222 F.

2d 622
55-1 USTC P 9456

FAIRMONT ALUMINUM COMPANY, Petitioner,

v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 6946.

United States Court of Appeals Fourth Circuit.

Argued April 14, 1955.
Decided May 18, 1955.

Earl Q. Kullman, New York City (Kirlin, Campbell & Keating, New York
City, on brief), for petitioner.
Melva M. Graney, Sp. Asst. to the Atty. Gen. (H. Brian Holland, Asst.
Atty. Gen., and Ellis N. Slack, Sp. Asst. to the Atty. Gen., on brief), for
respondent.
Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.
PARKER, Chief Judge.

This is an appeal from the Tax Court of the United States involving a
deficiency in excess profits taxes for the year 1945. 22 T.C. 1377. The question
in the case is based upon the contention of taxpayer that its equity invested
capital was not less than $1,500,000 instead of $550,000, the amount allowed.
Precisely the same question was raised by taxpayer before the Tax Court with
respect to the computation of its excess profits taxes for the year 1944, and was
decided adversely to its contention both by the Tax Court and by this court.
Fairmont Aluminum Co. v. Commissioner, 4 Cir., 180 F.2d 832, 834. The court
below held taxpayer concluded by the decision in the prior litigation on the
principle of collateral estoppel. Taxpayer argues that the principle of collateral
estoppel has no application (1) because it contends that the prior decision was
not one on the merits, (2) because it says that there has been a change of 'legal
atmosphere' and (3) because it says the Tax Court is not a court at all but an
administrative agency. We think that there is no merit in any of these
contentions.

There can be no question but that the prior decision was a decision on the
merits. In 1926 taxpayer had acquired property formerly belonging to the West
Virginia Metal Products Corporation. That property had been sold under
foreclosure proceedings and purchased by a committee of bondholders, who
transferred it to taxpayer for notes in the aggregate sum of $550,000 and 3,000
of the 60,000 shares of common stock. Taxpayer contended that the property so
acquired was worth $1,500,000 but offered nothing in support of the contention
except a 1923 balance sheet. With respect to that matter this court said:

'Manifestly a corporate balance sheet more than two years old has no tendency
to establish the value of property after it has been foreclosed and held for more
than two years thereafter. From the stipulated facts that the negotiations
between the bondholders committee and the Adam group were conducted at
arm's length, and that only 5% of the common stock was issued to the
bondholders with $550,000 of notes, whereas 95% went to the preferred
stockholders who put up $200,000, it is a fair inference that the common stock
was considered to have little or no value and that the $550,000 was considered
the fair value of the property transferred.'

We considered also the contention of taxpayer that its claim should be allowed
on the ground that it came into being as a tax free reorganization under the
holding in Palm Springs Holding Corporation v. Commissioner, 315 U.S. 185,
62 S.Ct. 544, 86 L.Ed. 785 and held that it had not established its claim on this
basis, saying:

'Taxpayer contends that it came into being as the result of a tax free
reorganization of the West Virginia Metal Products Corporation, relying for this
position principally upon the decision in the case of Palm Springs Holding
Corporation v. Commissioner, 315 U.S. 185, 62 S.Ct. 544, 86 L.Ed. 785; but
even if this were true, it would not benefit taxpayer. The balance sheet offered
furnishes no basis for computing equity invested capital in connection with that
reorganization or otherwise; and, in addition to this, there is no evidence to take
the case out of the ordinary rule that upon a reorganization where one
corporation is organized to take over the assets of another, the new corporation
takes only the value of the assets transferred (less the transferor's debts) as its
equity invested capital. Where the old corporation has a deficit, this may be
included in the equity invested capital of the new under (26 U.S.C.A. s) 718(a)
(7), but only if the conditions of 718(c)(5) are met, viz., if all the property of
the old corporation is transferred to the new, if the sole consideration of the
transfer of the property is the transfer to the transferor or its shareholders of all
stock of all classes of the transferee, and if the transferor corporation is
forthwith completely liquidated and immediately after the liquidation the

shareholders of the transferor own all such stock. Even if the bondholders of
the West Virginia Metal Products Corporation be treated as stockholders, under
the doctrine of the Palm Springs case, it is obvious that these conditions have
not been met. This being true, it is not necessary to consider whether the
reorganization falls within the rule of the Palm Springs case.'
6

In the prior case taxpayer relied upon a stipulation of facts, notwithstanding a

warning by government counsel that it was insufficient to establish either of the
contentions made by taxpayer. When the Tax Court decided that case against
taxpayer on the ground that there had been a failure of proof, taxpayer asked to
reopen the case for the taking of additional testimony, but this was denied. A
subsequent motion for a new trial was likewise denied. On appeal this court
had before it all the proceedings had in the Tax Court including these motions
and affirmed the judgment there rendered. There can be no question but that the
judgment so rendered was a judgment on the merits and was binding upon the
taxpayer, on the principle of collateral estoppel on the issues raised as to its
equity invested capital. A judgment on the merits is one which is based on legal
rights as distinguished from mere matters of practice, procedure, jurisdiction or
form. Swift v. McPherson, 232 U.S. 51, 34 S.Ct. 239, 58 L.Ed. 499; Clegg v.
United States, 10 Cir., 112 F.2d 886; 30 Am. Jur. p. 944; 49 C.J.S., Judgments,
8, p. 33; 27 Words and Phrases, Merits, pp. 146-147. Certainly a judgment on
an agreed statement of facts is a judgment on the merits, just as is a judgment
on the pleadings. See 27 Words and Phrases, Merits, p. 146 and cases there
cited. And it does not become anything other than a judgment on the merits
because a party fails to include in the agreed statement facts necessary to
support his contentions. When taxpayer has invoked the judgment of the court
with respect to his claim, he is bound by an adverse judgment, whether this has
resulted from the fact that the law is against him, from failure to produce
sufficient proof or from failure to include sufficient facts in a stipulation.

It is well settled that, although a judgment rendered with respect to taxes for
one year is not res judicata in a suit for taxes for another year, a decision as to a
matter put in issue and decided in the former suit is binding on the principle of
estoppel by judgment or collateral estoppel with respect to the same matter
arising in the subsequent litigation, provided that, in the meantime, there has
been no change in the fact situation or in the law applicable thereto.
Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 598, 601, 68 S.Ct.
715, 719, 92 L.Ed. 898. As said by the Supreme Court in the case cited:

'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
nonliability 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. Collateral estoppel operates,
in other words, to relieve the government and the taxpayer of 'redundant
litigation of the identical question of the statute's application to the taxpayer's
status.' Tait v. Western Md. Ry. Co., 289 U.S. 620, 624, 53 S.Ct. 706, 707, 77
L.Ed. 1405.
9

******

10

'If the legal matters determined in the earlier case differ from those raised in the
second case, collateral estoppel has no bearing on the situation. See Travelers
Ins. Co. v. Commissioner, 2 Cir., 161 F.2d 93. And where the situation is
vitally altered between the time of the first judgment and the second, the prior
determination is not conclusive. * * *

11

'Of course, where a question of fact essential to the judgment is actually

litigated and determined in the first tax proceeding, the parties are bound by
that determination in a subsequent proceeding even though the cause of action
is different. See Evergreens v. Nunan, 2 Cir., 141 F.2d 927 (152 A.L.R. 1187).
And if the very same facts and no others are involved in the second case, a case
relating to a different tax year, the prior judgment will be conclusive as to the
same legal issues which appear, assuming no intervening doctrinal change.'

12

There has been no change of fact, of law or of 'legal atmosphere' affecting

taxpayer's equity invested capital, since the decision in the prior case with
regard to that matter. The questions of fact essential to the judgment in that case
are the same questions of fact which are involved here; and the case cannot be
distinguished in principle from Tait v. Western Maryland Ry. Co., 289 U.S.
620, 53 S.Ct. 706, 77 L.Ed. 1405, cited with approval in the Sunnen case,
supra. In the Tait case this court had held that, where bonds of a railroad had
been sold at a discount, it was proper, for income tax purposes, that such
discount be amortized over the life of the bonds and a proportionate part thereof
be deducted each year as accrued interest from gross income. A deduction was
allowed for the tax years 1918 and 1919. Western Maryland Ry. Co. v.
Commissioner, 4 Cir., 33 F.2d 695. In subsequent litigation relating to tax
liability for the years 1920-1925, the same question was raised and it was held
that the parties were bound by the determination thereof in the prior litigation.
Western Maryland R. Co. v. Tait, D.C., 53 F.2d 211, affirmed 4 Cir., 62 F.2d
933, affirmed by Supreme Court 289 U.S. 620, 53 S.Ct. 706, 707, 77 L.Ed.

1405. In that case the question of the deductability of bond discount was the
same for the several years, just as here the question relating to equity invested
capital are the same. In holding that the decision in the former case operated as
an estoppel, the Supreme Court said:
13

'The scope of the estoppel of a judgment depends upon whether the question
arises in a subsequent action between the same parties upon the same claim or
demand or upon a different claim or demand. In the former case a judgment
upon the merits is an absolute bar to the subsequent action. In the latter the
inquiry is whether the point or question to be determined in the later action is
the same as that litigated and determined in the original action. Cromwell v.
County of Sac, 94 U.S. 351, 352, 353, 24 L.Ed. 195; Southern Pacific R. Co. v.
United States, 168 U.S. 1, 48, 18 S.Ct. 18, 42 L.Ed. 355; United States v.
Moser, 266 U.S. 236, 241, 45 S.Ct. 66, 69 L.Ed. 262. * * *

14

'This court has repeatedly applied the doctrine of res judicata in actions
concerning state taxes, holding the parties concluded in a suit for one year's tax
as to the right or question adjudicated by a former judgment respecting the tax
of an earlier year. (City of) New Orleans v. Citizens' Bank, 167 U.S. 371, 17
S.Ct. 905, 42 L.Ed. 202; Third National Bank v. Stone, 174 U.S. 432, 19 S.Ct.
759, 43 L.Ed. 1035; Baldwin v. (State of) Maryland, 179 U.S. 220, 21 S.Ct.
105, 45 L.Ed. 160; Deposit Bank (of Frankfort) v. (City of) Frankfort, 191 U.S.
499, 24 S.Ct. 154, 48 L.Ed. 276. Compare United States v. Stone & Downer
Co., 274 U.S. 225, 230, 231, 47 S.Ct. 616, 71 L.Ed. 1013. The public policy
upon which the rule is founded has been said to apply with equal force to the
sovereign's demand and the claims of private citizens.'

15

Taxpayer contends that changes in procedural law and in the legal atmosphere
brings the case within the exceptions noted in Commissioner of Internal
Revenue v. Sunnen, supra; but this contention is so lacking in merit as not to
warrant discussion. There has been no change in the law relating to equity
invested capital for the years in question and no change in procedural law or the
law of evidence which would enable taxpayer to produce evidence that he
could not have produced at that time. Taxpayer had all the evidence when our
prior decision was rendered as to equity invested invested capital that it has
now; and there has been no change in the facts. Taxpayer is merely attempting
to have tried over again the question as to the amount of equity invested capital
arising out of the taking over of the assets of the West Virginia Metal Products
Corporation, the very matter which we passed upon and determined in the prior
litigation. Taxpayer cites the cases of Wodehouse v. Commissioner, 2 Cir., 177
F.2d 881 and 4 Cir., 178 F.2d 987; but in neither of these decisions is collateral
estoppel relied on or discussed. Another case relied on is United States v. Erie

Forge Co., 3 Cir., 191 F.2d 627, which is manifestly not in point, holding
merely that there was no estoppel where the court had never assumed
jurisdiction of the matter in dispute in the prior case.
16

The taxpayer contends also that the doctrine of collateral estoppel, or estoppel
by judgment, may not be applied to proceedings of the Tax Court, which, it
contends, is not a court at all but an administrative agency. It is perfectly clear,
however, that whether the Tax Court be regarded as a court or as an
administrative agency, it is exercising judicial functions in hearing tax cases of
this character; and, when exercising judicial functions, as distinguished from
administrative functions,1 it is bound to apply such fundamental judicial
doctrines as res judicata and estoppel. The case of Commissioner of Internal
Revenue v. Sunnen, supra, in which the Supreme Court was at pains to point
out the distinction between res judicata and collateral estoppel with the
limitations upon the latter which were applied in that case was a case which
originated in the Tax Court; and all of the law there laid down by the Supreme
Court would have been beside the point if res judicata and collateral estoppel
had no application to Tax Court cases. In the course of the opinions in that case,
the court used the following language heretofore quoted, viz., 'Of course,
where a question of fact essential to the judgment is actually litigated and
determined in the first tax proceeding, the parties are bound by that
determination in a subsequent proceeding even though the cause of action is
different. See Evergreens v. Nunan, 2 Cir., 141 F.2d 927. And if the very same
facts and no others are involved in the second case, a case relating to a different
tax year, the prior judgment will be conclusive as to the same legal issues
which appear, assuming no intervening doctrinal change.' The case of The
Evergreens v. Nunan, 2 Cir., 141 F.2d 927, certiorari denied Evergreens v.
C.I.R., 323 U.S. 720, 65 S.Ct. 49, 89 L.Ed. 579, cited by the Supreme Court, is
a decision of the Court of Appeals of the Second Circuit, reviewing a decision
of the Tax Court, wherein Judge Learned Hand had stated the principle of
equitable estoppel or estoppel by judgment as applicable to a Tax Court
proceeding. Directly in point in holding the doctrine of collateral estoppel
applicable to Tax Court proceedings are the recent cases of Lynch v.
Commissioner, 7 Cir., 216 F.2d 574 and Lunsford v. Commissioner, 5 Cir., 212
F.2d 878. And see the cases cited in note 13 of the opinion of the Tax Court in
which that court has heretofore applied the doctrine of collateral estoppel.

17

Affirmed.

That res judicata and estoppel do not apply to administrative action, see

Houghton v. Payne, 194 U.S. 88, 24 S.Ct. 590, 48 L.Ed. 888; Federal
Communication Commission v. Pottsville Broadcasting Co., 309 U.S. 134, 145,
60 S.Ct. 437, 84 L.Ed. 656; N.L.R.B. v. Baltimore Transit Co., 4 Cir., 140 F.2d
51, 55; Wallace Corporation v. N.L.R.B., 4 Cir., 141 F.2d 87, 91