                        T.C. Memo. 2002-285



                      UNITED STATES TAX COURT



                 JEANNE M. TRENT, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7408-01.                Filed November 20, 2002.



     Richard P. Eisen, for petitioner.

     Gary S. Stirbis, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION

     COHEN, Judge:   This proceeding was commenced under section

6015 for review of respondent’s determination that petitioner is

not entitled to relief from joint and several liability for 1994

with respect to a joint return filed with Steven Trent

(S. Trent).   The issues for decision are whether petitioner is

barred from relief on the basis of res judicata under section
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6015(g)(2) and whether application of petitioner’s overpayments,

including earned income credits, for subsequent years violates

section 6015(e)(1)(B).   In his reply brief, respondent states:

“If the Court finds that petitioner is not barred from raising

I.R.C. sec. 6015 by the doctrine of res judicata, then respondent

concedes that petitioner is entitled to relief from joint and

several liability under I.R.C. sec. 6015(f).”   Unless otherwise

indicated, all section references are to the Internal Revenue

Code in effect for the year in issue.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner resided in Los Lunas, New Mexico, at the time she

filed the petition in this case.    From May 1981 to November 1996,

petitioner was married to S. Trent.    Petitioner and S. Trent had

2 minor children during the year in issue.   Petitioner had access

to the couple’s joint checking account and paid bills from the

account.

     S. Trent was the sole proprietor of a motorcycle repair

shop, Paradise Cycles (Paradise).   In 1993, petitioner began

working for Paradise as an office manager.   Petitioner answered

the telephone, picked up motorcycle parts, prepared a general

ledger, reviewed receipts and expenditures, and paid bills.     The

general ledger contained records of checks, expenses, and income.
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Expenses were separated into columns for rent, utilities, and

suppliers.   Personal expenses were logged by petitioner in the

ledger as a draw.   In 1994, Paradise hired a bookkeeper, Mary A.

Hogland, to prepare financial statements and to prepare the joint

Federal return of petitioner and S. Trent.

     Petitioner and S. Trent timely filed a joint Federal income

tax return for 1994, claiming a refund of $896.   During 1994,

Paradise was the sole source of income for petitioner’s family.

Paradise’s income and expenses were reported on Schedule C,

Profit or Loss From Business, to petitioner’s and S. Trent’s Form

1040.

     In 1995, petitioner and S. Trent experienced marital

difficulties.   In response to incidents on November 23 and

November 25, 1995, petitioner filed a petition to order S. Trent

to appear for a hearing on domestic abuse with the Second

Judicial District Court for Bernalillo County in New Mexico.

Petitioner also filed a Petition for Order Prohibiting Domestic

Violence on November 27, 1995.    On November 13, 1996, a divorce

decree was entered by the court.    In the divorce decree, S. Trent

received control of Paradise and retained all of the business-

related material and assets.   Pursuant to the divorce decree,

S. Trent assumed all business liabilities including any future

taxes or debts associated with Paradise.
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     Respondent subsequently commenced an audit of petitioner’s

and S. Trent’s 1994 Federal income tax return.    On August 22,

1997, respondent sent to petitioner and to S. Trent a notice of

deficiency for 1994 determining a deficiency in the amount of

$23,046.   Respondent disallowed Paradise’s deductions for

advertising, labor, and other expenses.   Respondent also

disallowed the offset for cost of goods sold.    Petitioner timely

filed a petition for redetermination of the deficiency with the

Court.

     Before July 13, 1998, petitioner met with Appeals Officer

Wayne McClellan (McClellan) in an effort to settle the dispute.

Prior to petitioner’s meeting with McClellan, a clerk in the

Appeals Office suggested that petitioner might ask about

“innocent spouse”.   At the end of her meeting with McClellan,

petitioner asked whether “innocent spouse” was something for

which she would qualify.   McClellan informed her that she was

following the correct steps and the correct procedures and that

then was not the time to raise an innocent spouse defense.

     Petitioner was unable to produce original documentation to

substantiate all of the deductions disallowed in the notice of

deficiency.   Petitioner subsequently retrieved microfiche copies

of bank statements from the bank.   Petitioner also retrieved

copies of receipts from Paradise’s suppliers.    Respondent

accepted petitioner’s substantiation for advertising and rent
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expenses.    Respondent additionally allowed $400 of the $4,032 for

labor expenses, but disallowed the remaining expenses because

there was no record that Forms 1099, Miscellaneous Income, were

issued.   Respondent further allowed $1,200 of the $4,441 claimed

for small tools expense.   Petitioner then stipulated to a

deficiency of $4,478 plus interest.     A decision was entered by

the Court on December 17, 1998.

     On April 19, 1999, respondent sent to petitioner a notice of

intent to levy.   On May 3, 1999, petitioner timely filed Form

8857, Request for Innocent Spouse Relief, requesting section 6015

relief from joint and several liability for the year in issue.

On March 15, 2001, respondent sent to petitioner a notice of

determination denying section 6015 relief.     The determination was

based on the conclusion that petitioner had knowledge of the

business and its activities that precluded relief.     In an

amendment to the answer filed April 22, 2002, in this case,

respondent raised the defense of res judicata.

     On March 10, 2000, respondent applied an overpayment of

$2,323 from petitioner’s 1999 Federal income tax return towards

the 1994 liability.   Following the March 15, 2001, determination,

respondent applied an overpayment of $2,367 from petitioner’s

2000 Federal income tax return towards the remaining 1994

liability.   On April 15, 2002, respondent notified petitioner

that her 2001 refund of $1,895 was delayed until respondent
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determined whether petitioner had any additional Federal taxes

due.    The three overpayments that respondent withheld to offset

petitioner’s liability included earned income credits for 1999,

2000, and 2001.

                                OPINION

       Generally, married taxpayers may elect to file a joint

Federal income tax return.    Sec. 6013(a).   After making the

election, each spouse is jointly and severally liable for the

entire tax due for that taxable year.     Sec. 6013(d)(3).   A spouse

(requesting spouse) may, however, seek relief from joint and

several liability by following procedures established in section

6015.    Sec. 6015(a).   Section 6015 replaced prior section 6013(e)

and was intended to expand relief available to joint filers.     See

Internal Revenue Service Restructuring and Reform Act of 1998

(RRA 1998), Pub. L. 105-206, sec. 3201, 112 Stat. 685, 734.      The

RRA 1998 gave section 6015 retroactive effect in that it was made

applicable to any liability for tax arising after July 22, 1998,

and to any liability for tax arising on or before such date that

remained unpaid as of July 22, 1998.      RRA 1998 sec. 3201(g)(1),

112 Stat. 740; Vetrano v. Commissioner, 116 T.C. 272, 277 (2001).

A requesting spouse may request relief from liability under

section 6015(b) or, if eligible, may allocate liability according

to provisions in section 6015(c).    Sec. 6015(a).   In addition, if
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relief is not available under section 6015(b) or (c), an

individual may seek equitable relief under section 6015(f).

Res Judicata Under Section 6015(g)(2)

     The judicial doctrine of res judicata provides that, when a

court of competent jurisdiction enters a final judgment in a

cause of action, the parties are bound “not only as to every

matter which was offered and received * * * but as to any other

admissible matter which might have been offered for that

purpose.”    Commissioner v. Sunnen, 333 U.S. 591, 597 (1948).

Because Federal income taxes are determined on an annual basis,

each year is a separate cause of action, and res judicata is

applied to bar subsequent proceedings involving the same tax

year.   See id. at 597-598; Calcutt v. Commissioner, 91 T.C. 14,

21 (1988).   The doctrine applies to judgments even where the

Court’s final decision was based on an agreement between the

parties.    See United States v. Bryant, 15 F.3d 756, 758 (8th Cir.

1994) (citing United States v. Intl. Bldg. Co., 345 U.S. 502, 505

(1953)).

     Respondent argues that petitioner is barred from raising the

issue of section 6015 relief based on her prior participation in

a Tax Court proceeding regarding the 1994 liability.   Section

6015(g)(2) provides that, in the case of an election under

section 6015(b) or (c) for any taxable year that is the subject

of a final court decision, such decision shall be conclusive
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unless the individual’s qualification for relief was not an issue

in the prior court proceeding and the individual did not

participate meaningfully in the prior proceeding.   In Vetrano v.

Commissioner, supra at 278, the Court stated:

     an individual who participated meaningfully in a court
     proceeding is precluded from electing relief under
     section 6015(b) or (c) for the same taxable year after
     the decision of the court becomes final, whether or not
     the individual’s qualification for relief under section
     6015(b) or (c) was an issue in the prior proceeding.

     Petitioner filed a petition for redetermination of the 1994

liability with the Court.   She then met with the Appeals officer

to discuss her case.   She personally participated in the meetings

with the Appeals officer, and she conceded at trial that she

signed the decision document freely and voluntarily.

     Petitioner testified that she raised the issue of relief

from joint and several liability with the Appeals officer and

that the Appeals officer declined to consider the issue at that

time.   Relying on statements by the Appeals officer, petitioner

argues that section 6015 relief was not an issue in the first

proceeding.   She argues that her level of involvement in the

prior case was not “meaningful” for purposes of section

6015(g)(2) because she was not represented by counsel, was not

involved in discussions of law or procedure, and was not

knowledgeable about law or procedure.

     The quality of advocacy and the actual knowledge of the

litigants are not special circumstances in determining whether a
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prior judgment is a bar in subsequent litigation.   See Jones v.

United States, 466 F.2d 131, 136 (10th Cir. 1972); Cory v.

Commissioner, 159 F.2d 391, 392 (3d Cir. 1947), affg. a

Memorandum Opinion of this Court dated Mar. 10, 1945; Dean v.

Commissioner, 56 T.C. 895, 899-900 (1971); Milberg v.

Commissioner, 54 T.C. 1562 (1970); Fairmont Aluminum Co. v.

Commissioner, 22 T.C. 1377 (1954), affd. 222 F.2d 622 (4th Cir.

1955).   Petitioner’s criteria would be impractical to apply in

the context of a doctrine intended to minimize multiplicity of

proceedings.   See Jones v. United States, supra at 136; Dean v.

Commissioner, supra at 902.   The related but broader doctrine of

collateral estoppel has been applied to decisions where the

taxpayer has appeared pro se in the prior proceeding.   See

Calcutt v. Commissioner, supra at 25.

     Under the narrow circumstances of this case, however, we

conclude that the general rule of res judicata should not apply.

Petitioner’s meeting with the Appeals officer handling her 1994

deficiency case occurred about the time that section 6015 was

being finalized by Congress and at least 10 days before its

effective date.   Although the decision was entered pursuant to

the negotiated settlement months later, it appears that both the

Appeals officer and petitioner were ignorant as to the effect of

the new law.   Res judicata was not discussed in the notice of

determination denying relief to petitioner or in the memorandum
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accompanying the recommendation to deny relief.   Res judicata was

not raised in the original answer filed in this case on

August 13, 2001--more than 3 years after the effective date of

section 6015.   For the first time, in a Motion for Leave to File

Amendment to Answer, filed April 9, 2002, respondent stated:

          Upon preparation for trial, respondent’s counsel
     discovered that the petitioner materially participated
     in a prior proceeding for the 1994 tax year before the
     U.S. Tax Court, whereby a Decision document was signed
     by petitioner on December 1, 1998, the respondent on
     December 16, 1998, and entered by the Court on
     December 17, 1998.

McClellan was not available to testify at trial, and we do not

know his rationale for declining to consider petitioner’s request

for relief from joint liability.   We assume, however, that he was

aware that proposed legislation would give taxpayers an

opportunity to raise that claim in a later action but, like

petitioner, was unaware of the res judicata effect of closing a

deficiency case under the circumstances then existing.

     Section 1.6015-1(e), Income Tax Regs., 67 Fed. Reg. 46286

(daily ed. July 18, 2002), effective with respect to requests for

relief filed on or after July 18, 2002, provides:

          (e) Res judicata and collateral estoppel. A
     requesting spouse is barred from relief from joint and
     several liability under section 6015 by res judicata
     for any tax year for which a court of competent
     jurisdiction has rendered a final decision on the
     requesting spouse’s tax liability if relief under
     section 6015 was at issue in the prior proceeding, or
     if the requesting spouse meaningfully participated in
     that proceeding and could have raised relief under
     section 6015. A requesting spouse has not meaningfully
                              - 11 -

     participated in a prior proceeding if, due to the
     effective date of section 6015, relief under section
     6015 was not available in that proceeding. Also, any
     final decisions rendered by a court of competent
     jurisdiction regarding issues relevant to section 6015
     are conclusive and the requesting spouse may be
     collaterally estopped from relitigating those issues.

Although not by its terms applicable to petitioner’s request for

relief, the regulation sets forth a rule that appropriately

should apply in this case.   In view of the uncertainty of the law

at the time of the meeting between petitioner and McClellan, this

case presents the type of special circumstances that may overcome

the bar of res judicata.   See generally Montana v. United States,

440 U.S. 147, 153-155 (1979); Commissioner v. Sunnen, 333 U.S.

591 (1948); Worcester v. Commissioner, 370 F.2d 713 (1st Cir.

1966), affg. in part, vacating in part, and remanding T.C. Memo.

1965-199.   Because petitioner was precluded by an apparent

misunderstanding on her part and on the part of the Appeals

officer from raising her claim to relief from joint liability in

the prior proceeding, we hold that she is not barred by section

6015(g) from equitable relief under section 6015(f).   In view of

respondent’s concession that she is entitled to such relief if we

so hold, we need not address her entitlement to relief under

section 6015(b) or (c).

Restrictions on Collection Activity Under Section 6015(e)(1)(B)

     Petitioner argues that the Commissioner incorrectly “levied”

petitioner’s refunds and credits for tax years 1999, 2000, and
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2001 after petitioner applied for relief from joint and several

liability.   Section 6015(e)(1)(B) states that respondent may not

levy on a requesting spouse’s property until the close of the

90-day period after respondent makes a final determination

respecting that spouse’s election for relief from joint and

several liability under section 6015(b) or (c), and, if a

petition is filed with the Tax Court during that period, the

restriction upon such a levy continues until the Court’s decision

becomes final.

     A levy must be distinguished from an offset of an

overpayment or refundable credit, such as the earned income

credit of section 32.   See, e.g., Belloff v. Commissioner, 996

F.2d 607, 615-616 (2d Cir. 1993) (comparing discussion of “levy”

in United States v. Natl. Bank of Commerce, 472 U.S. 713, 720

(1985), with “setoff” in United States v. Munsey Trust Co., 332

U.S. 234, 239 (1947)), affg. T.C. Memo. 1991-350.   Section

6402(a) grants the Commissioner the ability to credit an

overpayment to offset any taxpayer liability.   An overpayment

includes the amount of a refundable credit that exceeds any tax

owed.   See sec. 6401(b)(1); Savage v. Commissioner, 112 T.C. 46,

48 (1999).   The Commissioner properly may engage in nonlevy

collection actions, such as offsetting overpayments from other

tax years after the requesting spouse files for relief.    See,

e.g., Fulgoni v. United States, 23 Cl. Ct. 119, 126 (1991) (to
                              - 13 -

call an offset a “taking tantamount to a levy is disingenuous”);

cf. sec. 301.6330-1(g)(2) Q&A-G3, Proced. & Admin. Regs.

Respondent properly offset petitioner’s 1994 tax liability by

crediting refunds from other years in accordance with section

6402.   We hold that respondent did not engage in collection

activity in violation of section 6015(e)(1)(B).

     To take account of respondent’s concession,

                                              An appropriate order

                                         will be issued.
