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Carter v. United States

filed: September 1, 1992.


Appeal from the United States District Court for the Northern District of California. D.C. No. CV-89-20440-SW. Spencer M. Williams, District Judge, Presiding.

Before: Thomas Tang, Harry Pregerson, and Robert Boochever, Circuit Judges. Opinion by Judge Boochever; Partial Concurrence, Partial Dissent by Judge Tang.

Author: Boochever

BOOCHEVER, Circuit Judge:

Jay and Joan Carter appeal the entry of summary judgment against them in their tax refund suit challenging the Internal Revenue Service's disallowance of a deduction for charitable contributions in 1983. We affirm the district court's denial of the Carters' summary judgment motion, but reverse its grant of the IRS's summary judgment motion and remand for trial.


The Carters founded the Psychal Physionic Universal Life Church (PPULC) in 1975 after being ordained ministers in the Universal Life Church, Inc. of Modesto (ULC). They organized a congregation, affiliated their church with the ULC, and opened a church bank account on which the Carters were the sole signatories. Jay Carter became a full-time minister and does not hold any other employment. In lieu of a salary Jay receives a parsonage allowance, which is not taxable as income when paid to members of the clergy. See 26 U.S.C. § 107. Joan Carter, who is employed, donates to the PPULC fifty percent of her income, the maximum deductible contribution to a qualifying religious organization. The donations are deposited into the PPULC account and are used to pay the parsonage allowance (including mortgage payments, interest, taxes, utilities, and repairs on the house) and other expenses which the Carters characterize as exclusively church-related.

Beginning in 1976, the Carters claimed a charitable contribution deduction on their income tax returns for the 50% of Joan's salary they donated to the PPULC. Their annual donations ranged from approximately $10,000 in 1976 to $21,350 in 1983. Each year the IRS has disallowed the deduction and the Carters have paid the disputed amount. In 1981, the Carters sued the government in federal district court for a tax refund for the years 1976, 1977, and 1978 (Carter I). In 1984, the case went to trial before a jury, and the jury returned a verdict in favor of the Carters. In 1982, the Carters sued in Tax Court for a tax refund for the years 1979, 1980, 1981, and 1982 (Carter II). The Tax Court dismissed the suit after the Carters failed to comply with a discovery order for PPULC bank records.

The Carters then brought the instant suit (Carter III) in federal district court, seeking a refund on their 1983 taxes for the amount of deficiency resulting from the IRS's disallowance of their 1983 contributions to PPULC and from the addition of a five percent negligence penalty. The district court entered judgment for the government on the parties' cross-motions for summary judgment. The Carters filed a motion to set aside, alter and/or amend the judgment pursuant to Fed. R. Civ. P. 59(e) and 60(b), along with supplemental declarations concerning the facts of their case. The district court denied the motion. The Carters now timely appeal the judgment and the denial of their motion to set aside, alter and/or amend the judgment.


In Carter III the Carters moved for summary judgment, arguing that the Carter I verdict and judgment collaterally estopped the government from relitigating their entitlement to a charitable contribution deduction. The government also moved for summary judgment, arguing that Carter I had no preclusive effect and that the undisputed facts demonstrated that the Carters were not entitled to the deduction. In granting the government's summary judgment motion, the district court determined that collateral estoppel was unavailable as a matter of law. The court also ruled that the Carters had failed to raise a material dispute concerning their fulfillment of two requirements for the deduction: whether they had made a bona fide gift and whether PPULC earnings inured to their personal benefit. We agree with the district court that the Carter I judgment does not have collateral estoppel effect. Yet we also conclude that the Carter I judgment, along with the Carters' affidavit that all of their procedures, types of expenditures and church activities remain unchanged, were sufficient to raise a material dispute as to the Carters' entitlement to the deduction in 1983.

I. Collateral Estoppel

Under the doctrine of collateral estoppel, once an issue is actually litigated and necessarily determined, that determination is conclusive in subsequent suits alleging different claims between the same parties. See Montana v. United States, 440 U.S. 147, 153-54, 59 L. Ed. 2d 210, 99 S. Ct. 970 (1979). The availability of collateral estoppel is a mixed question of law and fact in which legal issues predominate, and our review is de novo. Davis & Cox v. Summa Corp., 751 F.2d 1507, 1519 (9th Cir. 1985).

Collateral estoppel principles apply in the income tax context to preclude the relitigation, in a proceeding concerning a later tax year, of any matters that were actually presented and determined in a suit concerning an earlier tax year. See Peck v. Commissioner, 904 F.2d 525, 527 (9th Cir. 1990). Several limitations apply. First, collateral estoppel is unwarranted if there has been a "significant 'change in the legal climate.' " Id. (citing Montana, 440 U.S. at 161). Second, the doctrine is inapplicable if the legally controlling facts - those facts essential to the prior judgment - have changed. See Montana, 440 U.S. at 159; Commissioner v. Sunnen, 333 U.S. 591, 601, 92 L. Ed. 898, 68 S. Ct. 715 (1948).*fn1 Third, in cases where the tax judgment sought to be applied preclusively results from a jury verdict, we have declined to give the judgment preclusive effect if new evidentiary facts exist which, although not themselves controlling facts, change the complexion of the controlling facts presented to the jury in the prior proceeding. See Parker v. Westover, 221 F.2d 603, 606 (9th Cir. 1955). In such cases, "the possibility of a different verdict because of the introduction of evidentiary facts different from those before a court and jury in a prior case is sufficient to surmount the danger of collateral estoppel in an income tax situation." Id.

Since Carter I, a legal development has occurred concerning the tax status of the Universal Life Church, and this development significantly changes the complexion of the basic facts presented to the jury in Carter I. In 1984, the Internal Revenue Service (IRS) revoked the ULC's tax exempt status as a corporation organized and operated exclusively for religious purposes, for the fiscal years ending April 30, 1978, through April 30, 1981. That revocation has been upheld in the federal courts. See Universal Life Church, Inc. v. United States, 13 Cl. Ct. 567 (1987), aff'd 862 F.2d 321 (Fed. Cir. 1988).

In Carter I, the Carters relied substantially on the ULC's tax exempt status as support for their claimed entitlement to a deduction for a charitable contribution. They argued to the jury, both in their opening and closing statements, that the ULC is a bona fide religion, and that because the Carter's congregation and the ULC are "one church" the ULC's tax-exempt status extends to the PPULC. Thus, contributions the Carters deposited into the PPULC account, they stated, belong to the ULC and the Carters were entitled to a deduction for those monies.

Each of the Carters' eight witnesses, including the Carters themselves, testified at length to the relationship between the ULC and its member congregations, and about the ULC's tax exempt status. Three of these witnesses were officials of the Universal Life Church. Reverend Kirby Hensley, the founder and president of the ULC, testified that member congregations are one with the ULC and that contributions deposited into the accounts of the member congregations belong to the ULC. Robert Imbeau also testified. Imbeau is a ULC minister and a member of the ULC Board of Directors, whose duties are to oversee and maintain the records of the various ULC congregations. Imbeau testified that because the congregations and the ULC "are one" they need not apply for their own tax exemption. Rebecca Cable, a ULC minister who serves as director of the ULC Ministerial Association and on the ULC Board of Directors and Advisory Board, testified extensively about the religious activities of the ULC. She also testified that contributions placed in congregations' bank accounts "belonged to the Universal Life Church, and ...

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