In United States of America v. Allen R. Davison, the U.S. District Court for the District of Kansas (Case No. 24-CV-02144, February 27, 2025) addressed the government’s action to reduce civil tax penalties to judgment against Allen R. Davison, a former CPA and attorney, related to his involvement with Cash Management Systems, Inc. (CMS) and its "tool plan" tax shelters. The court granted the government’s motion for summary judgment, preventing Davison from relitigating the penalties.

Facts of the Case:

Background The IRS assessed civil tax penalties against Davison in June 2014 for 2009 and 2010, totaling $36,000, under 26 U.S.C. § 6700, due to his role in marketing abusive tax shelters through CMS. These "tool plan" tax strategies were designed to allow employers and employees to claim substantial tax savings by dividing an employee’s pay into taxable labor and nontaxable portions for tool reimbursement. The IRS determined that CMS paid Davison $3,000 per month, totaling $36,000 for each tax year, and imposed penalties of 50% of that amount for each year.
Prior Tax Court Litigation Davison previously challenged the IRS’s assessment in Tax Court, which upheld the penalties in a 2020 decision. A typographical error in the Tax Court’s decision initially referred to penalties under § 6707 instead of § 6700, but this was later corrected.
Appellate Proceedings Davison’s appeal to the Tenth Circuit was dismissed for lack of appellate jurisdiction, with the appellate court only referencing § 6700.
District Court Action The government filed the present action in April 2024 to reduce the assessed § 6700 penalties to judgment.

Taxpayer’s Arguments:

Davison argued that the IRS should not have assessed the § 6700 penalties against him and that the penalties were incorrectly calculated.
He raised several affirmative defenses, including selective prosecution and the statute of limitations.
Davison also argued that the Tax Court’s decision should not be given preclusive effect due to the typographical error and subsequent amendment, asserting that Tax Court decisions are not subject to later amendment or change.
He claimed he was selectively prosecuted because Grant Thornton, where he worked, was not penalized.
Davison contended that the statute of limitations barred the government’s collection efforts.
He requested the court to include tax year 2008 in the action.

District Court’s Analysis:

Summary Judgment Standard The court outlined the standard for summary judgment, noting that it is appropriate when there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. It emphasized that the nonmoving party must set forth specific facts showing a genuine issue for trial.
Failure to Respond The court noted Davison’s failure to respond to the government’s summary judgment motion, which allowed the court to deem the government’s facts undisputed.
Res Judicata (Issue Preclusion) The court agreed with the government that res judicata barred Davison from relitigating the merits of the § 6700 penalties. It found that the elements of issue preclusion were satisfied:
- Identical Issues The issues in the present case were identical to those previously decided by the Tax Court.
- Adjudication on the Merits The Tax Court had adjudicated the penalties on the merits.
- Privity of the Parties Davison was a party to the prior Tax Court action.
- Full and Fair Opportunity to Litigate Davison had a full and fair opportunity to litigate the merits of the penalties in Tax Court. The court rejected Davison’s arguments that he was forced into Tax Court and that the lack of a jury trial prevented him from fully and fairly litigating his claim.
Typographical Error The court rejected Davison’s argument that the Tax Court’s amended decision invalidated the judgment, finding that the correction of the typographical error did not prejudice Davison. The court found that the Tax Court used its discretion to correct the mistake pursuant to Tax Court Rule 1(b), giving weight to Federal Rule of Civil Procedure 60(a).
Selective Prosecution The court dismissed Davison’s selective prosecution defense because he failed to demonstrate any disputed material fact. The government provided evidence that others were penalized for their involvement with CMS’s tool plans.
Statute of Limitations The court found that the government’s action was not barred by the statute of limitations because it was initiated within ten years of the penalty assessment, and a timely action extends the statute of limitations on collection.
Tax Year 2008 The court refused to reconsider including tax year 2008, reiterating its previous reasoning for denying Davison’s request.

Court’s Findings:

The court denied Davison’s motion for summary judgment and granted the government’s motion for summary judgment.
It concluded that res judicata barred Davison from relitigating the § 6700 penalties.
The court did not need to address Davison’s arguments on the merits of these issues because they had been fully litigated and decided in the prior Tax Court action.

Taxpayer’s Claim He Was “Forced” to Go to Tax Court

In this case, the District Court addressed Davison’s argument that he had been "forced" into Tax Court, ultimately rejecting it as a basis to avoid the application of res judicata. The court found that Davison had a full and fair opportunity to litigate the penalties in Tax Court.

District Court’s Analysis of the "Forced into Tax Court" Argument:

Davison’s Contention Davison argued that because taxpayers can seek Tax Court review without prepaying the penalty, unlike district courts, they "in effect may be forced into Tax Court which may not be their best judicial remedy". He also highlighted the absence of a right to a jury trial in Tax Court.
Court’s Rejection The court rejected Davison’s argument, noting that he did not assert that he was actually forced into Tax Court or that the Tax Court failed to provide him a full and fair opportunity to litigate his claim.
Lack of Explanation The court further noted that Davison failed to explain how the absence of a jury trial prevented him from fully and fairly litigating his claim on the merits in Tax Court. As the Davison court explained, "Nor does he explain how the lack of a right to a jury trial prevented him from fully and fairly litigating his claim on the merits in Tax Court".
Incentive to Litigate The court observed that Davison’s incentive to fully litigate the merits of the § 6700 penalties remained consistent. As the Davison court put it, "Defendant wanted to avoid paying the penalties then and still wants to avoid paying them now".
Full and Fair Opportunity Because Davison wanted to avoid paying the penalties both in the prior action and the present case, the court determined he had a full and fair opportunity to litigate the merits of the § 6700 penalties.

In its legal analysis, the District Court in Davison determined that the Tax Court decisions are given res judicata effect. The court also cited United States v. Annis, 634 F.2d 1270, 1272 (10th Cir. 1980) which states, “Annis is barred by the doctrine of res judicata from relitigating his liability for taxes, the issue having been previously decided against him by the Tax Court”.

In sum, the court concluded that Davison had a full and fair opportunity to litigate the merits of the penalties in the prior Tax Court action, and his arguments about being "forced" into that venue did not negate the preclusive effect of that judgment.

Prepared with assistance from NotebookLM.