This is аn appeal from the Tax Court of the United States involving a deficiency in excess profits taxes for the year 1945.
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 оf 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 mоre 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 conductеd 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,
“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 оf the new under [26 U.S.C.A. §] 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 *625 doctrine of the Palm Sрrings 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.”
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,
It is well settlеd 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,
“Income taxes are levied on an annual basis. Each year is the origin of a nеw 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 operatеs, 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 . ******
“If the legal matters determined in the earlier case differ from those raised in the second case, cоllateral 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 judg *626 ment and the second, the prior determination is not conclusive.- * * *
“Of course, where a question of fact essential to the judgment is actually litigаted 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 а different tax year, the prior judgment will be conclusive as to the same legal issues which appear, assuming no intervening doctrinal change.”
There has been no change of fact, of law or of “legal atihosphere” affecting taxpayer’s equity invested capital, since the deсision in the prior case with regard to that matter. The questions of fact-essential to the judgment in that ease 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.,
“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 . * * *
“This court has repeatedly applied the doctrine of res judicata in actions cоncerning 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 ápply with equal forcе to the sovereign’s demand and the'claims of private citizens.”
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 eon-
*627
tention 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 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.,
The taxpayer contends also that the doctrine оf 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 administrаtive agency, it is exercising judicial functions in hearing tax cases of this character; and, when exercising judicial functions, as distinguished from administrative functions,
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it is bound to apply such fundamental judicial doctrines as res judicata and estoppel. The case of Commissioner of Internal Revenue v. Sunnеn, 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 Suprеme Court would have been beside the point if res judicata and collateral estoppel had no application to Tax Court eases. In the course of the opinions in that case, the court used the following language heretofore quoted, viz., “Of course, where a question оf 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.,
Affirmed.
Notes
. That res Judicata and estoppel do not apply to administrative action, see Houghton v. Payne,