), affd. 251 F.2d 44, 46 (8th Cir. 1958).

     The question whether both spouses intended to file a joint

return is one of fact.   See Estate of Campbell v. Commissioner,

56 T.C. at 12; Heim v. Commissioner, 27 T.C. at 273, 251 F.2d at

46; Helfrich v. Commissioner, 25 T.C. 404, 407 (1955).    The

presence or absence of each spouse’s signature on the return is a

factor to be considered in answering this question, but it is not

conclusive.   See Hennen v. Commissioner, 35 T.C. 747, 748 (1961);

Howell v. Commissioner, 10 T.C. 859, 866 (1948), affd. 175 F.2d

240 (6th Cir. 1949).

     The following considerations point toward a conclusion that

Mary intended to file a 1994 joint tax return with petitioner at

the time that tax return was filed:    For decades, petitioner

prepared and filed joint tax returns for himself and Mary, and

this pattern continued until 1997, even though they had separated
                              - 28 -

in mid-1990.   An element of this pattern, specifically affirmed

by Mary in her testimony, was that Mary signed her and

petitioner’s joint tax returns if she was available when the tax

returns were completed, and that petitioner signed the tax

returns for her if she was not available when they were

completed.   This pattern continued and specifically applied to

the 1994 joint tax return, filed on October 16, 1995.10   Mary was

a teacher, at least from 1990 onward.   For 1994, Mary’s Federal

income tax withholding was not enough to satisfy the Federal

income tax liability on her income; yet Mary did not file a

separate 1994 income tax return until 1998, and then only on her

attorney’s advice.   Not only did Mary not file a separate tax

return until years later; Mary cooperated with petitioner’s joint

tax return efforts by providing her Form W-2 to petitioner, and

he both (1) used the information from the Form W-2 in preparing

the joint tax return and (2) attached Mary’s Form W-2 to the



     10
      Our comment in Estate of Campbell v. Commissioner, 56 T.C.
1, 13 (1971), applies almost exactly to the situation in the
instant case:

          Viewed in this context, the absence of her
     signature is hardly of overriding importance. Her
     signature on prior and subsequent returns appears to
     have been little more than a formal ritual as far as
     she was concerned. She left the responsibility for
     preparation and filing of the returns to her husband.
     She intended the returns to be filed as he chose. We
     conclude that Mrs. Campbell intended the 1964 return to
     be filed in the same manner as was each of the others:
     as a joint return.
                                - 29 -

joint tax return.   We conclude that both petitioner and Mary

intended that the tax return filed on October 16, 1995, be their

joint 1994 tax return.

     Respondent states on brief several contrary considerations,

none of which causes us to change our conclusion.

     (1) “Petitioner’s spouse filed a separate return for the

year 1994, using married, filing separately filing status.”

Firstly, respondent does not suggest that Mary’s separate tax

return, filed in 1998, constitutes a valid revocation of a timely

filed joint tax return.     See Ladden v. Commissioner, 38 T.C. 530,

533-534 (1962); sec. 1.6013-1(a)(1), Income Tax Regs.     The

relevance, then, is the light, if any, that Mary’s 1998 filing

shines on Mary’s intentions when the joint tax return was filed,

on October 16, 1995.     We conclude that the circumstances had

changed so drastically in August 1997 that Mary’s later actions

serve primarily to underscore the significance of her essentially

unbroken pattern of assent that continued through October 16,

1995, and even past that date.     Secondly, we give greater weight

to the fact that, until 1998, Mary did not file a separate tax

return even though she had more than $20,000 of Form W-2 income

and had an income tax liability in excess of her withholding.

     (2)   “At the time the 1994 tax return was filed, there were

severe marital problems present in the relationship between

petitioner and his wife.     In fact, petitioner and his spouse were
                                - 30 -

separated and were maintaining separate residences.”    Mary

testified that (1) after she and petitioner had separated,

petitioner continued to pay the bills and file the tax returns as

he had done theretofore, and (2) this pattern did not change

until August 1997.    Thus, on the facts of the instant case, the

separation did not affect the way Mary and petitioner carried out

their obligations to file a tax return for 1994.

     (3)--

          Finally, the Tax Court has stated that “so-called
     tacit consent rule has been applied * * * only in cases
     in which respondent was seeking to impose tax liability
     upon a spouse who had not signed the return, respondent
     having determined that there was consent to a joint
     return despite the missing signature.” Hennen v.
     Commissioner, 35 T.C. 747 (1961).

             The Court concluded:

                  [W]e cannot agree that tacit consent can be
                  applied where respondent has made a contrary
                  determination, as here. Tacit consent is
                  only an explanation of the basis for
                  respondent’s determination that the absence
                  of one signature is not fatal to a joint
                  return, and has no application unless
                  respondent has made such a determination.
                  The tacit consent rule is not separable from
                  the correctness imputed to respondent’s
                  finding of a joint return in cases where one
                  spouse does not sign.

     Id. at 749.

     Firstly, petitioner has not here invoked the “tacit consent

rule”, and so should not be charged with the limitations of that

rule.   Secondly, the normal burden of proof rules--not some

extraordinary burden--apply when a taxpayer contends that the
                              - 31 -

taxpayer’s spouse intended a joint tax return even though the

taxpayer’s spouse did not sign the tax return.   See Lane v.

Commissioner, 26 T.C. 405, 408-409 (1956).11


     11
      Our analysis in Klayman v. Commissioner, T.C. Memo. 1979-
408, applies very well to the instant case, as follows:

          Respondent’s second legal argument is related to
     the first. Respondent contends that the doctrine of
     tacit consent, pursuant to which we have upheld
     determinations that a joint return is valid even if not
     signed by both spouses, applies only in situations in
     which respondent has determined that the return is a
     joint return. Respondent contends that he can rely on
     this doctrine to determine that an unsigned return is a
     joint return, but that taxpayers cannot rely on a
     theory of tacit consent to support their claim that an
     unsigned return is a joint return. In essence,
     respondent argues that a taxpayer cannot prove that one
     spouse tacitly consented to the other spouse’s filing
     of a joint return. In support of this position,
     respondent relies on Hennen v. Commissioner, 35 T.C.
     747 (1961), and Parker v. Commissioner, 37 T.C.M. 144,
     47 P-H Memo. T.C. par. 78,023 (1978).

          Again, respondent’s position is without merit.
     Although Hennen v. Commissioner, supra, does contain
     language to the effect that the presumption of tacit
     consent has been applied only upon a determination by
     respondent, we also stated in Hennen that the tacit
     consent presumption is only an explanation of the basis
     for respondent’s determination. We held in Hennen that
     the taxpayer cannot rely on a presumption of tacit
     consent if respondent determines that no such consent
     existed. Rather, in such situations the taxpayer must
     prove that tacit consent existed. Similarly, in Parker
     v. Commissioner, supra, we held that the presumption of
     tacit consent was inapplicable when respondent
     determined that a return was not joint, but the
     taxpayers were able to prove that one spouse tacitly
     consented to the filing of joint returns by the other.
     Indeed, Parker v. Commissioner supports a conclusion
     directly contradictory to the position respondent has
     adopted here. See also Lane v. Commissioner, 26 T.C.
                                                    (continued...)
                                - 32 -

     We conclude, on the preponderance of the evidence, that the

1994 tax return that petitioner filed on October 16, 1995, was

the joint tax return of petitioner and Mary, and that petitioner

is entitled to be treated for 1994 as married filing jointly.

     Our attention has been drawn to statements in Olpin v.

Commissioner, 237 F.3d 1263, 1267 (10th Cir. 2001), revg. T.C.

Memo. 1999-426, which, if applied to the instant case, would

appear to result in a conclusion that Mary’s intentions as to the

tax return may be irrelevant.    Both sides in the instant case

appear to have accepted that petitioner intended to file a joint

tax return but that the tax return would not be treated as joint

unless Mary also intended it to be joint.    Our analysis also has

been focused on what the record shows as to Mary’s intent.    We

conclude that the result we have reached on the analysis we used

--that petitioner’s 1994 tax filing status was married filing

jointly--is not different from the result that would be reached

under the approach of the Court of Appeals for the Tenth Circuit


     11
      (...continued)
     405 (1956) (taxpayer proved that an unsigned return was
     a joint return).6 In this case, respondent does not
     have the benefit of the presumption of correctness.
     Compare Hennen v. Commissioner, supra. However, in
     reaching our conclusion that petitioners filed joint
     returns, we have not relied on a presumption of tacit
     consent; petitioners proved that they intended to file
     joint returns.
     6
        Respondent’s position here contradicts his previous
     acquiescence in our decision in Lane v. Commissioner, supra.
     See 1956-2 C.B. 7.
                               - 33 -

in Olpin.    Accordingly, we have no occasion in the instant case

to consider whether we should follow the approach set forth in

the penultimate paragraph of the opinion of the Court of Appeals

for the Tenth Circuit in Olpin.

     We hold, for petitioner, that petitioner’s 1994 tax filing

status was married filing jointly.

     To take account of respondent’s concession and the

foregoing,



                                          Decision will be entered

                                     under Rule 155.
