Sunday, October 9, 2011

Older Stonehill cases

Harry S. Stonehill, TC Memo 1984-331.


Case Information: Code Sec(s):

Docket: Docket No. 1574-65.

Date Issued: 06/28/1984

Judge: Opinion by FEATHERSTON,J.

Tax Year(s): Years 1958, 1959, 1960, 1961.

Disposition: Decision for Commissioner.

Cites: TC Memo 1984-331, PH TCM P 84331, 48 CCH TCM 394.


1. JUDICIAL PROCEEDINGS—Res judicata—scope of res judicata. Deficiency, fraud penalty, and interest imposed by judgment on pleadings. Shaheen, 62 TC 359 (No. 43), followed. District Court jeopardy assessment foreclosure proceeding (Stonehill, 38 AFTR2d 76-5699, affd., 51 AFTR2d 83-1152, cert. den., 465 US __) was res judicata. Foreclosure proceeding involved same parties (or their privies), same issues, and same years.

Reference(s): 1984 P-H Fed. ¶38,872.


Official Report


Hans A. Nathan, for the petitioner.[pg. 84-1284]

Evelyn Small, for the respondent.




This case was assigned to Special Trial Judge Peter J. Panuthos for the purpose of considering and ruling on respondent's Motion for Judgment on the Pleadings pursuant to Delegation Order No. 8 of this Court, 81 T.C. XXV (1983). The Court agrees with and adopts his opinion which is set forth below.



PANUTHOS, Special Trial Judge:

This case is before the Court on respondent's Motion for Judgment on the Pleadings, filed April 30, 1984, pursuant to Rule 120, 1 on the ground that the United States District Court, Central District of California, entered a judgment which is res judicata with respect to the deficiencies and additions to tax determined by respondent. Memoranda have been submitted by the parties and a hearing was held on May 30, 1984.

On January 18, 1965, respondent made jeopardy assessments pursuant to the provisions of section 6861(a) 2 of deficiencies and additions to tax as follows:

Additions to Tax

Year Deficiencies Sec. 6653(b) Interest Total

1958 $ 395,100.53 $ 197,550.27 $ 136,504.53 $ 729,155.33

1959 $ 2,505,364.59 $ 1,252,682.30 $ 715,264.43 $ 4,473,311.32

1960 $ 2,259,503.83 $ 1,129,751.92 $ 509,502.64 $ 3,898,758.39

1961 $ 2,709,405.60 $ 1,354,702.80 $ 448,388.07 $ 4,512,496.47

-------------- -------------- ------------- --------------

Total $ 7,869,374.55 $ 3,934,687.29 $1,809,659.67 $13,613.721.51

On January 25, 1965, the United States instituted proceedings under the provisions of section 7403 in the United States District Court for the Central District of California to enforce collection of the deficiencies and additions to tax which had been assessed pursuant to the jeopardy assessment.

On March 18, 1965, respondent issued a notice of deficiency to petitioner with respect to the taxable years 1958 through 1961. In the notice respondent determined deficiencies and additions to tax as follows:

Addition to Tax

Year Deficiency Sec. 6653(b)

1958 .... $ 447,767.77 $ 223,883.89

1959 .... $2,618,097.21 $1,309,048.60

1960 .... $2,257,264.90 $1,128,632.45

1961 .... $2,783,951.86 $1,393,798.41

------------- -------------

Total $8,107,081.74 $4,055,363.35

On March 24, 1965, petitioner timely filed a petition with this Court. At the time of filing his petition, petitioner resided in Vancouver, British Columbia, Canada. On September 23, 1968, respondent timely filed his answer in this proceeding. 3 On April 10, 1970, petitioner timely filed his reply to respondent's answer. 4

On July 23, 1976, the United States District Court, Central District, California, filed an opinion and entered a judgment after a trial on the merits of the Government's action to foreclose Federal tax liens in the matter of United States v. Stonehill, 420 F.Supp. 46 [ 38 AFTR 2d 76-5699] (C.D. Cal. 1976). The judgment entered by the United States District Court for the Central District of California, on October 15, 1980 5, determined that there was due from petitioner taxes, additions to tax, and[pg. 84-1285] interest for the taxable years 1958 through 1961 in the amount of $8,984,668.48. The findings of the United States District Court reflect the following breakdown:

Addition to Tax Deficiency

Year Deficiency Sec. 6653(b) Interest

1958 ... $ 10,938.84 $ 5,469.42 $ 3,779.29

1959 ... $1,068,307.26 $534,153.63 $304,994.41

1960 ... $ 762,312.15 $381,156.08 $171,896.17

1961 ... $1,011,062.46 $505,531.23 $167,323.91


Year Interest Total

1958 ... $ 14,426.49 $ 34,614.04

1959 ... $1,408,918.06 $3,316,373.36

1960 ... $1,005,361.60 $2,320,726.00

1961 ... $1,333,421.99 $3,017,339.59


Grand Total <1>$8,689,052.99


<1> We note that the total here is something less than set forth as the

judgment entered on Oct. 15, 1980. We assume the difference in these figures

is attributable to the fact that the breakdown accrues interest through Jan.

31, 1979, while the judgment contains interest accrued through a later date.

The judgment was affirmed as to petitioner by the United States Court of Appeals for the Ninth Circuit on April 8, 1983. 6 United States v. Stonehill, 702 F.2d 1288 [ 51 AFTR 2d 83-1152] (9th Cir. 1983), cert. denied 465 U.S. __ (1984). On April 6, 1984, respondent filed his supplemental answer, pleading the above facts and concluding that the determination of petitioner's income tax liability and the additions thereto under section 6653(b) for the taxable years 1958 through 1961 are res judicata with respect to proceedings before this Court. In his reply filed on April 18, 1984, petitioner essentially admits the factual allegations of respondent's supplemental answer, however, he concludes that res judicata is not applicable.

In determining whether or not the doctrine of res judicata is applicable we look to the landmark case of Commissioner v. Sunnen, 333 U.S. 591 [ 36 AFTR 611] (1948). In discussing this concept, the Supreme Court stated as follows at p. 597:

It is first necessary to understand something of the recognized meaning and scope of res judicata, a doctrine judicial in origin. The general rule of res judicata applies to repetitious suits involving the same cause of action. It rests upon consideration of economy of judicial time and public policy favoring the establishment of certainty in legal relations. The rule provides that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound "not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose." *** The judgment puts an end to the cause of action, which cannot again be brought into litigation between the parties upon any ground whatever, absent fraud or some other factor invalidating the judgment. [Citations omitted; 333 U.S. at 597.]

In applying the concept of res judicata to the field of Federal income tax, the Supreme Court further stated as follows:

These same concepts are applicable in the federal income tax field. Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action. Thus if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year. But if the later proceeding is concerned with a similar or unlike claim relating to a different tax year, the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit. *** [333 U.S. at 598.]

Harry S. Stonehill, petitioner herein, is the person who was a defendant in the foreclosure proceeding in the United States District Court for the Central District of California. The respondent is a party in privity with the United States of America, the prosecuting party in the aforementioned district court proceeding. Amos v. Commissioner, 43 T.C. 50, 52 (1964), affd. 360 F.2d 358 [ 16 AFTR 2d 6061] (4th Cir. 1965). The same causes of action which are at issue here, petitioner's income tax liability and additions thereto for the taxable years 1958 through 1961, were in issue in the district court proceeding. Each taxable year is an origin of a separate liability, and each taxable year is also the origin of a separate cause of action. Commissioner v. [pg. 84-1286] Sunnen, supra. See also Shaheen v. Commissioner, 62 T.C. 359 (1974).

As argued by respondent in his memorandum, this case is governed by our holding in Shaheen v. Commissioner, supra. In that case the United States made a jeopardy asessment and filed suit in the United States District Court to enforce collection of the jeopardy assessment. A petition was filed by the taxpayer in the United States Tax Court. The district court entered a default judgment against the taxpayer for failure to appear at a pretrial conference and a judgment was entered determining Federal income taxes and additions due from the taxpayer. No appeal was taken from the judgment. When the matter came for hearing in the United States Tax Court, the Commissioner filed a Motion for Judgment on the Pleadings on the theory that the district court judgment was res judicata with respect to the tax years in issue. We agreed with the Commissioner in that case. Utilizing the criteria set forth in Commissioner v. Sunnen, supra, we determined that all of the elements of res judicata were present.

The facts in this case even more strongly support application of the rule of res judicata in that rather than having a default judgment in the district court, we have here a judgment based on the merits which was appealed to the Ninth Circuit and affirmed. Certiorari having been denied, every avenue of appeal has been exhausted with respect to that proceeding. Accordingly, we believe the case of Shaheen v. Commissioner, supra, is controlling here, and for all of the reasons set forth in that opinion respondent's Motion for Judgment on the Pleadings should be granted.

In his memorandum and also in argument, petitioner made a feeble attempt to argue that the doctrine of res judicata should not apply. Some of his arguments are essentially the same as those he made before the district court and the court of appeals regarding the net worth computations that were never placed in evidence in that case. See United States v. Stonehill, 702 F.2d 1288, 1296 [ 51 AFTR 2d 83-1152] (9th Cir. 1983). Petitioner suggests that respondent has abandoned his original position and therefore is not entitled to the presumption of correctness. Petitioner points to the fact that the district court made adjustments to the respondent's net worth statement which effectively reduced the assessments by approximately 60 percent. Petitioner ultimately contends that the case before this Court involves a different cause of action than that brought before the United States District Court.

Having carefully reviewed the record before us including the opinion of the Court of Appeals for the Ninth Circuit, we are satisfied that petitioner's arguments have no merit. Petitioner has not convinced us that we should not apply the holding of Shaheen v. Commissioner, supra, to this case.

Moreover, in his reply filed April 10, 1970, in paragraph 9 thereof, petitioner's counsel states as follows:

In further reply to the answer of respondent herein, petitioner avers that the issues herein are presently being litigated between the parties in the United States District Court for the Central District of California, pending United States v. Harry Stonehill, et al, Civil Action No. 65-127-HW, which court, under applicable law and by stipulation of the parties binding upon the respondent, has full jurisdiction to determine said issues and that pending such determination all proceedings herein should be stayed.

This case has been continued by the Court upon numerous requests by petitioner. The representations by petitioner's counsel were that the action in the district court would resolve the issues before this Court. In his motion to continue filed with the Court on January 10, 1978 (after the opinion in the United States District Court was filed), petitioner stated as follows:

4. Docket No. 1574-65 and 2074-65 involved the same issues as are under adjudication in the District Court, and the decision of the Court will be res judicata as to these two cases.

Petitioner made this allegation again in other status reports as well as other motions to continue this matter. After the United States Supreme Court denied certiorari, respondent fowarded a stipulated decision to petitioner reflecting the judgment of the United States District Court. Counsel for petitioner's response was "I'm not authorized to sign the decision documents *** ."

Petitioner's objections to the motion for judgment on the pleadings have no merit. We note that the petition in this case was filed in 1965. Thus, this proceeding has been docketed with this Court for 19 years. We will not participate in prolonging this litigation any further.

For reasons set forth herein, respondent's motion for judgment on the pleadings is granted.

An appropriate order and decision will be entered.


All rule references are to the Tax Court Rules of Practice and Procedure.


All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.


Respondent's various requests for an extension of time for filing of the answer were granted by the Court. The basis for the requests for extension was that the files necessary for preparation of the answer were with the Department of Justice for purposes of maintaining the suit in the United States District Court in California.


Petitioner's requests for extension of time to file a reply were also granted by the Court.


We note that in his supplemental answer filed on Apr. 6, 1984, respondent alleges that the United States District Court for the Central District of California entered a judgment on Oct. 15, 1980, which was based upon a finding filed on Feb. 5, 1979. In his reply filed on Apr. 18, 1984, petitioner admits that a judgment was entered on Oct. 15, 1980. Petitioner, however, alleges that the finding of the district court was filed on Feb. 5, 1970. While we do not understand the reason for the discrepancy in these dates, the Court takes judicial notice of the opinion filed on July 23, 1976, in the United States District Court for the Central District of California reported at 420 F.Supp. 46 [ 38 AFTR 2d 76-5699].


The United States Court of Appeals reversed in part, with respect to an issue not relevant herein.

Harry S. Stonehill, TC Memo 1987-405. , Code Sec(s) 702.


Case Information: Code Sec(s): 702

Docket: Docket No. 31223-85.

Date Issued: 08/18/1987

Judge: Opinion by SCOTT,J.

Tax Year(s): Year 1980.

Disposition: Deficiencies redetermined.

Cites: TC Memo 1987-405, PH TCM P 87405, 54 CCH TCM 147.


1. PARTNERSHIPS—Taxation of partnership earnings—partner's income. Taxpayer-partner's distributive share of partnership income was includable in his income regardless of his actual receipt of it. Fact taxpayer, pursuant to stipulation in action against him to foreclose tax liens, had arranged for his share to be placed directly into trust account (over which he had no signatory authority) for payment of his tax debt or other obligations, was irrelevant.

Reference(s): 1987 PH Fed. ¶28,517(5). Code Sec. 702 .


Official Report


Bert B. Rand, John C. Rand and Thomas Nathan, for the petitioner.

Warren P. Simonsen and J. Darrel Knudtson, for the respondent.


SCOTT, Judge:

Respondent determined a deficiency in petitioner's Federal income tax for the calendar year 1980 in the amount of $4,533. All of the issues raised by the pleadings have been disposed of by agreement of the parties, except whether petitioner is required to include in income $30,403, his distributive share of ordinary income from a partnership, which by agreement between the parties was paid directly into a bank account over which he had no signature authority.

All of the facts have been stipulated and are found accordingly. Petitioner, Harry S. Stonehill, an individual whose residence at all times relevant to this case was located outside of the United States and its possessions, filed a Federal income tax return for the calendar year 1980 in September 1981.

For the tax year ended December 31, 1980, petitioner was entitled to receive $30,403 as his distributive share of ordinary income from a partnership, Haromu Properties (the partnership).

An action to foreclose income tax liens was brought against petitioner in the United States District Court for the Central District of California, Case No. 43244. A decision was entered in favor of the Government. United States v. Stonehill, 420 F.Supp. 46 [ 38 AFTR2d 76-5699] (C.D. Cal. 1976), affd. in part, revd. in part and remanded 702 F.2d 1288 [ 51 AFTR2d 83-1152] (9th Cir. 1983). In connection with the litigation, petitioner agreed that assets consisting of his interest in the partnership would be paid into an account to be established in the National Savings & Trust Co. ("National Savings") in the joint names of Director of International Operations, Internal Revenue Service and Trammell, Rand, Nathan & Lincoln, P.C. as Trustees for Haromu Properties. A stipulation to this effect was filed in the District Court. The account was to be disbursed at the conslusion of the litigation.

In 1980 the $30,403 was paid on behalf of the partnership to the joint bank account established at National Savings. The $30,403 has at all times been in the bank account under the joint control of the Director of International Operations and the law firm of Trammell, Rand, Nathan & Lincoln.

Petitioner did not include the $30,403 in his taxable income for 1980 or for any other year.

In his notice of deficiency respondent increased petitioner's income for 1980 as reported by the $30,403 representing his distributive share of the partnership income.

It is petitioner's contention that the funds in the trust account representing his distributive share of income of the partnership were neither actually nor constructively received by him and were not used in the year here in issue to pay his tax liability so as to produce an economic benefit to him. He contends that for this reason the amount is not includable in his taxable income.

Petitioner cites a number of cases dealing with constructive receipt of income but relies primarily on a Memorandum Opinion of this Court, Stone v. Commissioner, T.C. Memo. 1984-187 [ ¶84,187 PH Memo T.C.], which he contends is indistinguishable from the instant case. In the Stone case we held that the taxpayers had no actual or constructive receipt of interest income and therefore no liability on that income where revenue officers, after serving notices of levy, caused the taxpayers' interest income to be withheld from them. In the Stone case, the taxpayers had been sued by the United States for alleged violations [pg. 87-2069] of the False Claims Act (March 2, 1863, ch. 67, 12 Stat. 696, 31 U.S.C. secs. 231-235) and the Anti-Kickback Act (March 8, 1946, ch. 80, 60 Stat. 37, 41 U.S.C. secs. 51-54). The taxpayers voluntarily entered into an escrow arrangement with the United States and a trust company depositing some $2.5 million in stocks, bonds and Treasury bills in order to ensure payment of any judgment that might be forthcoming against them. Pursuant to the escrow arrangement, the trust company agreed to hold the securities, invest the proceeds and pay over dividends and interest received to the taxpayers' account.

Subsequent to entering into the escrow arrangement, the Internal Revenue Service made jeopardy assessments against the taxpayers for five prior years. Pursuant to Notices of Levy the trust company withheld payment of interest to the taxpayers. We held that the taxpayers were not subject to tax on the interest income earned on the escrowed securities, finding that there was no constructive receipt of that interest, since the taxpayers' control of the income was subject to substantial limitations or restrictions as described in section 1.451-2(a), Income Tax Regs.

Petitioner's reliance on the Stone case is unjustified. This case does not involve a question of constructive receipt of income or a question of economic benefit. This case involves the taxability of partnership income.

The provisions of subchapter K govern the taxation of income earned by a partnership. Although partnership income is computed, section 701 1 provides that the partners are liable in their individual capacities for the tax on their distributive share of the partnership income. Section 704(a) states that the partners' distributive shares will generally be determined by the partnership agreement. Section 702(c) requires a partner to include in his taxable income his distributive share of the gross income of the partnership. Section 706(a) requires that a partner's distributive share of the income, gain, loss, deduction, or credit of the partrnership be included in his taxable income for the taxable year of the partnership ending within or with the partner's taxable year. Section 1.702-1(a), Income Tax Regs., requires the partner to "take into account separately in his return his distributive share, whether or not distributed, *** ." (Emphasis supplied).

Respondent's contention is that petitioner's receipt of his distributive share of the partnership income is irrelevant for tax purposes. We agree with respondent.

In United States v. Basye, 410 U.S. 441, 448-449 [ 31 AFTR2d 73-802] (1973), the Supreme Court specifically stated that "parties are taxable on their distributive or proportionate share of current partnership income irrespective of whether that income is actually distributed to them." In the Basye case, a medical limited partnership, Permanente Medical Group (Permanente) entered into an agreement with Kaiser Foundation Health Plan, Inc.. (Kaiser) to supply medical services to Kaiser's members in its northern California region. Kaiser agreed to make payment to Permanente of "base compensation" encompassing a fixed amount per program member times a stated monthly fee and by payment of contributions to a retirement benefits trust fund (trust fund) for Permanente partner- and nonpartner-physicians. Permanente did not report the payments to the trust fund as partnership income and its partner physicians did not include those amounts in the computation of their distributive share of the partnership income. The Commissioner concluded that the Kaiser payments to the trust fund were compensation to Permanente and, therefore, income to the partnership and as such, part of the distributive income of the partnership which the partners were required to include in their taxable income.

The Supreme Court held that each partner-physician was taxable on his distributive share of the partnership income, which included the trust fund contributions.

The Supreme Court discussed the fact that because of provisions of the trust fund agreement some of the partners would never actually benefit from the payment by Kaiser to the trust fund, but stated—

Since the retirement fund payments should have been reported as income to the partnership, along with other income received from Kaiser, the individual partners should have included their shares of that income in their individual returns. 26 U.S.C. sec. 61(a)(13), 702, 704. For it is axiomatic that each partner must pay taxes on his distributive share of the partnership's income without regard to whether that amount is actually distributed to him. Heiner v. Mellon, 304 U.S. 271 [ 20 AFTR 1263] (1938), decided under a predecessor to the current partnership provisions of the Code, articulates [pg. 87-2070] the salient proposition. After concluding that "distributive" share means the "proportionate" share as determined by the partnership agreement, id., at 280, the Court stated:

"The tax is thus imposed upon the partner's proportionate share of the net income of the partnership, and the fact that it may not be currently distributable, whether by agreement of the parties or by operation of law, is not material." [Fn. ref. omitted. United States v. Basye, supra, at 453-454.]

Petitioner in the instant case, as the taxpayers in the Basye case, is attempting to disclaim tax liability on the basis that he had no right to receive the income.

Petitioner is liable here because the partnership statutes so mandate- —

Few principles of partnership taxation are more firmly established than that no matter the reason for nondistribution each partner must pay taxes on his distributive share. Treas. Reg. sec. 1.702-1 *** . United States v. Basye, supra, at 453.

In Basye, the Supreme Court further stated:

It is true that no partner knew with certainty exactly how much he would ultimately receive or whether he would in fact be entitled to receive anything. But the existence of conditions upon the actual receipt by a partner of income fully earned by the partnership is irrelevant in determining the amount of tax due from him. [410 U.S. at 455.]

We find this statement dispositive in this case. Petitioner did not know exactly how much of the distributive share he would ultimately receive, if any, although here it appears that the entire amount would ultimately be used to pay his obligations if not actually received by him. However, the existence of conditions upon a partner's actual receipt—or upon his constructive receipt—is irrelevant in determining the amount of tax due from him—

The partnership had received as income a definite sum which was not subject to diminution or forfeiture. *** The sole operative consideration is that the income had been received by the partnership, not what disposition might have been effected once the funds were received. [Fn. ref. omitted. United States v. Basye, supra at 456.]

These principles, in and of themselves, dictate the result herein. Petitioner was entitled to his distributive share. Petitioner, for a variety of reasons, arranged for his distributed share to be placed into the trust account for payment of his tax debt or other obligations. That, however, is irrelevant to our determination—petitioner is liable for the tax on his distributive share regardless of the receipt of the income. 2

Decision will be entered under Rule 155.


Unless otherwise stated to the contrary all section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue and all rule references are to the Tax Court Rules of Practice and Procedure.


See also Klein v. Commissioner, 25 T.C. 1045 (1956); Bell v. Commissioner, 219 F.2d 442 [ 46 AFTR 1721] (5th Cir. 1955), affg. a Memorandum Opinion of this Court.

STONEHILL v. IRS, Cite as 103 AFTR 2d 2009-1215 (558 F.3d 534), 03/06/2009

Pauline STONEHILL, co-executor and co-special administrator of the estate of Harry S. Stonehill, APPELLANT v. INTERNAL REVENUE SERVICE, APPELLEE.

Case Information:

Code Sec(s):

Court Name: U.S. Court of Appeals, Dist. of Columbia Circuit,

Docket No.: No. 08-5060,

Date Decided: 03/06/2009.

Prior History: District Court, (2008, DC Dist Col) 101 AFTR 2d 2008-461, 534 [101 AFTR 2d 2008-461] F Supp 2d 1, 2008-1 USTC ¶50164, affirmed.

Disposition: Decision against Taxpayer.

Cites: 558 F.3d 534, 2009-1 USTC P 50290.


1. FOIA—IRS records—privileged information—waiver—privacy—information compiled for law enforcement purposes—collateral estoppel—summary judgment. District court properly granted govt. summary judgment on FOIA complaint to compel IRS to turn over documents relating to govt.'s decades-old raids on widow/executrix's deceased husband's Philippines business offices and ensuing tax judgment, which IRS allegedly ob- tained by fraud: IRS was entitled to assert newly raised deliberative process privilege with respect to certain documents which it had already sought to withhold under attorney-client or work product privileges in related case/F.R.Civ.P. 60(b) proceeding. Argument that, where contemporaneous parallel FOIA and non-FOIA proceedings involved same documents, reviewing body or officer, and privileges, failure to raise privilege in 1 proceeding should constitute waiver in parallel proceeding, was belied by facts that some FOIA exemptions were inapplicable in civil discovery, that there was no opportunity to obtain protective order in FOIA cases, and that discovery orders in non-FOIA cases were non-appealable. Alternative argument that extension of FOIA waiver rule to discovery proceedings would advance goal of promoting govt. fairness and avoid delay was rejected where IRS showed no improper motive for invoking additional privileges in FOIA action and widow was also responsible for delay.

Reference(s): ¶ 76,556.502(50) ; ¶ 76,556.502(75) ; ¶ 74,337.504(5)


Robert E. Heggestad argued the cause and filed the briefs for appellant.

Jonathan S. Cohen, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Nathan J. Hochman, Assistant Attorney General, Jeffrey A. Taylor, U.S. Attorney, and Bethany B. Hauser, Attorney. John A. Dudeck Jr. , Attorney, entered an appearance.


Appeal from the United States District Court for the District of Columbia (No. 06cv00599)

Before: Henderson, Rogers and Griffith, Circuit Judges.

Opinion for the Court by Circuit Judge Rogers.

Judge: Rogers, Circuit Judge:

Notice: This opinion is subject to formal revision before publication in the Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify the Clerk of any formal errors in order that corrections may be made before the bound volumes go to press.

The issue in this appeal is whether an agency may withhold documents under Exemption 5 of the Freedom of Information Act (“FOIA”), 5 U.S.C. § 552(b)(5), when it did not invoke the same underlying privilege claims in an ongoing discovery dispute in a different, non-FOIA case in which those documents were withheld as irrelevant. Harry S. Stonehill, through his estate, maintains that the waiver rule requiring all FOIA exemptions to be raised at the same time in the original district court FOIA proceedings, see, e.g., Maydak v. Dep't of Justice , 218 F.3d 760, 764 (D.C. Cir. 2000), should be extended to apply to contemporaneous proceedings involving the same documents and parties and equally applicable privileges. However, Stonehill's suggestion to extend the FOIA waiver rule to discovery proceedings overlooks critical differences between the two information-gathering regimes such that the extension would not necessarily advance the policy goals underlying the waiver rule. Accordingly, we affirm the grant of summary judgment to the IRS.


This FOIA case is intertwined with Stonehill's effort to obtain vacation of a judgment foreclosing tax liens on his property. He seeks through civil discovery and FOIA to obtain documents that would show that United States law enforcement officials, in resisting a motion to suppress evidence, misrepresented the United States' involvement in a 1962 raid on Stonehill's offices in the Philippines by Philippine law enforcement authorities. See United States v. Stonehill, 53 F. App'x 470, 471 (9th Cir. 2002) (unpublished) (“Stonehill III”); United States v. Stonehill, 702 F.2d 1288, 1292 [51 AFTR 2d 83-1152] (9th Cir. 1968) (“Stonehill II”); Stonehill v. United States, 405 F.2d 738, 743–46 [23 AFTR 2d 69-339] (9th Cir. 1968) (“Stonehill I”); Appellant's Br. at 7–8. The Ninth Circuit has suggested that suppression of the seized evidence, consisting of thirty-five truckloads of documents, would have been required under the Fourth Amendment if United States agents had conducted the raids. Stonehill I, 405 F.2d at 743.

Stonehill initially filed a FOIA request with the IRS on July 10, 1998, on behalf of himself and his business associate Robert P. Brooks. He requested all records pertaining to Stonehill and Brooks, including particular documents regarding the early 1960s investigation of their Philippines businesses. The IRS responded that only five responsive documents could be found after “thorough research.” Letter from Stephen H. Flesner, Disclosure Officer, Internal Revenue Service, to Robert E. Heggestad, Heggestad & Weiss, PC (undated). On January 5, 1999, Stonehill requested additional information regarding IRS materials referenced in documents he had obtained from the State Department. The IRS responded that the documents could [pg. 2009-1217] not be located and suggested that the Justice Department might be able to provide more helpful documents. Stonehill filed an administrative appeal and the IRS repeated that the documents could not be located.

On October 2, 2000, based on documents he had received from other agencies in response to his FOIA requests, Stonehill filed a motion pursuant to Federal Rule of Civil Procedure 60(b) in the Central District of California to vacate the tax judgment on the ground it was procured through a fraud on the court. He also renewed his FOIA request with the IRS on March 15, 2001. The IRS initially stayed review, responding only on October 16, 2001, after the district court had denied Stonehill's Rule 60(b) motion on August 28, 2001. The IRS informed Stonehill that approximately 90 boxes containing responsive documents had been located. On November 26, 2002, the IRS issued a final response to Stonehill's FOIA request, stating that some documents had been provided to him and others were being withheld or redacted pursuant to FOIA Exemptions 3, 5, 7(C), and 7(D). On June 17, 2003, the IRS General Appeals office issued a partial determination of Stonehill's appeal, affirming the disclosure officer's decision that certain exemptions applied while reserving judgment on certain documents withheld under Exemption 3 that were not yet available for review. On September 5, 2003, that office advised Stonehill that it was suspending review of the remaining Exemption 3 documents while the discovery litigation was ongoing in the district court following a remand by the Ninth Circuit, see Stonehill III, 53 F. App'x 470; the office noted that if Stonehill prevailed in the district court, his FOIA appeal would appear to be rendered moot.

On December 20, 2005, the California district court granted Stonehill's motion to compel production of documents and rejected the IRS's claims that the attorney-client privilege and work product doctrine barred production. The district court ordered the government to “turn over documents regarding the 1966 Tax Division investigation into the government's role in the 1962 raids.” United States v. Stonehill, No. CV 65-127-PA, at 8 (C.D. Cal. Dec. 20, 2005) (“Stonehill IV”). 1 The district court also denied the motion to compel production of documents involving third-party taxpayer information and some treaty obligation information, as well as some confidential informant information redacted by the Central Intelligence Agency. Id. at 4–8. Although the IRS produced some documents pursuant to the discovery order, those documents were redacted on relevance grounds; other documents were withheld as irrelevant.

On March 31, 2006, Stonehill filed his FOIA complaint in the district court here, seeking production of IRS records from the Stonehill files regarding his former attorney. In an amended complaint he requested additional documents responsive to his 1998 FOIA request. The IRS produced a Vaughn index, invoking Exemptions 3, 5, 6, and 7(C), and moved for summary judgment. In opposing summary judgment, Stonehill argued the IRS was collaterally estopped from raising the same privileges in the FOIA litigation as it raised in the Rule 60 proceeding, and was barred from invoking for the first time the deliberative process privilege as to 172 documents, as the IRS had not opposed disclosure of any documents based on the deliberative process privilege in the Rule 60 discovery proceeding. He further argued that the IRS could not raise the attorney work product doctrine as to 681 documents, or 26 U.S.C. § 6103, protecting confidentiality of tax information, as a justification for withholding 157 documents under FOIA Exemption 3, because the IRS had not asserted those grounds for nondisclosure with respect to those particular documents in the Rule 60 proceeding.

The D.C. district court agreed that the IRS was collaterally estopped with respect to documents for which it had claimed the same justifications for nondisclosure in discovery. The California district court's December 2005 decision had applied the same criteria in assessing the claimed privileges as apply under Exemption 5 and the issue had been fully and fairly litigated then. However, the district court rejected Stonehill's waiver argument with regard to new privilege claims and granted summary judgment for the IRS.


[1] On appeal, Stonehill urges adoption of a rule that where parallel FOIA and non-FOIA proceedings are pending contemporaneously involving the same documents, the same reviewing body or officer, and the same, equally applicable privileges, failure to raise a privilege in one proceeding will constitute a waiver in the parallel proceeding, absent compelling circumstances. See Appellant's Br. at 27. Alternatively, he urges this court to hold that waivers occurred in his case because by not raising the deliberative process and attorney work product privileges in the parallel discovery proceeding, the IRS intentionally relinquished its right to assert them in this FOIA proceeding. Specifically, he points out that despite earlier opportu- nities to invoke privileges, the IRS delayed its review and production of documents and conducted unnecessary duplicative document reviews in response to his FOIA request, with the result that his effort to gain access to information has been unduly delayed. Now, over a decade after his initial FOIA request, he is confronted with newly invoked FOIA exemptions involving privileges that could have been asserted earlier in resisting discovery.

The requirement for an agency, as a general rule, to invoke all FOIA exemptions ““at the same time, in the original district court proceedings,”” August v. FBI , 328 F.3d 697, 699 (D.C. Cir. 2003) (quoting Maydak v. Dep't of Justice, 218 F.3d 760, 764–65 (D.C. Cir. 2000)), is premised on two policy goals: (1) “the interest in judicial finality and economy, which has “special force in the FOIA context, because the statutory goals — efficient, prompt , and full disclosure of information — can be frustrated by agency actions that operate to delay the ultimate resolution of the disclosure request,”” id. (quoting Senate of Puerto Rico v. Dep't of Justice, 823 F.2d 574, 580 (D.C. Cir. 1987)), and (2) preventing the government from playing cat and mouse by “withholding its most powerful cannon until after the [d]istrict [c]ourt has decided the case and then springing it on surprised opponents and the judge,” id. Basic “fairness to parties seeking disclosure ordinarily requires that they be afforded a full and concentrated opportunity to challenge and test comprehensively the agency's evidence regarding all claimed exemptions,” Senate of Puerto Rico , 823 F.2d at 580.

The FOIA disclosure regime, however, is distinct from civil discovery. See NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 144 n.10 (1975). Different considerations determine the outcome of efforts to obtain disclosure: relevance, need, and applicable privileges – bounded by the district court's exercise of discretion – in the discovery regime, see Fed. R. Civ. P. 26(b)(1), statutory exceptions reflecting a congressional balancing of interests in FOIA. See North v. Walsh , 881 F.2d 1088, 1095 (D.C. Cir. 1989). Because these considerations present different issues, that a document is exempt from discovery does not necessarily mean it will be exempt from disclosure under FOIA. Id.; cf. 18 Charles Allen Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure § 4417, at 449 (2d ed. 2002). Additionally, while information disclosed during discovery is limited to the parties and can be subject to protective orders against further disclosure, when a document must be disclosed under FOIA, it must be disclosed to the general public and the identity of the requester is irrelevant to whether disclosure is required. See FTC v. Grolier Inc., 462 U.S. 19, 28 (1983); Loving v. Dep't of Defense, 550 F.3d 32, 39 (D.C. Cir. 2008); North, 881 F.2d at 1095–96. Conversely, even as to FOIA Exemption 5, which incorporates the privileges the government typically enjoys in pretrial discovery, see Grolier, 462 U.S. at 28, not all documents available in discovery are also available pursuant to FOIA. Exemption 5 “protects only those memoranda which would not normally be discoverable in civil litigation against an agency,” Ryan v. Dep't of Justice, 617 F.2d 781, 790 (D.C. Cir. 1980), whereas case-specific exceptions can sometimes permit discovery of otherwise privileged material. See Grolier, 462 U.S. at 28 (“It is not difficult to imagine litigation in which one party's need for otherwise privileged documents would be sufficient to override the privilege but that does not remove the documents from the category of the normally privileged.”). The fact, then, that certain FOIA exemptions overlap with grounds for nondisclosure in discovery does not require extending the equitable FOIA waiver rule even when the discovery proceedings and FOIA litigation are contemporaneous and involve the same documents and parties and equally applicable privileges.

Given the distinct nature of these two information-gathering regimes, extension of the FOIA waiver rule to discovery proceedings would not advance the policy interest in finality and judicial economy, which is based on FOIA's goal of prompt disclosure of information. See, e.g., Senate of Puerto Rico , 823 F.2d at 580. Stonehill maintains that allowing the IRS to raise FOIA exemptions for the first time in this FOIA litigation has resulted in unnecessary delay and wasted judicial resources. In part, he offers, this is because the IRS undertook a separate review of the documents for the FOIA proceeding even though the IRS had previously reviewed the documents in response to his discovery requests. However, for two principal reasons we conclude Stonehill has not shown that extension of the FOIA waiver rule would eliminate an agency's need to conduct a separate FOIA review or otherwise avoid necessary delays.

First, although the grounds for nondisclosure underlying FOIA Exemptions 3 and 5 may be invoked in civil discovery, some FOIA exemptions are not applicable to discovery. Even after reviewing documents for privileges in response to a discovery request, an agency could reasonably undertake a separate review to determine [pg. 2009-1219] whether other exemptions are applicable. Likewise, even those privileges that are available both in discovery and in the FOIA context may not be equally applicable in the two proceedings. Therefore, an agency could reasonably reconsider its invocation, or lack thereof, of certain privileges before making determinations in the FOIA litigation. That an agency ultimately may conclude that the privileges are equally applicable would not necessarily mean that it could know this in advance of a separate FOIA-specific review. Similarly, as the IRS did here, an agency may need to assess the applicability of any unwaivable statutory exemptions, like 26 U.S.C. § 6103, which protects confidentiality of tax information. See August, 328 F.3d at 701.

Second, the stakes of disclosure are different in the two regimes, justifying and arguably necessitating separate reviews with distinct considerations in mind during each. Documents released in a FOIA action must be made available to the public as a whole, North, 881 F.2d at 1096, and, unlike in civil discovery, see Fed. R. Civ. P. 37, there is no opportunity to obtain a protective order. In that respect, the stakes of disclosure for the agency are greater in the FOIA context. The stakes in the discovery context are also high insofar as there is a risk of a production order if a privilege is not invoked and because of the generally non-appealable nature of discovery orders, see In re England, 375 F.3d 1169, 1174 (D.C. Cir. 2004). However the agency may prioritize these considerations, the motivating concerns are distinct in the two contexts.

Extending the waiver rule, then, would not necessarily prevent separate reviews of documents for parallel proceedings involving the same documents and privileges that turn out to be equally applicable. Moreover, even to the extent a waiver rule might eliminate the need for a separate review in response to a FOIA request, the rule itself could result in delay in judicial resolution of the discovery issues while the agency, anticipating the possibility of future FOIA litigation, prepared a Vaughn index or developed reasons for objecting to release in a later FOIA case even where those reasons would not be raised in the discovery proceeding; the agency would need to assess all possible privileges even after it determined that the documents were irrelevant to the non-FOIA proceedings. Cf. North, 881 F.2d at 1099.

Neither would extension of the FOIA waiver rule to discovery proceedings necessarily advance the second goal of promoting government fairness by requiring the government, in general, to raise all its exemptions at the same time, so that neither the parties nor the court are surprised by assertions of new exemptions, and so that parties have concentrated opportunities to challenge agency attempts to withhold documents. See Senate of Puerto Rico, 823 F.2d at 580. Stonehill's reasons for extension of the FOIA waiver rule are stronger here. He contends he has been deprived of “a fair and concentrated opportunity to challenge the evidentiary basis for hundreds of IRS exemptions that have changed in the FOIA administrative proceeding, the Rule 60(b) proceeding and again in the FOIA litigation.” Appellant's Br. at 36. A change of agency tactics in invoking privileges could indeed be evidence of the cat-and-mouse game of which this court has been “wary,” August, 328 F.3d at 697.

The IRS's decision to invoke additional privileges in the FOIA litigation is hardly inconsistent with the different stakes involved, as distinct from reflecting a “sinister,” August, 328 F.3d at 700, or improper motivation. For example, the IRS was under no obligation to invoke privileges for documents it had determined were irrelevant under Rule 26(b)(1) in the Rule 60(b) proceeding whereas it had the prerogative to invoke privileges for those documents in the FOIA litigation, where relevance was not a bar to production. More significantly, the incentives for prompt agency review and production in response to document requests already exist. In the FOIA context, the waiver rule seeks to eliminate further litigation about newly asserted FOIA exemptions, once an exemption has been asserted and the court has rejected it. See Maydak, 218 F.3d at 764; Ryan, 617 F.2d at 792; Jordan v. Dep't of Justice, 591 F.2d 753, 779–80 (D.C. Cir. 1978). Absent such a rule, the IRS offers, an agency “might be tempted to litigate its claimed FOIA exemptions one by one for strategic reasons, see Ryan, 617 F.2d at 792, or to delay a careful examination of documents until its first claimed exemptions have been rejected, see Jordan, 591 F.2d at 780.” Appellee's Br. at 30–31. As noted, in a discovery proceeding there are potentially adverse consequences if the agency fails to examine the documents and to raise all its defenses: The district court may order production, see Fed. R. Civ. P. 37, and the agency could not rely on immediate appeal. On appeal, the agency would encounter the prudential rule against raising new arguments, see Jordan, 591 F.2d at 780, and could not rely, as a matter of course, on the opportunity to invoke additional defenses to production upon remand.

Given the existing motivations for an agency to be forthright in asserting its justifications for nondisclosure during discovery, extending the FOIA waiver rule to those proceedings would at best have a marginal benefit in terms of ensuring government fairness. Undue delays and duplicative agency conduct can be prevented through the exercise of district court discretion, cf. Laborers' Int'l Union of N. Am. v. Dep't of Justice, 772 F.2d 919, 920–21 (D.C. Cir. 1984), advancing many of the objectives that Stonehill seeks from extension of the waiver rule. For example, after succeeding in his appeal to the Ninth Circuit, Stonehill obtained a broad discovery production order from the district court in December 2005, Stonehill IV, No. CV 65-127-PA, at 8, 17, rejecting most of the IRS's privilege objections. In the FOIA litigation, too, the district court ruled that collateral estoppel barred the IRS from invoking the same privileges for the same documents as in the Rule 60 proceeding as the issues had been decided under the same standards in the December 2005 order.

Although Stonehill was confronted in the FOIA action with new objections to disclosure long after he made his FOIA request, even the particular circumstances of his case do not show that extending the waiver rule to discovery would advance the relevant policy goals, much less that there was a waiver by the IRS. Assuming the IRS's stay of his administrative FOIA appeal pending resolution of the discovery proceedings was unfair to the extent it postponed resolution of asserted FOIA exemptions, the stay also arguably facilitated the efficient use of judicial resources by avoiding delays in the discovery proceeding attendant to agency reviews influenced by FOIA demands. The district court's application of estoppel principles in the FOIA action avoided further delay and conserved judicial resources regarding privileges that had already been litigated and decided. In any event, the stay alone does not show an improper motivation by the IRS. Cf. Boyd v. Criminal Division of the U.S. Dep't of Justice, 475 F.3d 381, 391 (D.C. Cir. 2007); Iturralde v. Comptroller of Currency, 315 F.3d 311, 314–15 (D.C. Cir. 2003). That the same person reviewed the requested documents in both proceedings lends no support for extension of the FOIA waiver rule, because the likely effect of a ruling on that basis would be for agencies to use different reviewers in different proceedings, hardly consistent with the goals of efficiency and prompt disclosure. That the IRS did not assert the deliberative process privilege during the administrative appeal is not inconsistent with the waiver rule, which requires only that all privileges be asserted in the original district court proceedings and even allows for exceptions in extraordinary circumstances. See August, 328 F.3d at 699. The IRS also is not responsible for all of the delay in this case. Cf. Weisberg v. Dep't of Justice, 745 F.2d 1476, 1498 (D.C. Cir. 1984). Stonehill submitted his FOIA request in 1998, but did not file his FOIA action until 2006, more than five years after he filed the Rule 60(b) motion. Given that Stonehill adopted a litigation strategy based on using two separate regimes for obtaining the desired documents, Stonehill's complaints about delay cannot be totally divorced from the choices he made.

Finally, Stonehill's proposal to extend the FOIA waiver rule to discovery proceedings fails to take into account that the waiver rule is not rigidly applied. Rather, the court sometimes excuses apparent waivers based on extraordinary circumstances, in recognition of the fact that “although FOIA strongly favors prompt disclosure, its nine enumerated exemptions are designed to protect those “legitimate governmental and private interests” that might be “harmed by release of certain types of information.”” August , 328 F.3d at 699 (quoting John Doe Agency v. John Doe Corp., 493 U.S. 146, 152 (1989)); see also EPA v. Mink, 410 U.S. 73, 80 (1973). Absent evidence of improper motives for obtaining a tactical advantage, interim developments including the factual development of a case or changes in an applicable legal doctrine may warrant allowing an agency to invoke an exemption for the first time on appeal. Id. at 700. Implicit in this approach is the acknowledgment that, given the balance of interests reflected in FOIA, some delays are inevitable in litigation over the invocation of statutory exemptions. Here, the several discovery proceedings and Stonehill's successful appeal to the Ninth Circuit led to production requirements that, to some extent, may have affected the IRS's approach in resisting discovery and hardly curtailed its efforts to protect privileges in the FOIA proceeding.

Congress has addressed concerns about delays in civil proceedings in the Civil Justice Reform Act of 1990, see 28 U.S.C. §§ 471–73, and district court rules reflect such efforts, see, e.g., D.D.C. R. 16.3 (pre-trial conference requirement, largely mirroring D.D.C. Civil Justice Expense and Delay Reduction Plan, eff. Mar. 1, 1994). But delays attendant to information-gathering regimes may often simply be the result of additional searches for documents as well as additional document reviews. Some delay may be reduced, as occurred here, through the district court's exercise of discretion to facilitate production of documents and to eliminate needless relitigation through application of equitable estoppel principles. Although the IRS did not produce 90 boxes of documents until [pg. 2009-1221] after the California district court denied Stonehill's Rule 60(b) motion, and then stayed the administrative appeal pending the district court's discovery decision on remand, Stonehill does not suggest that the IRS would have located the documents sooner or proceeded without staying the FOIA appeal had the FOIA waiver rule applied to discovery. Any unfairness caused by release of requested documents after Stonehill's death is mitigated by his estate's vigorous pursuit of his claims. Considering the circumstances as a whole, then, we are not persuaded that the court should link the two informationgathering regimes through a waiver rule when doing so would not necessarily advance the policy goals underlying the rule. Delays within the FOIA regime, Stonehill's principal focus, do not provide a rationale for linking its waiver rule to discovery where different considerations are involved. Accordingly, we affirm the grant of summary judgment.


The case is lodged in the United States District Court for the District of Oregon.

U.S. v. STONEHILL, Cite as 77 AFTR 2d 96-2212 (83 F3d 1156), 5/20/1996 , Code Sec(s) 6321


Case Information:

Code Sec(s): 6321

Court Name: U.S. Court of Appeals, Ninth Circuit,

Docket No.: Docket No. 95-17019,

Date Decided: 5/20/1996.

Prior History: District Court affirmed. Related proceedings at (1984, DC OR) 55 AFTR 2d 85-1325, 87- 2 USTC ¶9399; (1983, CA9) 51 AFTR 2d 83-1152, 702 F 2d 1288, 83-1 USTC ¶9285, which affirmed in part, reversed and remanded in part (1980, DC CA) 48 AFTR 2d 81-5689 and (1976, DC CA) 38 AFTR 2d 76-5699, 420 F Supp 46, 76-2 USTC ¶9647; (1987) TC Memo 1987-405 [¶87,405 PH Memo TC], PH TC Memo ¶87405, 54 CCH TCM 147 [¶87,405 PH Memo TC]; and (1984) TC Memo 1984- 331 [¶84,331 PH Memo TC], PH TC Memo ¶84331, 48 CCH TCM 394 [¶84,331 PH Memo TC].

Tax Year(s):

Disposition: Decision for Govt. 83 F.3d 1156.

Cites: 77 AFTR 2d 96-2212, 83 F3d 1156, 96-1 USTC P 50318.

[pg. 96-2213]


1. Lien property—chose in action. District court properly found that taxpayers' personal claims against purchaser of lien property that was in receivership were subject to tax lien as chose in action: under California law, property rights attached to chose in action, and California choses in action were Code Sec. 6321 property because they had pecuniary value and were transferable. Also, taxpayers who only owned property through corp. didn't have valid personal claims against purchaser for allegedly illegally depressing property's value; and court properly confirmed property's sale at agreed purchase price after reviewing 3 valid appraisals.

Reference(s): ¶ 63,215.02(70) ; ¶ 63,215.02(18) Code Sec. 6321


Robert E. Heggestad, Heggestad & Weiss, Wash., D.C., for the Defendants-Appellants.

John McCarthy, Tax Div., Dept. of Justice, Wash., D.C., for the Plaintiff-Appellee.

Appeal from the United States District Court for the Northern District of California

Before: Robert BOOCHEVER, Cynthia Holcomb HALL, and Ferdinand F. FERNANDEZ, Circuit Judges. Opinion by Judge Hall.


Judge: HALL, Circuit Judge:

Appellants Harry S. Stonehill and Robert P. Brooks seek to prevent the United States from selling real property in which they have an interest, pursuant to a federal tax lien. The property is held in a tax receivership, and the receiver entered into a contract to sell the property to the Town of Tiburon, California, for $6.8 million. The terms of the contract include a provision requiring dismissal of two state lawsuits filed against Tiburon by the receiver alleging that Tiburon depressed the value of the property through a series of illegal zoning procedures. The receiver agreed to dismiss the lawsuits on behalf of the receivership, but appellants refused to dismiss their personal claims. The district court ordered appellants to dismiss their claims, and they appealed this order. We now affirm.


This case began with a tax dispute filed against the appellants by the United States in 1965. Final judgment was entered against appellants in 1980, and the government subsequently secured liens on appellants' property. In 1984, at appellants' request, the court appointed a tax receiver to manage the foreclosure of the property. The real property at issue here is the last remaining property to be liquidated.

The property is owned by one of the appellants' businesses, Pine Street Corporation, and is a 101-acre tract in Tiburon, California, that is zoned for residential use. The value of this property derives mainly from the ability to construct residences thereon. From 1988 to 1994, Pine Street submitted several applications to Tiburon for approval of a development plan for the property. During the same period Tiburon substantially modified its General Development Plan. At one time the General Plan would have allowed Pine Street to develop one home site per acre. In the end, however, Tiburon approved development of only 19 home sites on this property.

Throughout this process appellants contended that Tiburon engaged in illegal down-zoning in order to depress the value of the property so that the town could purchase the parcel for use as designated open space. The tax receiver filed two suits in California state court against Tiburon on behalf of Pine Street and the appellants, claiming inverse condemnation and other zoning improprieties.

After the second lawsuit was filed, the town of Tiburon and the Marin County Open Space Committee entered into negotiations to purchase the property for $6.8 million, with the condition that the receiver would dismiss the two lawsuits against the Town. The district court authorized the receiver to finalize the sale and instructed him to present the final offer to the court for approval. Appellants submitted a motion for reconsideration, asserting among other things that they objected to dismissal [pg. 96-2214] of their complaints against the Town. The district court denied the motion.

The United States then filed a motion to expand the receivership to encompass appellants' personal claims against the Town, contending that these claims were subject to the federal tax liens. The district court granted this motion on April 6, 1995. Appellants then filed a motion to stay in Marin County Superior Court, requesting that court not to take any action to settle or dismiss the state lawsuits pending resolution of the federal proceeding. Before the California Superior Court ruled on this motion, the district court confirmed the sale of the property, and ordered appellants to dismiss their personal claims. On October 10, 1995, the district court issued its final order confirming the sale. Appellants appealed this order on October 17, 1995, and we granted an emergency stay on November 7, 1995.

We review a district court's decision involving its supervision of an equitable receivership for abuse of discretion. SEC v. Hardy, 803 F.2d 1034, 1037 (9th Cir. 1986). Therefore, the district court's order expanding the receivership is reviewed under this standard.


[1] The first issue on appeal concerns whether the government may attach and foreclose upon the appellants' personal lawsuits pursuant to the federal tax lien. We hold that the lawsuits, as choses in action, 1 are personal property subject to attachment and foreclosure by the government.

The Internal Revenue Code provides that: “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount...shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” 26 U.S.C. section 6321 (emphasis added). The Supreme Court has broadly construed this statutory language, noting that the statute “reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” United States v. National Bank of Commerce, 472 U.S. 713, 719-20 [56 AFTR 2d 85-5210] (1985). To determine whether the property is subject to the federal tax lien, the court conducts a two-part analysis. First, state law determines the nature of the legal interest the taxpayer has in the property. Id. at 722; Little v. United States, 704 F.2d 1100, 1105 [51 AFTR 2d 83-1196] (9th Cir. 1983). Once the court determines the state- law right possessed by the taxpayer, then the federal tax consequences are solely a matter of federal law. National Bank of Commerce, 472 U.S. at 722; Little, 704 F.2d at 1105. Thus, federal law controls whether the state-law right constitutes property or rights to property attachable by a federal tax lien. National Bank of Commerce, 472 U.S. at 722; Little, 704 F.2d at 1105; In re Kimura, 969 F.2d 806, 810 [70 AFTR 2d 92-5414] (9th Cir. 1992).

Our first inquiry is whether California attaches any property rights to a chose in action, and we find that it does. California courts have consistently construed the Civil Code sections relating to property to include a chose in action, in contract or tort, as personal property. See Cal. Civil Code sections 654 and 663; Parker v. Walker, 6 Cal. Rptr. 2d 908, 912 (Cal. App. 3 Dist. 1992) (“A cause of action to recover money in damages, as well as money recovered in damages, is a chose in action and therefore a form of personal property.”); Carver v. Ferguson, 254 P.2d 44, 45 (Cal. App. 3 Dist. 1953) (holding that a cause of action in tort, being a thing in action, is personal property); Bensinger v. Davidson, 147 F. Supp. 240, 245 [50 AFTR 1298] (S.D. Cal. 1956) (holding that a chose in action for unjust enrichment is personal property under California law, which is subject to a federal tax lien).

The second question, then, is whether this interest consists of property or rights to property under 26 U.S.C. section 6321. We have held that if the state law interest is “an economic asset in the sense that it [pg. 96-2215] has pecuniary worth and is transferable,” then it is subject to the federal tax lien. Little, 704 F.2d at 1105-06; Kimura, 969 F.2d at 811. We conclude that choses in action in California, such as the lawsuits at issue here, satisfy both of these requirements. First, it is obvious that a right to collect damages, albeit speculative, has pecuniary worth. Second, the California Civil Code specifies that a chose in action, which is “a right to recover money or other personal property by a judicial proceeding,” Cal. Civil Code section 953, may be transferred or assigned. Cal. Civil Code section 954. Therefore, appellants' causes of action against Tiburon constitute property or rights to property to which federal tax lien consequences may attach. Accord United States v. Comparato, 22 F.3d 455, 457-58 [73 AFTR 2d 94-1799] (2nd Cir.) (holding that the taxpayers' vested interest in their deceased son's medical malpractice claims was subject to a federal tax lien), cert. denied, 115 S. Ct. 481 (1994).

Once a federal lien attaches to taxpayers' property, the government may then foreclose upon the property. See 28 U.S.C. section 2001. We conclude that the government may foreclose upon the taxpayers' causes of action just as it could any other real or personal property. A taxpayer's chose in action represents one of the taxpayer's assets, and the government has the right to pursue the action to judgment, even if the taxpayer may not have done so himself. The complement to the government's ability to pursue the lawsuit is the ability to settle or dismiss it. Cf. National Bank of Commerce, 472 U.S. at 725 (“In a levy proceeding, the IRS steps into the taxpayer's shoes...[and] acquires whatever rights the taxpayer himself possesses.”) (internal quotations omitted). If the government was denied this avenue for resolving the suit, then the receivership may not be able to achieve the most advantageous outcome for all concerned.

The provisions of 28 U.S.C. section 2001 govern foreclosures of taxpayers' property. This section limits the government receiver's ability to sell foreclosed property at a private sale for an unfair price: “Before confirmation of any private sale, the court shall appoint three disinterested persons to appraise such property....No private sale shall be confirmed at a price less than two-thirds of the appraised value.” By its terms, section 2001 applies only to real property. But section 2004 provides that sales of personal property must also be conducted “in accordance with section 2001..., unless the court orders otherwise.” 28 U.S.C. section 2004 (emphasis added). Therefore, it is at the district court's discretion whether to obtain appraisals before foreclosing upon personal property, such as appellants' causes of action.

The district court determined that the appellants' personal claims against Tiburon were meritless, and therefore, had no intrinsic value. Appellants do not own the property themselves. Instead, they are shareholders in Pine Street Corporation, which itself owns the property. They do not claim they are entitled to collect damages from Tiburon for the decrease in property value caused by the allegedly improper zoning. They concede that this claim belongs solely to the Pine Street Corporation, and is therefore controlled by the receiver. Instead, they claim that they are entitled to consequential damages measured by the increased tax liability they incurred due to interest penalties resulting from the delay in selling the property (from 1989 to now), allegedly caused by the improper zoning.

Well-established principles of corporate law prevent a shareholder from bringing an individual direct cause of action for an injury done to the corporation or its property by a third party. Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949); Sutter v. General Petroleum Corp., 28 Cal. 2d 525, 530 (1946); Jones v. H.F. Ahmanson & Co., 81 Cal. Rptr. 592, 597- 99 (Cal. 1969). Therefore, the causes of action against Tiburon belong solely to the Pine Street Corporation. Appellants' injuries are merely incidental to the injury caused to the corporation by Tiburon. Cf. J&J Farms, Inc. v. Cargill, Inc., 693 F.2d 830, 836 (8th Cir. 1983) (holding that [pg. 96-2216] losses were not recoverable where they “were the projected result of a collateral or secondary enterprise and thus too remote and speculative”); Northern Helex Corp. v. United States, 524 F.2d 707, 720 (Ct. Cl. 1975) (noting that the lost profits from a corporation's collateral undertakings, which could not be carried out due to the defendant's breach, were too remote to be recoverable). The appellants have no valid personal claims against Tiburon, regardless of the fact that they are named in the complaints in their individual capacities. Thus, appellants' causes of action have no value. As a result, the district court was within its discretion when it ordered appellants to release and dismiss any claims they may have against Tiburon in connection with this matter.


Even if the district court may properly dismiss their personal claims, appellants contend that the district court erred when it confirmed the sale. They assert three arguments as to why the sale is improper: (1) the statutory requirement of appraisals by three disinterested appraisers was not met, (2) the accepted purchase price represents the depressed value of the property and is therefore unfair, and (3) the purchase price does not include any value for the dismissal of the appellants' personal lawsuits. We have already shown the third argument to be without merit, so we consider only the first two.


The statute governing private sales of real property by the government pursuant to a tax lien, 28 U.S.C. section 2001(b), requires that the court “appoint three disinterested persons to appraise such property.” Appellants claim that the three appraisers recommended to the district court by the receiver were not disinterested, and therefore, the statutory appraisal requirement was not met.

Appellants presented, at most, vague assertions of bias on the part of the three appraisers, Messrs. Semple, Carneghi, and Mills. They allege that Semple had previously been retained by Tiburon, so therefore he has an interest in placing the lowest possible value on the land to ensure a low purchase price for the town. But of the three appraisals, his was the highest, which would seem to vitiate this argument. Carneghi has appraised the property before, at the request of the current receiver and his predecessor. Appellants contend that this relationship with the receivers, and “possible fidelity” towards the receivership renders Carneghi “interested.” Without more evidence of actual bias by these appraisers, the fact that they have appraised this property before does not necessarily prove they are “interested” parties.

Appellants' allegations against Mills are the least persuasive. Carneghi's company was previously called “Mills-Carneghi- Bautovich,” raising a suspicion in appellants' minds that Mills has been associated with Carneghi in the past. There is no indication that any such past association, if it existed, would be evidence of bias by Mills.

The district court found this evidence wholly unpersuasive, and we agree. The statute calls for the appraisers to be disinterested, but it does not require them to be completely unfamiliar with the property and the dispute. They must simply be impartial and unbiased. Without more, we cannot conclude that the district court clearly erred when it accepted these appraisals.


Appellants allege that the accepted purchase price of $6.8 million reflects the depressed value of the property caused by Tiburon's illegal down-zoning, and is therefore an inadequate and unfair price. Thus, appellants reassert their claims against Tiburon, and suggest that the purchase price should reflect the value of the property without the down-zoning. In other words, they argue that they should be compensated as though the Pine Street Corporation has already prevailed in the lawsuits against Tiburon.

By statute, the court must not approve a sale of property pursuant to a tax lien for [pg. 96-2217] less than two-thirds of the fair market value. 28 U.S.C. section 2001(b). The district court accepted the purchase price after reviewing three valid appraisals, which show that $6.8 million clearly exceeds two-thirds of the fair market value of the property.

But the purchase agreement also requires the receiver to dismiss the receivership's causes of action against Tiburon. Unlike appellants' meritless personal claims, the receivership has valid claims against Tiburon. However, any value these claims may have is speculative at best, and the district court did consider the value of the lawsuits when it decided to approve the sale.

An attorney experienced in land use litigation submitted his recommendations to the district court regarding the viability of the lawsuits. He ultimately concluded that there is a low probability of a recovery exceeding the current purchase offer, plus the additional cost of litigation and the continuously accruing interest on appellants' tax liability. Furthermore, the receiver, an experienced real estate attorney, indicated that Tiburon would most likely rescind the purchase offer if it did not include dismissal of the lawsuits. If this offer were rejected then the receiver estimated that a sale to a private developer, if an interested buyer were found, would net far less than the $6.8 million offered. The district court considered this information, and noted that: “After carefully studying the proposed agreement, the receiver's motion and supporting documents...I conclude that the proposed sale achieves the highest possible return on the Tiburon property....Even the most optimistic evaluation of the claims shows that it is extremely unlikely that defendants could recover enough damages to offset the high expense and long delay of litigation.” District Court's Order of August 18, 1995. On this basis, the district court judge then exercised his discretion to forgo appraisals of the lawsuits.

Under these facts we cannot conclude that the district court abused its discretion in approving the sale. We therefore affirm the district court's order approving the sale of the property to Tiburon for the purchase price of $6.8 million.


For the foregoing reasons, we find that appellants' personal lawsuits are subject to the federal tax lien, and thus, the district court did not abuse its discretion when it expanded the receivership to encompass the lawsuits. Furthermore, we affirm the district court's order confirming the sale of the property. Therefore, we remand so that the district court may order appellants to dismiss and release any claims they may have against Tiburon in connection with this matter, and we order the emergency stay lifted so that the sale can proceed apace.

Affirmed and Remanded.


Literally, a thing in action. “A personal right not reduced into possession, but recoverable by a suit at law....A right to receive or recover a debt, demand, or damages on a cause of action ex contractu or for a tort or omission of a duty....Personalty to which the owner has right of possession in future, or a right of immediate possession, wrongfully withheld.” Black's Law Dictionary 241 (6th ed. 1990).

U.S. v. STONEHILL, Cite as 55 AFTR 2d 85-1325, 04/12/1984

U.S., PLAINTIFF-APPELLEE v. Harry S. STONEHILL, Robert P. Brooks and Lourdes Blanco Stonehill, DEFENDANTS-APPELLANTS and Tierra Ranch, Inc., et al., Defendants and Trammell, Rand, Nathan & Lincoln, a partnership, and Pacita C. Brooks, Intervenor-Appellants.

Case Information:

Code Sec(s):

Court Name: U.S. District Court, Dist. of Oregon,

Docket No.: DC Nos. Cv. 65-127-SO, 43244, 65-2345, 65-2348,

Date Decided: 04/12/1984

Disposition: Decision for Govt.

Related Proceedings: Related cases at 38 AFTR2d 76-5699 ( 420 F.Supp. 46) and 51 AFTR2d 83-1152 (702 F.2d 1288).

Cites: 55 AFTR 2d 85-1325, 87-2 USTC P 9399.


1. JUDICIAL PROCEEDINGS—Civil actions by U.S.—District Court jurisdiction. Relief from judgments of District Courts which were affirmed on appeal denied. [pg. 85-1326] District Court Judge's error during hearing where he based decision on contents of transcript on erroneous assumptions didn't change fact that equities and law were with Govt.

Reference(s): 1985 P-H Fed. ¶38,729(133).


John J. McCarthy, Sr. Litigation Counsel, Arthur L. Biggins, Atty., Dept. of Justice, Wash., D.C., for Appellee.

Bert B. Rand, Trammell, Sand, Nathan & Lincoln, 1000 Potomac St., N.W., Suite 302, Wash., D.C., Ridgway K. Foley, Jr., Schwabe, Williamson, Wyatt, Moore & Roberts, 1600-1800 Pacwest Ctr., Portland, Ore., H. David Hermansdorfer, Hermansdorfer & Templeton, Galloway Bldg., Suite 200, Ashland, Ky., Attys. for Appellants.

Judge: SOLOMON, District Judge:


Harry S. Stonehill and Robert P. Brooks (taxpayers) seek relief from the judgments entered against them in this and several other district courts, which judgments were affirmed on appeal. Taxpayers assert that during the hearing on the contents of a transcript on appeal, I conceded that I had erred in basing my decision on erroneous assumptions.

I have examined the full transcript of the proceedings dated May 20, 1981, and as I pointed out at that time, the counsel for the taxpayers in their presentation "take out selected portions from selected witnesses." (pg. 75).

I also stated that "I can't understand how I so grievously misunderstood the taxpayers' case. And I can't blame them for not calling it to my attention because they're out to win the case and not to let me correct any error that I made.

"But I don't know whether there is that error, and it may very well be that other portions of the record would permit you to put it in. And if you (government counsel) think so, you can go ahead and put it in."

The taxpayers' contention that the government was not entitled to the presumption of correctness for the assessments because they lacked factual foundations was fully argued in the Court of Appeals and was considered and rejected by that court.

I have reviewed the full transcript of the May 20, 1981 proceedings, my opinion dated July 23, 1976 and reported at 420 F.Supp. 46 [ 38 AFTR2d 76-5699], the opinion of the Court of Appeals reported at 702 F.2d 1288 [ 51 AFTR2d 83-1152], and other pertinent documents. I find that the equities and the law are with the government and against the taxpayers.

The motion of Harry S. Stonehill and Robert P. Brooks for relief from the judgments is therefore denied.

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