Fairmont Aluminum Co. v. Comm'r of Internal Revenue

• Citation: 22 T.C. 1377
• Decision Date: 30 September 1954
• Docket Number: Docket No. 40176.
• Parties: FAIRMONT ALUMINUM COMPANY, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

22 T.C. 1377

FAIRMONT ALUMINUM COMPANY, Petitioner,v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket No. 40176.

Tax Court of the United States.

Filed September 30, 1954.

1. In a prior decision this Court concluded that the taxpayer's proof, consisting solely of stipulated facts, was insufficient to establish error in the determination of the Commissioner. Held, the prior decision was a decision ‘on the merits' that can serve to preclude relitigation of the identical issues arising in a determination of the taxpayer's liability for a later year.

2. Held, further, the addition of a provision to the Judicial Code in 1951 relating to the admissibility of secondary evidence in all courts of the United States was not, in the circumstances of this case, such a ‘change in legal climate’ within the meaning of Commissioner v. Sunnen, 333 U. S. 591, as to foreclose the defense of collateral estoppel.

3. Held, further, the doctrine of collateral estoppel is applicable in proper cases before the Tax Court. Earl Q. Kullman, Esq., for the petitioner.

William A. Schmitt, Esq., for the respondent.

The Commissioner of Internal Revenue determined a deficiency in excess profits tax for 1945 in the amount of $85,019.82 and an over-assessment in income tax in the amount of $38,991.36 for the same year. As the result of an order of severance of issues the principal question presently for decision is whether a prior adjudication by this Court, affirmed by the Court of Appeals for the Fourth Circuit (180 F. 2d 832), involving petitioner's tax liability for the years 1942–1944, forecloses the litigation on the merits herein of the issues tendered by the pleadings.

FINDINGS OF FACT.

The stipulation of facts filed by the parties is incorporated herein by reference.

Petitioner, which had been incorporated as a West Virginia corporation on September 27, 1926, filed its income and excess profits tax returns for the calendar year 1945 with the collector of internal revenue for the district of West Virginia.

West Virginia Metal Products Corporation was a West Virginia corporation which had issued first mortgage bonds secured by a trust indenture, dated July 27, 1921, with respect to all of its real property, plant, and equipment. The mortgage was foreclosed on March 15, 1924. The first mortgage bondholders had organized a Bondholders Committee, and pursuant to the foreclosure proceedings, the properties involved were transferred by the trustee on or about March 15, 1924, to three named persons, who together constituted such committee. The Bondholders Committee then commenced arm's-length negotiations with certain persons referred to as the Adam Group who were not bondholders and who were not previously identified with the management of West Virginia Metal Products Corporation. As a result of these negotiations, and as more fully detailed in the stipulation of facts herein, the petitioner was organized and acquired all of the properties formerly owned by West Virginia Metal Products Corporation; the Bondholders Committee acquired petitioner's serial mortgage notes secured by a first mortgage on all of its properties in the aggregate amount of $550,000 plus 3,000 shares of petitioner's common stock; and the Adam Group, in exchange for $200,000 in cash, received 200 shares of petitioner's preferred stock and 56,975 shares of its common stock.

The Commissioner's determination that there was a deficiency of $85,019.82 in petitioner's excess profits tax for 1945 and an overassessment of petitioner's income tax of $38,991.36 for the same year was explained as follows:

It is determined that you are not entitled to any equity invested capital under the provisions of section 718(a)(2) of the Internal Revenue Code in connection with the acquisition of certain physical assets from the former bondholders of the West Virginia Metal Products Corporation.

Docket No. 13970 was a proceeding instituted by petitioner in this Court contesting a determination by the Commissioner with respect to its income and excess profits taxes for the years 1942–1944. The statement attached to the notice of deficiency, which was the basis of the proceeding in Docket No. 13970, read in part as follows:

It is held that you are not entitled to any equity invested capital under Section 718(a)(2) of the Internal Revenue Code in connection with the acquisition of certain physical assets from the former bondholders of the West Virginia Metal Products Corporation.

In its petition in this proceeding petitioner made the following allegations of error:

(b) In determining allowable depreciation of such of petitioner's assets as were acquired from West Virginia Metal Products Corporation, respondent erred in failing to find that petitioner's basis for depreciation was the adjusted cost basis to the said West Virginia Metal Products Corporation.

(c) In determining allowable depreciation of such of petitioner's assets as were acquired from West Virginia Products Corporation, the respondent erred in failing to find that petitioner's basis for depreciation was the fair market value and that such fair market value was in excess of $1,500,000.

(d) In determining petitioner's invested capital, the respondent erred in failing to include therein the sum of $2,529,774.33, being the invested capital of West Virginia Metal Products Corporation, petitioner's predecessor after reorganization.

(e) In determining petitioner's invested capital, the respondent erred in failing to include the sum of $1,500,000, being the fair market value of assets acquired by petitioner from West Virginia Metal Products Corporation.

(f) The respondent erred in determining that petitioner is not the successor [to] said West Virginia Metal Products after their insolvency reorganization.

Substantially identical allegations were made in the earlier proceeding. The issues in the earlier proceeding were decided adversely to the petitioner in a Memorandum Opinion of this Court entered October 25, 1948. In that case petitioner had relied upon a stipulation of facts presented at the hearing without further evidence, notwithstanding that petitioner's counsel had been warned by Government counsel that the stipulated material, in the Government's view, was insufficient to establish either of the alternative bases for the assets relied upon by petitioner. The Memorandum Opinion of this Court concluded that there had been a failure of proof. On November 15, 1948, petitioner moved, inter alia, for reargument ‘and/or for leave to reopen this proceeding for the taking of further evidence.’ It also moved on the same day for review by the full Court, similarly requesting reopening of the proceeding for the taking of further evidence. Both motions were denied on November 24, 1948. Thereafter, petitioner presented a motion dated March 31, 1949, for leave to file a motion for new trial on the ground of newly discovered evidence. The motion for leave was accompanied by the proposed motion for new trial which in turn had annexed to it the alleged newly discovered evidence. The motion for leave was not granted. An appeal was taken to the Court of Appeals for the Fourth Circuit which had before it not only the Findings of Fact, Opinion, and decision of this Court but also the foregoing motions upon which petitioner had failed to obtain favorable action. On March 8, 1950, the Court of Appeals rendered its opinion affirming the decision of this Court. Fairmont Aluminum Co. v. Commissioner, 180 F.2d 832.

The entire record in the earlier proceeding, both in this Court and in the Court of Appeals, including all pleadings, testimony, evidence, briefs, and papers filed therein, is incorporated herein by reference.

By an amendment to his answer herein the Commissioner raised the defense of collateral estoppel since the same issues present here were also present and litigated in the earlier proceeding.

If due diligence had been used prior to the trial in Docket No. 13970 all evidence presented by petitioner in the present case could have been obtained prior to the trial in Docket No. 13970.

OPINION.

RAUM, Judge:

This case involves petitioner's excess profits taxes for 1945. In the earlier proceeding covering the years 1942, 1943, and 1944, there was presented for the year 1944 the identical question that is raised by the petitioner for 1945.

In substance, the crucial issue between the petitioner and the Commissioner, in both the present case and the prior case, relates to the basis of the assets owned by the petitioner which had formerly been owned by West Virginia Metal Products Corporation. In both the present case and the prior case, petitioner has taken the alternative positions (1) that the basis of such assets was their fair market value at the time petitioner acquired them, alleged to be in excess of $1,500,000, or (2) that petitioner is entitled to the basis that such assets had in the hands of West Virginia Metal Products Corporation, alleged to be $2,529,774.33.

The petitioner endeavored to support its positions in the earlier trial with a stipulation of facts, in face of the plain warning from the Government that it regarded the stipulation insufficient for that purpose. Petitioner's counsel firmly reiterated his view at the hearing that the stipulation was adequate and the case was thus submitted to the Court without further evidence. The Court concluded that the stipulation was insufficient to support either of the alternative bases urged by petitioner, and it therefore rendered a decision against petitioner, which was affirmed by the Court of Appeals. The present case is merely an attempt to relitigate the identical issue for 1945, with respect to the basis of the identical assets involved in the prior proceeding for 1944. This presents a classic situation for the application of the doctrine of collateral estoppel (cf. Tait v. Western Md. Ry. Co., 289 U. S. 620), and were it not for some sweeping contentions that pe...