Federal Tax Day - Current, J.3, IRS Properly Denied Refund to Individuals Based on Issue Preclusion (Palaniappan, CA-9), (Jan 8, 2026)

Two individuals were not entitled to a tax refund for the tax year at issue after the District Court found and the Court of Appeals affirmed the grant of judgment on the pleadings in favor of the Government. The issue stemmed from a lump sum distribution made under a deferred compensation arrangement under Code Sec. 409A in the tax year at issue. The individuals had previously raised the same arguments during a bankruptcy proceeding, where it was determined that one of them had participated in the Code Sec. 409A plan and that the distribution was subject to income tax withholding.

Applying federal issue preclusion standards, the Court of Appeals held that the relevant factual and legal issues were actually litigated and necessarily decided in the earlier proceeding. Therefore, the individuals could not re-litigate them in the refund suit. Because all elements of issue preclusion were met, the District Court's dismissal was proper. The Court of Appeals also declined to consider arguments not raised in the opening brief or presented for the first time on appeal.

Unpublished opinion, affirming a DC Ariz. decision, 2024-1 USTC ¶50,135.

N. Palaniappan, CA-9