Donald A. Peck Judith W. Peck v. Commissioner of Internal Revenue

904 F.2d 525 66 A.F.T.R.2d 90 -5037, 90-1 USTC P 50,311 Donald A. PECK; Judith W. Peck, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. No. 88-7484. United States Court of Appeals, Ninth Circuit. Argued and Submitted Dec. 14, 1989. Decided June 5, 1990. Harry J. Kaplan, San Jose, Cal., for petitioners. James I.K. Knapp, Acting Asst. Atty. Gen., Gary R. Allen, David English Carmack, Kenneth W. Rosenberg, Tax Division, Dept. of Justice, Washington, D.C., for respondent. Appeal from a Decision of the United States Tax Court. Before WRIGHT, HUG, and LEAVY, Circuit Judges. EUGENE A. WRIGHT, Circuit Judge: 1 This case requires us to apply collateral estoppel principles in the tax context. The taxpayers, Donald and Judith Peck, entered into a 30-year lease of real property in 1974 from their controlled corporation. The lease terms did not change for the first five years. In a prior action, the Tax Court found that the Pecks' rent deductions under the lease for 1974, 1975 and 1976 must be reduced by the full amount of gardening expenses and 25% of the property taxes and mortgage payments under 26 U.S.C. Sec. 482 . 1 This court affirmed that decision, with one judge…

This case requires us to apply collateral estoppel principles in the tax context. The taxpayers, Donald and Judith Peck, entered into a 30-year lease of real property in 1974 from their controlled corporation. The lease terms did not change for the first five years. In a prior action, the Tax Court found that the Pecks’ rent deductions under the lease for 1974, 1975 and 1976 must be reduced by the full amount of gardening expenses and 25% of the property taxes and mortgage payments under 26 U.S.C. § 482 . 1 This court affirmed that decision, with one judge dissenting in part. Peck v. Commissioner, 752 F.2d 469 (9th Cir.1985) (per curiam) (Peck I).

In this action, the IRS assessed deficiencies against the Pecks for 1977 and 1978 based on their rental deductions in connection with the same lease. The Tax Court applied collateral estoppel, and held that because the terms of the lease for these two years were the same as those for the first three years, the parties were bound by the courts’ determination in Peck I in computing the amount of rent deductions. Peck v. Commissioner, 90 T.C. 162, 168 (1988).

*527 ANALYSIS 2 I

The doctrine of collateral estoppel (issue preclusion) is…

dissenting:

In Peck I, the tax court held that the transfer served a legitimate business purpose, and it concluded that the Commissioner could not “disallow” the deduction because section 482 authorized him only to “distribute, apportion, or allocate” certain items. Peck v. Commissioner, 43 T.C.M. (CCH) 291, 295 (1982).

The court went on to hold in favor of the Commissioner on the contention that the rent deduction should be reduced by the amount of those additional payments for expenses directly attributable to the land transferred to the corporation (as distinguished from payments attributable to the improvements retained by the taxpayers). Id. The holding in footnote 8 of Peck I is as follows:

Id. at 296 .

I dissent from the majority holding that the formula in footnote 8 binds the taxpay *531 ers for the years 1977 and 1978. I agree with the majority’s holding that the taxpayers are barred by collateral estoppel from the contention that the lease as written is reasonable. However, once that is decided, the Commissioner is required to exercise his discretion under section 482. The taxpayers should be allowed to contest the exercise of that discretion rather than be bound by…