In some federal tax disputes, if at first you don’t succeed you may not get to try again. A recent Fifth Circuit decision confirms issue preclusion when the parties and the issue are truly the same. See ETC Sunoco Holdings, LLC v. United States, No. 21-10937 (5th Cir. June 8, 2022). Sunoco sought a refund in the Court of Federal Claims for tax years 2005 through 2008, arguing that they should be permitted a deduction of their costs of goods sold as an excise tax expense even though it did not technically reduce the company’s excise-tax liability. The Court of Federal Claims disagreed. See Sunoco, Inc. v. United States, 908 F.3d 710, 715 (Fed. Cir. 2018). Sunoco then sued again, five years later, for alleged overpayments from tax years 2010 and 2011 but filed suit in the Northern District of Texas instead. Jurisdiction in tax disputes can often be brought in the Federal District Court with local jurisdiction or the Court of Federal Claims that has national jurisdiction. Therefore, jurisdictionally, this was proper.  However, District Courts can choose not to hear the case if they conclude that the doctrine of issue preclusion applies.

Three Elements of Issue Preclusion

Issue preclusion is traditionally satisfied if three elements are present.

  1. Another court (e.g. The Court of Federal Claims) decided the same issue.
  2. The party (i.e. Sunoco) had a full and fair opportunity to litigate the issue and did so.
  3. The determination of the issue was necessary to the court’s ultimate judgment.

Fourth Factor?

Sunoco didn’t dispute that all three elements applied and, instead, relied on precedent indicating that a fourth factor is sometimes applied when there are “special circumstances that would render preclusion inappropriate or unfair.” See Gandy Nursery, Inc. v. United States, 318 F.3d 631, 639 (5th Cir. 2003). This fourth factor is usually applied when there is an intervening change in the law or other change in legal principles that might make the prior ruling erroneous or obsolete. Sunoco claimed that other oil and gas companies are appealing the same issue in other circuits and that a favorable decision in those appeals could render the Court of Federal Claims decision obsolete. The Fifth Circuit disagreed stating that they were relying on something that hasn’t yet and may never occur. Further, the Fifth Circuit said that the finality of an issue for preclusion purposes is “strongest when the same parties would be forced to relitigate”. Here the parties would be exactly the same (i.e. Sunoco and the United States.)  In such cases, the Fifth Circuit indicated that “preclusion applies without regard for equitable factors.”

Tax Dispute Strategies

Tax disputes are somewhat unique in that they are always against the United States or the Internal Revenue Service. Therefore, the U.S. government will always be involved in any subsequent trial of the same tax issue. Perhaps one of the other cases with different oil companies will produce a different result, but the result would be the same for Sunoco unless they seek and win a challenge to the Fifth Circuit decision at the U.S. Supreme Court.

Taxpayers with issues spanning multiple years should consult with their tax attorney on which tax year presents the “best” facts and legal arguments. If bringing a suit on later tax years is more likely to be successful, perhaps it can and should be brought first. Of course, statutes of limitations on when tax claims can be brought must be considered and might preclude waiting to bring suit on later years. However, there are many mechanisms available to speed up the usual processing time for refund claims and hold earlier claims until the last available day for filing. Therefore, recognizing that a taxpayer will most likely only get one shot, it is worth considering all procedural options with their tax lawyer so that they can prepare and bring the best case first.