The Sixth Circuit Court of Appeals overturned a District Court ruling in favor of the taxpayer in the case of Audio Technica U.S., Inc. v. United States, Case No. 19-3469.[1] The District Court had ruled that the IRS had conceded a specific-fixed rate percentage in prior years Tax Court settlements, which prevented the IRS from challenging that same percentage in the current year’s dispute. But the Sixth Circuit did not agree that the prior agreements prevented the IRS from raising that issue.

The Sixth Circuit summarized the prior years as follows:

In addition to the 2006-2010 tax years at issue here, Audio Technica also claimed the credit for the 2002-2005 tax years, as well as the 2011 tax year. The IRS disagreed and issued Audio Technica a notice of deficiency, essentially saying that it was not entitled to the credit amounts it claimed, and so Audio Technica filed a petition for review with the United States Tax Court.

Rather than litigate the Tax Court proceedings through trial, Audio Technica and the government reached agreements to settle those cases, which were approved by the Tax Court. These settlements did not address the details of the parties’ dispute; rather, they (1) listed the dollar amounts of the agreed-upon deficiencies by tax year, in the case of the 2002-2005 dispute, or (2) stated the total dollar amount of Audio Technica’s research credit, in the case of the 2011 dispute. But according to Audio Technica, these amounts were determined by the parties through their “specific agreement” as to Audio Technica’s fixed-base percentage, namely.92%.

For the year before the Circuit Court panel, the taxpayer decided, rather than again take the dispute to the Tax Court, to pay the tax and sue for a refund in the U.S. District Court. One of the issues that IRS had raised was to question the fixed based percentage that Audio Technica had used which was that same .92 amount.

Audio Technica objected to the IRS raising that issue, and the trial judge agreed:

As the case was about to proceed to trial, Audio Technica filed a motion in limine arguing that the government was judicially estopped from claiming that the.92% fixed-base percentage did not apply in this case. Specifically, Audio Technica said that the IRS had “twice previously agreed to stipulated settlements recognizing that [Audio Technica’s] fixed base percentage of.92% for the 1984 to 1988 base period was correct.” (Mem. in Support of Mot. in Limine, R. 80-1 at PageID #1127.) Because of this, Audio Technica said, “the doctrines of judicial estoppel and general principles of equity and fairness” required that the government “be estopped from introducing any evidence or asserting a position different than it agreed to with regard to the Fixed Base Percentage in the instant matter.” (Id.) With respect to the requested remedy, the motion asked for an order prohibiting any argument or reference to the jury “that the 80’s base calculation or fixed base percentage should be any alternative amount other than the amounts claimed by Plaintiff or [that] were accepted in the prior 2010 litigation between Plaintiff and Defendant.” (Mot. in Limine, R. 80 at PageID #1122-23.)

The district court granted this motion, holding that because the government “agreed to settlements with results derived through a stipulated, fixed base percentage of.92%,” and because these settlements were “accepted and signed by the Tax Court,” the government was barred from arguing that another percentage might apply in this case. (Order Granting Mot. in Limine, R. 114 at PageID #1345-46.) And while the government had argued that the.92% figure “was a compromise position” reached through negotiation, the court found that it had “consistently allowed this same basis of.92% to be used to resolve similar tax issues in dispute here,” meaning that judicial estoppel applied. (Id. at #1346.)

The Circuit Court opinion notes that the doctrine of judicial estoppel, which the District Court had used as a justification of its decision, prevents a party to litigation from taking a position opposite of one the party had put forward in earlier litigation and which that court had agreed with. But the panel did not agree that was what had happened here.

In this case, the IRS had simply entered into a settlement agreement that both parties agreed to (so presumably was a compromise position), which is different from having a court rule on an issue the IRS had advanced in that case:

Judicial estoppel cannot apply in this case because the Tax Court litigation was resolved through a settlement, meaning there was no judicial acceptance of the government’s position. “Settlements, even in the form of an agreed order, ordinarily do not constitute judicial acceptance of whatever terms they contain.” Teledyne, 911 F.2d at 1219. This is because judicial estoppel turns on the estopped party’s having successfully convinced the earlier court that it was right. But “[i]f the initial proceeding results in settlement, the position cannot be viewed as having been successfully asserted.” Edwards, 690 F.2d at 599; see also City of Kingsport v. Steel Roof Structure, Inc., 500 F.2d 617, 620 (6th Cir. 1974) (“[B]ecause of the settlement of plaintiffs’ case, the defense of the bar of the statute of limitations was never decided, and therefore no estoppel can possibly exist.”).

As well, the specific fixed rate percentage was not listed in the settlement documents in question—so the Tax Court clearly didn’t make any sort of decision on that number being appropriate:

Furthermore, even if the settlements could have allowed for judicial estoppel, the Tax Court never relied upon or adopted the agreed-upon fixed-base percentage when it approved the settlements in this case. Neither of the stipulated decisions filed with the court includes the .92% fixed-base percentage or any other reference to the proper calculation of the tax credit. Rather, those agreements listed only total dollar amounts, either that Audio Technica owed the IRS in deficiencies or that the IRS owed Audio Technica in credits.

Even if the parties, working behind the scenes, came up with these settlement figures by using the.92% rate, the Tax Court was none the wiser. Accordingly, the Tax Court could not have accepted the.92% fixed-base percentage as part of those proceedings, and so the government cannot be judicially estopped from arguing that Audio Technica failed to show this percentage is correct.

[1] Audio Technica U.S., Inc. v. United States, Case No. 19-3469, CA6, June 26, 2020, https://www.opn.ca6.uscourts.gov/opinions.pdf/20a0193p-06.pdf (retrieved June 27, 2020)