Opinion
Docket No. 26298.
1955-04-21
JACOB'S FORK POCAHONTAS COAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Dewey R. Roark, Jr., Esq., and George E. H. Goodner, Esq., for the petitioner. Philon Wigder, Esq., for the respondent.
Dewey R. Roark, Jr., Esq., and George E. H. Goodner, Esq., for the petitioner. Philon Wigder, Esq., for the respondent.
COLLATERAL ESTOPPEL IN EXCESS PROFITS TAX CASES.— In a prior suit involving claims for excess profits tax relief for 1940-1952, petitioner based its claim under section 722(b)(4) (1939 Code) on the grounds, inter alia, that during or immediately prior to the base period (a) it had commenced business or (b) had changed the character of its business. At the hearing in the prior suit petitioner did not argue the former claim but directed its argument to showing that it had changed the character of its business; the Court entered its decision that petitioner was not entitled to relief under the provisions of section 722(b)(4). Held, petitioner is precluded by the principle of collateral estoppel from litigating in this suit claims for relief under section 722(b)(4) for later taxable years (1943-1945).
This proceeding involves applications for excess profits tax relief for the calendar years 1943, 1944, and 1945, and a related claim for refund for 1943. In an earlier proceeding, 17 T.C. 357 (1951), we denied petitioner's applications for relief for 1940, 1941, and 1942. By amendment to his answer here the respondent has asserted that our prior judgment bars a consideration of the merits of petitioner's present applications. After a hearing before a commissioner of this Court, findings of facts necessary to determine the collateral estoppel issue were made by the commissioner and the case was referred here for a determination of this issue.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of West Virginia with its principal place of business at Welch, West Virginia. Its income and excess profits tax returns were filed on a calendar year basis with the collector of internal revenue for the district of West Virginia.
On or about September 14, 1943, petitioner filed with respondent its applications for excess profits tax relief under section 722 of the Internal Revenue Code of 1939 for the taxable years 1940, 1941, and 1942. In Schedule B of such applications petitioner checked section 722(b)(1), (2), (4), and (5) as the bases for the relief claimed. The grounds upon which petitioner relied to establish eligibility for relief under section 722 were summarized in principal part as follows in the statement accompanying its applications for relief:
(1) The taxpayer began coal mining operation in 1935, just prior to the beginning of the base period, and on account of the difficulties encountered in developing the mine, did not reach a normal level of production until the year 1940. 722(b)(1)(4). The difficulties encountered consisted of bad top conditions and irregularities in the coal seam which retarded the work of developing the mine. During 1937 and 1938 a serious fault in the seam of coal was encountered which made it necessary to abandon former workings and open up at a new entry more than a mile from the former opening. Sec. 722(b)(4).
(2) During 1939 the unionized employees of the company went out on a strike which lasted six weeks. It is estimated the diminution in output caused by this interruption amounted to at least 25,000,00 (sic) tons of coal. Sec. 722(b)(1).
(3) During 1939 the company acquired by lease, a new boundary of coal land, containing more than 1000 acres, and at once began the development of the same. The opening of this new area together with the purchase of the necessary additional equipment shown in the above table were largely responsible for the increase in coal output and profits for the years 1940, 1941 and 1942.722(b) (4)(5).
(4) During the base period the business of the taxpayer was depressed on account of being a member of an industry whose sales agents were engaged in a price war, as a result of which the company lost $186,417.53, or $0.8052 per ton on 231,497.81 tons of slack being 45.32% of total output of coal shipped during the base period. Despite the unusual loss on slack coal, the average profit on coal during the base period was $0.02570 per ton. Section 722(b)(2).
(5) On account of the depressing effect of this enormous loss on slack during the base period the taxpayer contends that the provisions of Section 722(b)(5) are applicable, and that relief in this situation would not be inconsistent with the spirit of Section 722.
The above-quoted grounds for relief, together with the facts alleged in support of the applications, were incorporated by reference, as Exhibits A to D, inclusive, in a petition subsequently filed with this Court, as will hereinafter appear.
Under date of March 7, 1946, respondent duly notified petitioner that its applications for relief under section 722 for 1940, 1941, and 1942 were disallowed.
On June 5, 1946, petitioner filed a petition with this Court, Docket No. 11174, in which it sought, inter alia, a review of respondent's action and an allowance of its section 722 claims for relief for 1940, 1941, and 1942. The allegation of error with respect to its section 722 claims was set forth in paragraph 4(i) of the petition, which reads as follows:
(i) Respondent has erroneously disallowed the applications for relief filed by petitioner under section 722 of the Internal Revenue Code upon the grounds set out in said applications for relief (attached hereto as Exhibits A to D, inclusive) and has erroneously failed to grant the relief from excess profits taxes requested in said applications.
Paragraph 5(k) of the petition in Docket No. 11174 sets forth the following allegations of fact in support of the allegation or error in paragraph 4(i):
(k) Petitioner has filed applications for relief from excess profits taxes as set forth in paragraph 2 above. The grounds for relief and the facts relied upon in support thereof are set forth in Exhibits A to D, inclusive, hereto attached and the grounds and facts set forth therein are reasserted herein by reference and made a part of this petition by incorporation as fully as if set out herein at length. The grounds and facts set forth in Exhibits A to D, inclusive, were considered by respondent together with a protest filed by petitioner on or about February 26, 1945, and other information furnished at a conference held by the parties on August 27, 1945. Petitioner is entitled to the relief requested by it in its aforesaid applications.
On July 9, 1945, respondent filed an answer in Docket No. 11174 in which he denied that he erred as alleged in paragraph 4(i) of the petition, and admitted and denied with respect to paragraph 5(k) of the petition as follows:
5(k) Admits that petitioner has filed applications for relief from excess-profits taxes under the provisions of Section 722 of the Internal Revenue Code, as amended, for the years 1940, 1941 and 1942; admits that the alleged facts upon which petitioner relies to support its claims for relief are set forth in Exhibits A to D attached to the petition; and that the Commissioner in making his determination has considered said data; however, the correctness of such alleged facts and data is denied. Denies the remaining allegations contained in subparagraph (k) of paragraph 5 of the petition.
On September 26, 1950, Docket No. 11174 was heard on the merits. At the hearing all issues were waived or stipulated except one, namely, petitioner's right to relief under section 722(b)(4). In response to an inquiry from the Court as to possible reliance by petitioner upon section 722(b)(1) or (b)(2) factors, petitioner's counsel specifically stated: ‘No, your Honor. We are relying on section 722(b)(4). * * * we are not relying on section 722(b)(1) or section 722(b)(2), and our case is based on the acquisition of this new lease in the fall of 1939.’ And to the Court's further inquiry, ‘That is your change of business?’, counsel replied, ‘Yes, your Honor.’
Briefs by the parties in Docket No. 11174 were filed seriatim, the petitioner's on November 10, 1950, the respondent's on December 11, 1950, and petitioner's reply on January 5, 1951. The argument of each party was addressed to the question of whether petitioner qualified for relief under section 722(b) (4) because it changed the character of its business during the base period. The specific ‘change in the character of the business' to which the parties directed their arguments was ‘a difference in the capacity for production or operation,‘ the petitioner contending that a substantial increase in capacity for production had resulted from the acquisition of leaseholds on additional coal acreage and the respondent denying it.
On September 21, 1951, this Court promulgated its opinion in Docket No. 11174, which is reported in 17 T.C. 357. We there held that the petitioner was not entitled to relief under section 722(b)(4) of the Internal Revenue Code. On September 27, 1951, we entered our decision accordingly. In our Opinion, at page 362, appears the following:
Under section 722(b)(4) the petitioner must show that during or immediately prior to the base period it either commenced business or changed the character of its business. Though the petitioner was incorporated on June 21, 1935, it makes no claim that it commenced business ‘during or immediately prior to the base period.’ Petitioner's case is based primarily upon the contention that it ‘changed the character of the business' by the acquisition of a new mining lease in the fall of 1939, which change petitioner contends resulted from a ‘difference in the capacity for production or operation’ within the language of section 722(b)(4). * * *
On September 27, 1951, the Court entered its decision in Docket No. 11174, which, in the pertinent part reads as follows:
ORDERED and DECIDED: That there is no refund of excess profits tax due the petitioner under the provisions of Section 722(b)(4) of the Internal Revenue Code for the calendar years 1940, 1941 and 1942; * * *
No rehearing or reconsideration was sought by petitioner after promulgation of the opinion or entry of the above decision.
On or before July 29, 1944, March 10, 1948, and March 8, 1949, petitioner filed applications for relief under section 722 of the Internal Revenue Code for the taxable years 1943, 1944, and 1945, respectively. In Schedule B of the application for relief for 1943, petitioner checked section 722(b)(1), (2), (4), and (5) as the bases for the relief claimed. In Schedule A of such application, items 1 and 6 directed respondent's attention to its application for relief for the year 1940. In its application for relief for 1944 and 1945 petitioner failed to check any of the subsections of section 722 in Schedule B thereof, but attached to each application substantially identical statements to the effect that the taxpayer had previously filed applications for relief (Form 991) for the years 1940 to 1944, inclusive, that all ‘that is set out in those applications which is in any was material or applicable to’ its applications for 1944 and 1945, ‘together with all the additional and supplemental information and data heretofore filed in connection with any of such applications, is incorporated herein by reference and made a part hereof.’
Under date of September 29, 1949, respondent duly notified petitioner that its applications for relief under section 722 for the taxable years 1943, 1944, and 1945 were disallowed.
On December 28, 1949, petitioner filed the petition now before this Court, Docket No. 26298, in which it seeks a review of respondent's action and an allowance of its section 722 claims for relief for the taxable years 1943, 1944, and 1945. The allegations of error, paragraph 4(a) to (f), inclusive, of the petition, read as follows:
(a) Respondent erred in denying petitioner's applications for relief (Exhibits A, B, and C) without giving his reasons therefor.
(b) Respondent erroneously failed to determine the average base period income credit to which petitioner is entitled, in an amount not less than $69,591.95.
(c) Respondent erroneously failed to determine that normal production, output, and operation were interrupted during the base period because of the unusual and peculiar events set forth in the applications for relief and the supplemental information filed therewith.
(d) Respondent erroneously failed to determine that petitioner was a member of an industry which was depressed during the base period because of temporary and unusual economic events.
(e) Respondent erroneously failed to determine that petitioner's capacity for production increased during the base period.
(f) Respondent erred in failing to reduce the excess profits tax liability determined by him by 10 per cent, as provided in sections 780 and 781 of the Internal Revenue Code.
The allegations of fact upon which petitioner relies to support the errors alleged in paragraph 4 are set forth in paragraph 5(a) to (j), inclusive. Pertinent hereto is the following statement contained in subparagraph 5(e), which is admitted in the answer:
5. The facts upon which petitioner relies as the basis of this proceeding are those set out in the said applications for relief (Exhibits A, B, and C), the supplemental data incorporated herein by reference, and the following additional facts:
(e) Petitioner has filed applications for relief from excess profits taxes as set forth in paragraph 2 above.
Paragraph 2 of the petition, aforementioned, the allegations of which were also admitted by the answer, reads in material part as follows:
2. Applications for relief from excess profits taxes for the taxable years 1943, 1944, and 1945 on Form 991 were filed by petitioner on or before July 29, 1944, March 10, 1948, and March 8, 1949, respectively, under section 722 of the Internal Revenue Code. True copies of said applications are attached hereto as Exhibits A, B, and C, respectively. Said applications make reference to the application for relief filed for the year 1940, which application (Form 991) with one supplemental document dated November 3, 1943, are attached to the petition for 1940 filed by this petitioner at Tax Court Docket No. 11,174 and designated as Exhibits A and D thereof; said Exhibits A and D are incorporated herein by reference. * * *
At the hearing of this proceeding on October 13, 1953, petitioner amended paragraph 4 of its petition by adding the following subparagraph:
(g) Respondent erroneously failed to determine that petitioner commenced business during or immediately prior to the base period and did not reach by the end of the base period the earning level which it would have reached if it had commenced business two years before it did so.
Respondent denied this allegation in his answer to amendment to petition filed November 27, 1953.
At the hearing of this proceeding on October 13, 1953, respondent amended his answer by adding paragraph 7 thereto. Respondent affirmatively alleges in such amendment to his answer (a) that one of the issues sought to be litigated is whether the petitioner is entitled to excess profits tax relief under section 722(b)(4) for 1943, 1944, and 1945; (b) that, heretofore, respondent determined that petitioner was not entitled to excess profits tax relief for 1940, 1941, and 1942; (c) that, thereafter, petitioner appealed to this Court, Docket No. 11174, where there was put in issue and litigated with respect to 1940, 1941, and 1942 the identical issue which is one of the issues sought to be litigated in this cause with respect to 1943, 1944, and 1945, namely, whether petitioner is entitled to relief under the provisions of section 722(b)(4) of the Internal Revenue Code; that this Court held that petitioner was not entitled to relief under section 722(b)(4) for 1940, 1941, 1942 (17 T.C. 357) and entered its decision accordingly on September 27, 1951; (d) that the parties in the present proceeding are identical with those in Docket No. 11174; and (e) that petitioner is precluded, under the doctrine of collateral estoppel, from further litigating its contentions under the provisions of section 722(b)(4) for 1943, 1944, and 1945.
On December 11, 1953, petitioner filed its reply to respondent's amendment to answer. The reply admits the allegations contained in subparagraphs 7(a), 7(b), and 7(d), and denies the allegations contained in subparagraph 7(e). With respect to subparagraph 7(c) petitioner's reply admits it appealed to this Court in Docket No. 11174, that the Court promulgated its opinion September 21, 1951, and entered its decision September 27, 1951, wherein relief was denied for 1940, 1941, and 1942. The remaining allegations contained in subparagraph 7(c) were denied by petitioner's reply.
The evidence relied on by petitioner to substantiate its claims for relief for 1943-1945 consists of the exhibits to the petition and the transcript of the testimony of witnesses in the prior suit, petitioner's tax returns with attached waivers for the years in question here, and a revenue agent's report dated April 14, 1948.
At the hearing of this case on October 13, 1953, petitioner specifically waived its contentions under section 722(b)(1) and (b)(2), and stated that section 722(b)(5) was ‘more of a catch-all’ and it did not ‘intend to offer any evidence as such on that issue.’ In its brief on the collateral estoppel issue, filed June 1, 1954, petitioner waived its contention under section 722(b)(5), and relied solely on section 722(b)(4).
OPINION.
TIETJENS, Judge:
On brief the petitioner narrowed its grounds for relief from those set forth in the petition to the following two, both of which are based on section 722(b) (4) of the Internal Revenue Code of 1939: (a) That it commenced business during or immediately prior to the base period, or (b) that in the same period it changed the character of its business. The relevant portions of section 722(b) (4) are set forth below.
SEC. 722. GENERAL RELIEF— CONSTRUCTIVE AVERAGE BASE PERIOD NET INCOME.(a) GENERAL RULE.— In any case in which the taxpayer establishes that the tax computed under this subchapter (without the benefit of this section) results in an excessive and discriminatory tax and establishes what would be a fair and just amount representing purposes of an excess profits tax based upon a comparison of normal earnings and earnings during an excess profits tax period, the tax shall be determined by using such constructive average base period net income in lieu of the average base period net income otherwise determined under this subchapter. * * *(b) TAXPAYERS USING AVERAGE EARNINGS METHOD.— The tax computed under this subchapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on income pursuant to section 713, if its average base period net income is an inadequate standard of normal earnings because—(4) the taxpayer, either during or immediately prior to the base period, commenced business or changed the character of the business and the average base period net income does not reflect the normal operation for the entire base period of the business. If the business of the taxpayer did not reach, by the end of the base period, the earning level which it would have reached if the taxpayer had commenced business or made the change in the character of the business two years before it did so, it shall be deemed to have commenced the business or made the change at such earlier time.
The respondent argues that we are precluded from considering the merits of petitioner's case by the doctrine of collateral estoppel; that is, the questions for decision in this case were put in issue and decided by this Court in the previous case involving petitioner's claims for relief from excess profits taxes for the calendar years 1940, 1941, and 1942, there having been no intervening charge in the controlling facts and the applicable legal principles. In opposition the petitioner makes two arguments: (1) That collateral estoppel is not applicable to this proceeding because ‘ * * * the situation (has been) vitally altered between the the time of the first judgment and the (present) * * * ,‘ Commissioner v. Sunnen, 333 U.S. 591, 600 (1948); and (2) If collateral estoppel is applicable here, it bars only a ‘change in the character of the business' argument under section 722(b)(4), which, petitioner contends, was the only question put in issue, litigated, and decided in the prior proceeding. At the hearing the petitioner argued also that collateral estoppel does not preclude a showing of a change in the character of its business if the change is for reasons other than those relied on in the prior proceeding, but this argument was not pursued in petitioner's brief.
When the Supreme Court in Commissioner v. Sunnen, supra, referred to the situation's being ‘vitally altered’ since the judgment in the prior suit, it was stating one of the limitations on the application of the principle of collateral estoppel— viz, when the same issue is presented in a second suit between the same parties the principle of collateral estoppel should not be applied to preclude a consideration of the merits of this issue if there has been an intervening change in the applicable legal principles, statutory law, or Treasury regulations; but the facts should be examined anew in light of the change in the law and a fresh determination made. The change in the law relied on by petitioner here is the fact that, at the time of the hearing of this case there was pending in Congress a bill to provide judicial review of decisions of this Court in World War II excess profits tax cases. (S. 984, 83d Cong., 1st Sess.) Petitioner pointed out that at the time of the hearing this bill had passed the Senate and had been introduced in the House of Representatives. We might add that this bill was not enacted into law in the last Congress. We do not think this contention of petitioner warrants extended discussion. It is apparent from the Court's opinion in the Sunnen case that what it meant by a change in the law was a change in the legal principles, statutory law, or regulations that would determine the legal consequences of the factual situation in both cases. The proposal relied on by petitioner has nothing to do with the law applicable to the merits of petitioner's claims for excess profits tax relief.
Addressing himself to the petitioner's second argument the respondent contends that petitioner is attempting to relitigate here the ‘change in the character of business' issue under the guise of ‘commencement of business'; in other words, that petitioner has changed merely the name and not the substance of the argument presented in the prior proceeding.
Further, the respondent insists that the ‘commencement of business' issue was in fact presented and decided in the prior proceeding and, accordingly, that the petitioner is collaterally estopped from litigating it again. We agree.
The commencement issue was covered in the assignment of errors in the earlier case and whatever evidence petitioner thought was available with reference to the issue was there introduced. At least no further evidence is here sought to be put in on the merits, and the old record only is relied upon to establish a basis for relief. The petitioner emphasizes, however, the Court's statement in the earlier opinion that ‘it (petitioner) makes no claim that it commenced business ‘during or immediately prior to the base period,‘‘ but we do not think this statement is to be taken literally. Had no ‘claim’ for relief been made based on commencement of business, petitioner would have been precluded from litigating it in this Court in the first place. Blum Folding Paper Box Co., 4 T.C. 795. We think the Court was simply pointing out why the ‘commencement’ issue was not otherwise specifically commented on in the opinion. True, it was not further discussed in the opinion, but we think that was because it was not argued by the petitioner. This does not mean to us, however, that the claim was not before the Court and was not determined by the Court. The broad determination in the prior case can be summed up by quoting from the first and last paragraphs of the Court's Opinion there, as follows:
The petitioner claims relief in this proceeding solely under section 722(b) (4), Internal Revenue Code.
We conclude and hold that petitioner has not shown it is entitled to relief under section 722(b)(4) of the Internal Revenue Code.
We also point out that the decision entered by the Court in the prior case was not couched in terms referring to but one clause contained in section 722(b) (4). The decision was not that petitioner was not entitled to relief because of a change in the character of its business. Rather, the decision broadly stated that petitioner was not entitled to a refund of excess profits taxes ‘under the provisions of Section 722(b)(4).’
In reaching our conclusion that the ‘commencement’ factor was before the Court in the prior case and there determined we have consulted the entire record in that case, including the pleadings. In our opinion, the failure of the petitioner to rely on the ‘commencement’ factor or to argue the matter on brief did not take that factor out of the case. We are not willing to subscribe to the contention that having raised an issue and having presented evidence bearing on it, a petitioner can remove that issue from the case by failing to argue it and thereby preserve to himself an opportunity to litigate the question on the legal theories which he does argue. If such a contention prevailed, litigation could be continued indefinitely depending upon the ingenuity of counsel in marshalling the facts and rearranging the points of his arguments. The policy of the law is to the contrary. Cf. Harley Alexander, 22 T.C. 318.
An observation by Mr. Justice Holmes is here apposite. In United States v. California & Ore. Land Co., 192 U.S. 355, 358, he said: ‘the whole tendency of our decisions is to require a plaintiff to try his whole cause of action and his whole case at one time. He cannot even split up his claim * * * and, a fortiori, he cannot divide the grounds of recovery.’
It seems to us that all the petitioner now attempts to do is again to call the Court's attention to the facts which were in evidence in the prior proceeding, but now, shifting emphasis and changing the course of its argument on those same facts, to have the Court find a basis for relief which, although it must have foundation in the same set of facts, in some way was passed over before. The Supreme Court in Chapman v. Smith et al., 57 U.S. 114, 133, pointed out long ago that ‘one criterion for trying whether the matters or cause of action be the same as in the former suit, is, that the same evidence will sustain both actions.’ In our opinion, what petitioner does here is to ask us again to look at virtually the same evidence on which relief was previously denied and to see if this time we cannot give relief. In our opinion this is the very thing that the Sunnen case, supra, says petitioner cannot do.
Paraphrasing slightly the language of this Court in George Kemp Real Estate Co., 17 T.C. 755, affd. (C.A. 2) 205 F.2d 236, a section 722 case: The parties in both proceedings are the same. The matter raised in both proceedings is the same, namely, whether the petitioner is entitled to relief under the provisions of Internal Revenue Code section 722, subsection (b)(4), and there has been no change in the applicable legal rules since the decision in the prior proceeding was rendered. Under these circumstances, we conclude that the petitioner is not entitled again to litigate before this Court its claim for relief.
Reviewed by the Court.
Decision will be entered for the respondent.