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Cory v. Commissioner of Internal Revenue.

decided: January 30, 1947.


Author: Goodrich

Before GOODRICH and MCLAUGHLIN, Circuit Judges, and MURPHY, District Judge.

GOODRICH, Circuit Judge.

This case involves alleged deficiencies in taxpayer's income taxes for the taxable years of 1937 to 1941, inclusive. The question is whether the taxpayer is subject to taxation upon the income of four trusts set up by him with his wife and three sons as respective beneficiaries. Responsibility, if any, is predicated upon Section 22(a) of the Internal Revenue Code.*fn1 The Tax Court upheld the tax*fn2 and the taxpayer appeals.

The liability of this taxpayer for income tax upon the income from these trusts was passed upon by this Court in Cory v. Commissioner of Internal Revenue, 3 Cir., 1941, 126 F.2d 689. Certiorari was denied in 1942, 317 U.S. 642, 63 S. Ct. 34, 87 L. Ed. 517. The years there involved were 1935 and 1936. An assessment imposing liability was upheld on application of the doctrine of Helvering v. Clifford, 1940, 309 U.S. 331, 60 S. Ct. 554, 84 L. Ed. 788.

The factual background concerning the formation and operation of the four trusts has been discussed thoroughly in the prior Tax Court and Circuit Court opinions and will not be restated here.*fn3 Comment will be made only upon the facts germane to the issues of this appeal.

It is to be kept in mind on this second appearance of the litigation between the taxpayer and the taxing authorities that the identical trusts are involved which were before the Court in the case just cited. The taxpayer is the same party, the trustee of the trusts remains unchanged and the claimant for taxes, that is the United States, is the same claimant who made the claim before. The beneficiaries are also unchanged. One is the wife of the settlor. The other three are his sons.

The legal question which immediately leaps to the eye is the application of the doctrine of res judicata. Why are not matters between the taxpayer and government foreclosed by that doctrine from further consideration in this Court? One answer might be that since income taxes are levied on an annual basis the claim for taxes for one year is not the same thing as the claim for taxes for another year and, therefore, the rule of res judicata cannot apply. This argument comes too late and all we need to do to answer it is to refer to the authorities which settle that question the other way.*fn4 The fact that each year's tax is a separate claim does not prevent the application of res judicata if the case is otherwise an appropriate one for its application.*fn5

The second argument made by the taxpayer is that in the former litigation the taxpayer did not really present his case. He says that in the Tax Court the Commissioner, who had the burden of proof, merely showed the trust agreements and that he, the taxpayer, did not round out the picture because the burden was on the Commissioner, not on him. But it is very clear in the application of the doctrine of res judicata that the parties are not entitled to have a question considered on its merits a second time merely because they failed to produce all the facts the first time.*fn6 Furthermore, and this we deem highly important, the question of the liability of this taxpayer for the income of the four trusts involved under the Helvering v. Clifford doctrine was thoroughly considered as part of the case in this Court earlier. The issue was tendered in the brief of the taxpayer-appellant, was answered by the government and was fully considered by the Court which decided against the taxpayer.*fn7 That seems to us to settle any question of whether the issues were raised and considered and decided in the first litigation. The result of that litigation upon the parties in subsequent litigation appears from the Restatement of Judgments as follows ( § 69(1)):

" § 69. Effect of Appeal or Inability to Appeal.

"(1) Where there is an appeal from a judgment, the determination by the appellate court of issues actually litigated is conclusive between the parties in a subsequent action on a different cause of action."

The Tax Court held that as to the trust for Mrs. Cory, the settlor's wife, the prior litigation settled taxpayer's liability for the income of that trust. We see no possible escape from this conclusion. The circumstances for the years in question, except for the passage of time, were precisely what they were in the first litigation. The relationship between the parties continued and the terms of the trust were unchanged. The family situation with respect to the wife, who was and continued to live with her husband, was unchanged. We think the Tax Court was correct in saying that further consideration of the trust for Mrs. Cory was precluded by the rule of res judicata.

When we come to the situation of the trusts for the three sons we must grant that there are some changes aside from the fact that everybody concerned had grown older during the intervening years. At the time of the first litigation the two elder sons had attained their majority*fn8 and the youngest son was a minor. During the years involved here the two elder sons had left the parental roof and established homes of their own. The income from the trusts continued to be paid to them as a supplement to their earned incomes. The youngest son has, during the tax years in question, attained his majority and has been away from the family home while attending college and law school.

To the extent that these changing facts present legally significant differences from the state of facts on which this case was first presented to this Court they, obviously, change the propriety of the application of res judicata to the later tax years.*fn9 However, it must be noted that in our earlier decision the Court was required to pass upon the question whether the fact that the two elder sons had attained their majority relieved the taxpayer from the application of the doctrine of Helvering v. Clifford. The Court said that it did not*fn10 and, therefore, necessarily committed itself to the proposition of law that the fact that certain beneficiaries of the trust may no longer call upon the settlor for support does not preclude the application of the Helvering v. Clifford rule to the liability of the settlor for tax upon the trust income. It may be remarked, parenthetically, that in this conclusion this Court is supported by numerous other decisions in various Circuits, though we would by no means claim that any phase of the application of this difficult doctrine is sun clear.*fn11 As to the trust for the youngest son, to bring our former decision and holding into this litigation, it is clear that the fact that the youngest son has now attained his majority is not a fact which pulls the case out of Helvering v. Clifford. This was necessarily involved in the former decision of this Court.Therefore, the only change in fact not covered by our earlier decision is that presented in the departure of the two already adult sons from the family roof and the establishment by them of separate homes elsewhere. As already shown, however, the Helvering v. Clifford rule is not confined in its concept of a family group to those members of the family who dwell together under one roof.*fn12 Therefore, the departure of the grown-up sons to homes of their own would seem to have no such legal significance as would prevent the doctrine of res judicata from having full application.*fn13

It seems to us, therefore, that the taxpayer's desire to have a different rule applied to his liability for income from these trusts is open to three difficulties and that the overcoming of any two of them will throw him into the third. First, in so far as the question of what "ownership" is sufficient to make a settlor liable under Helvering v. Clifford is a question of fact, that question has been decided adversely to the taxpayer by the Tax Court. The govvernment urges this proposition and cites authority which it says supports it.*fn14 We refrain from committing ourselves upon the point except to the extent of ...

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