Ask The California Employment Tax And Payroll Tax Attorney – The Doctrine Of Res Judicata. Does It Apply To State Tax Audits? The Achamak Trading, Inc. Case Part 2

By Robert S. Schriebman
2023

Introduction

This is Part 2 of a two-part series.

Is it possible to lose an administrative law judge hearing, file a claim for refund, and get a new judge hearing for the same matter? That was the issue raised in the Achamak Trading Inc. case. The case involves The Doctrine of Res Judicata.

The Achamak Trading Case

Achamak Trading Inc. OTA Case No. 19054810

Achamak involved the denial of an SBE claim for refund for the periods 2005-2007 in the amount of $40,100.

Achamak operated a gas station and mini-mart in San Bernardino. The company underwent two sales tax audits. The first audit involved the years 2005-2007 and the second audit involved the years 2008-2011.

For the first audit period Achamak requested a hearing before the then SBE (now called the CDTFA). The SBE sent Achamak a hearing notice dated December 4, 2015, and scheduled a hearing on the merits for February 24, 2016. Achamak did not respond to this hearing notice, and failed to attend the scheduled hearing.

Because Achamak did not show up at the hearing, its matter was placed on the “non-appearance calendar.” Achamak was informed that the SBE would base its decision on the written record without a new oral hearing. As a result, the SBE voted to adopt and approve the appeals conference decision known as a “D&R.” No further assessment reductions were warranted.

On September 7, 2017, Achamak timely filed a claim for refund for recovery of partial payments it had made toward the first assessment – $40,100. On January 9, 2019, a second administrative appeals conference was held to review the claim for refund. The claim was denied. The denial stated that Achamak was precluded from pursuing the matter further based on The Doctrine of Res Judicata. Achamak then filed an appeal with the OTA. The OTA affirmed the administrative decisions that the refund claim was barred by res judicata.

In this part 2, I will discuss The Doctrine of Red Judicata, its elements and why the OTA told Achamak that they could not have two bites of the same litigation apple.

What is the Doctrine of Res Judicata?

Traditionally, the doctrine of res judicata prevents parties or their privies from relitigating a cause of action after a final judgement on the merits has been entered by a court of competent jurisdiction. ((Commissioner v. Sunnen (1948) 333 US 591, 597; Bernard v. Bank of America Nat. Trust & Savings Assn. (1942) 19 Cal.2d 807,810). Res judicata prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in prior proceeding. Res judicata is based upon the sound public policy by preventing a party who has had one fair trial on an issue from again drawing it into controversy.

Although res judicata traditionally applied in the context of courts and their decisions, it also applies to adjudicatory administrative decisions. Both OTA and its predecessor, the Board, have applied res judicata to reject administrative appeals in the franchise and income tax context. The same principle must apply in EDD litigation before the CUIAB.

Res judicata prevents litigation of all grounds for recovery that were previously available to the parties regardless of whether those grounds were asserted or determined in the prior proceeding.

The Four Key Elements for Res Judicata to Apply

There are four elements that must be satisfied for res judicata to apply to bar a second hearing on the same mater:

• The parties in each action must be identical.
• Either a court or an administrative agency must have rendered the first judgment.
• The prior action must have resulted in a final judgment on the merits.
• The same cause of action or claim (i.e., the same tax periods) must be involved in both suits.

Conclusion

Res Judicata is a two-way sword. The Achamak case involved a sales tax audit. What about an EDD or FTB audit? How does the doctrine work? We learned that the taxpayer cannot have two ALJ-type hearings on the same case.

A taxpayer cannot have two bites of the same litigation apple. You can’t lose in court or in an administrative ALJ hearing, file a claim for refund, and have a new and second ALJ hearing on the same matter.

Res Judicata does not apply if one loses an administrative hearing such as an appeals conference and thereafter files a petition for a judicial hearing such as an OTA hearing or a CUIAB hearing. Res Judicata only applies between judge-type hearings.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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