Bankruptcy Plan Language and Rule 155 Cannot Preclude or Re-Litigate IRS Shareholder-Ownership Tax Deficiencies

1. Introduction

In Veeraswamy v. Comm'r of Internal Revenue (2d Cir. Feb. 9, 2026) (summary order), the Second Circuit affirmed a United States Tax Court decision sustaining an income-tax deficiency and penalties against petitioner-appellant Karen Veeraswamy for tax year 2014. The Commissioner’s theory was that Veeraswamy was a 50% shareholder of the S corporation Ashand Enterprises (“Ashand”) and therefore owed tax on her pro rata share of Ashand’s capital gains and rental income.

Veeraswamy (pro se on appeal, and not appearing for oral argument) countered that statements made during Ashand’s 2013–2015 bankruptcy proceedings (and related proceedings involving her then-husband, Velappan Veeraswamy) established that Velappan was the sole owner, and that preclusion doctrines (and related equitable theories) barred the IRS from asserting she was an owner. She also challenged the income computation, the Tax Court’s handling of post-opinion computations under Tax Court Rule 155, and the imposition of penalties under 26 U.S.C. § 6651(a).

2. Summary of the Opinion

  • Ownership finding affirmed: The Second Circuit held the Tax Court did not clearly err in finding Veeraswamy owned 50% of Ashand in 2014, relying heavily on documentary evidence and Veeraswamy’s own bankruptcy-court representations.
  • No preclusion from bankruptcy materials: The Court held Ashand’s bankruptcy confirmation materials did not amount to a final merits determination of ownership, and the issue was not “actually litigated and decided,” so neither claim nor issue preclusion applied.
  • Income calculation upheld: The deficiency notice had a rational basis connecting Veeraswamy to Ashand’s income, so the presumption of correctness applied and was not rebutted.
  • Rule 155 ruling upheld: The Tax Court did not abuse its discretion by refusing to use Rule 155 to revisit deductions already resolved in the court’s findings.
  • Penalties affirmed: Veeraswamy failed to show “reasonable cause” under § 6651(a), and she did not qualify for relief from underpayment penalties under § 6654(e)(3)(A).

3. Analysis

A. Precedents Cited

Standard of review and pro se construction

  • Chai v. Comm'r of Internal Revenue, 851 F.3d 190 (2d Cir. 2017): supplied the governing appellate standards—de novo review for legal conclusions and clear-error review for factual findings. This framework mattered because Veeraswamy’s principal challenge (ownership) was factual and therefore difficult to overturn absent clear error.
  • Triestman v. Fed. Bureau of Prisons, 470 F.3d 471 (2d Cir. 2006) (per curiam): required liberal construction of pro se submissions. The panel invoked this principle, but still enforced preservation/forfeiture rules and evidentiary burdens.

Preclusion doctrine (claim and issue preclusion)

  • Marvel Characters, Inc. v. Simon, 310 F.3d 280 (2d Cir. 2002): established that federal law governs the preclusive effect of a federal judgment—critical because Veeraswamy relied on federal bankruptcy-court orders and plans.
  • Allen v. McCurry, 449 U.S. 90 (1980): provided the requirement that claim preclusion generally needs a prior “final judgment on the merits.” The panel used this requirement to reject the notion that bankruptcy confirmation/closure documents conclusively determined ownership.
  • Boguslavsky v. Kaplan, 159 F.3d 715 (2d Cir. 1998): supplied the “actually litigated and decided” requirement for issue preclusion. The Court emphasized that Ashand’s ownership was not actually litigated and decided in the bankruptcy proceedings.
  • Arizona v. California, 530 U.S. 392 (2000): cited for the rule that settlements ordinarily lack issue-preclusive effect unless the parties clearly intend otherwise. This undercut any argument that the settlement in Velappan’s bankruptcy fixed ownership for later tax purposes—especially because the settlement contained express non-admission language.

Preservation/forfeiture on appeal

  • Green v. Dep't of Educ. of City of N.Y., 16 F.4th 1070 (2d Cir. 2021): reinforced that appellate courts generally will not consider issues raised for the first time on appeal. The panel used this to dispose of new equitable-estoppel and penalty-related theories not presented to the Tax Court.

Deficiency presumption and “rational basis” limitation

  • Schaffer v. Comm'r of Internal Revenue, 779 F.2d 849 (2d Cir. 1985): stated that a deficiency notice is presumed correct and the taxpayer bears the burden to prove it wrong—supporting affirmance where Veeraswamy did not substantively rebut the IRS computations at trial.
  • Llorente v. Comm'r of Internal Revenue, 649 F.2d 152 (2d Cir. 1981): qualified the presumption—only as strong as its rational underpinnings, and inapplicable if lacking a rational basis. The Court used this to analyze whether the IRS had a plausible link between Veeraswamy and the income (it did, given her repeated 50% ownership representations and payment from the bankruptcy estate).

Tax Court Rule 155 computations

  • Chimblo v. Comm'r of Internal Revenue, 177 F.3d 119 (2d Cir. 1999): set the abuse-of-discretion standard for reviewing Rule 155 computations. This deferential standard supported affirmance of the Tax Court’s refusal to entertain Veeraswamy’s post-opinion attempt to inject large deductions.

Penalties and “reasonable cause”

  • Marrin v. Comm'r of Internal Revenue, 147 F.3d 147 (2d Cir. 1998): explained § 6651(a)’s “reasonable cause and not willful neglect” standard and recognized that reliance on a competent professional’s mistaken legal advice can sometimes establish reasonable cause. The panel distinguished Marrin because Veeraswamy conceded the accountant did not advise her that she need not file.

B. Legal Reasoning

1) Ownership as a fact question anchored in admissions and documents

The Court affirmed the Tax Court’s finding that Veeraswamy remained a 50% owner in 2014 based on a cumulative record: (i) corporate minutes showing 50/50 ownership at formation; (ii) her testimony regarding management participation after separation; (iii) S-corporation filings (Forms 1120S and K-1s) reflecting her ownership; and—most importantly—(iv) her repeated bankruptcy-court representations (including under penalty of perjury) that she was “50 percent equity shareholder,” which she used to claim entitlement to escrow funds and an equity distribution.

The Court also stressed the absence of contrary evidence: allegations that Velappan “likely altered” ownership were unsupported, and there was no proof of abandonment or transfer of her interest before 2014.

2) Bankruptcy confirmation materials did not determine ownership for tax purposes

Veeraswamy’s preclusion theory relied on language in a proposed plan indicating Velappan was the “sole owner of Debtor.” The Second Circuit rejected preclusion because the operative bankruptcy orders did not decide ownership: the final decree explicitly disclaimed settling payment propriety “as between” the competing equity claimants, and the confirmation order made no findings on equity ownership. Under Allen v. McCurry and Boguslavsky v. Kaplan, there was no final merits adjudication and no issue actually litigated and decided.

In a related footnote, the Court added that a settlement in Velappan’s bankruptcy also did not decide ownership, invoking Arizona v. California and emphasizing the settlement’s express clause denying any admission or adjudication of fact or law.

3) Deficiency notice: rational connection and failure to rebut

Applying Schaffer and Llorente, the Court held the IRS had a rational basis: Veeraswamy represented herself as a 50% shareholder and received a substantial bankruptcy payment “based on her assertions,” justifying taxation of her pro rata share under the S-corp pass-through rules (citing 26 U.S.C. §§ 61(a) and 1366(c)).

The Court also highlighted trial-level deficiencies: the revenue agent sought substantiating documents for contributions/adjustments and received none; Veeraswamy did not meaningfully contest the computations at trial; and an expenses assessment she later relied on was presented months after the Tax Court had already decided deductions and was not properly raised via reconsideration materials.

4) Rule 155 cannot be used to re-open decided issues

Even assuming her Rule 155 submission was timely, the Court agreed the Tax Court acted within discretion because Tax Court Rule 155(c) forbids argument on matters already disposed of or “new issues.” Veeraswamy’s computation sought more than $1 million in deductions despite the court’s earlier finding that she was entitled only to $152,100 and that she had not proved more at trial. The panel treated the attempted deduction overhaul as impermissible relitigation.

5) Penalties: no reasonable cause; limited § 6654 relief not invoked or proven

Under 26 U.S.C. § 6651(a) and Marrin, the Court affirmed mandatory penalties absent reasonable cause. Veeraswamy’s accountant consultation did not help because she did not receive (or rely on) advice that she need not file. For underpayment penalties under § 6654, the Court noted the narrow statutory relief for “casualty, disaster, or other unusual circumstances” and found it was neither argued nor supported by evidence. Additional appellate theories (complexity; speculative criminal exposure) were forfeited under Green and, in any event, not substantiated.

C. Impact

Although issued as a nonprecedential summary order, the decision is practically important in three recurring tax contexts:

  1. Bankruptcy record vs. tax liability: Parties cannot assume that plan language, confirmation, or closure documents will bind the IRS (or the Tax Court) on ownership unless the ownership issue was actually litigated and decided or clearly resolved in a judgment with preclusive effect.
  2. Admissions in other forums: Sworn or repeated statements in bankruptcy filings can become powerful evidence of ownership and income attribution in later tax litigation, particularly for pass-through entities.
  3. Procedural discipline in Tax Court: The order reinforces that Rule 155 is a mechanical computation tool—not an opportunity to introduce new evidence, expand deductions, or re-argue issues that should have been proven at trial.

4. Complex Concepts Simplified

  • S corporation “pass-through” taxation: An S corporation generally does not pay entity-level federal income tax. Instead, its income items (e.g., rents, capital gains) “pass through” to shareholders, who report their pro rata shares on personal returns (here, referenced via 26 U.S.C. § 1366(c)).
  • Claim preclusion vs. issue preclusion:
    • Claim preclusion can bar re-litigation of the same claim after a final judgment on the merits.
    • Issue preclusion can bar re-litigation of a particular issue, but only if it was actually litigated and decided previously.
    The Court found neither applied because Ashand’s ownership was not adjudicated in the bankruptcy orders.
  • Presumption of correctness of a deficiency notice: The IRS’s deficiency determination is presumed correct; the taxpayer must prove it wrong. That presumption can fail if the IRS has no rational basis tying the taxpayer to the income—something the Court found was satisfied here.
  • Tax Court Rule 155: After the Tax Court decides the substantive issues, Rule 155 is used to compute the precise dollar amount owed. It is not a second trial and cannot be used to add new deductions or re-argue already decided issues.
  • “Reasonable cause” penalties defense: To avoid § 6651(a) penalties, a taxpayer must show the failure to file/pay was due to reasonable cause and not willful neglect— typically requiring proof of ordinary business care and prudence (and sometimes genuine reliance on competent professional advice).

5. Conclusion

The Second Circuit’s affirmance rests on a straightforward but consequential principle: ownership and income attribution for S-corporation tax purposes are factual determinations that bankruptcy-plan language and post-opinion computation procedures generally cannot displace absent actual litigation and adjudication. The case also underscores that taxpayers who assert ownership to obtain bankruptcy distributions may later face corresponding tax consequences, and that penalty relief requires timely, evidence-backed showings of reasonable cause rather than post hoc arguments.