Before KALODNER and HASTIE, Circuit Judges and LAYTON, District Judge.
This appeal arises out of a suit to recover income and victory taxes paid by plaintiffs' decedent ("taxpayer") for the year 1943. The District Court denied relief, Kaplan v. United States, 154 F.Supp. 167, and this appeal followed. Two transactions are involved. They are the basis of taxpayer's two causes of action set forth in a single complaint. An issue common to both is whether the taxpayer, who made his income tax returns on the basis of cash receipts and disbursements, was entitled to deduct payments made in 1942 and 1943 on account of obligations arising from two separate loss transactions, or whether the losses were deductible only in prior years when the events occurred giving rise to them. As to one of the transactions, the taxpayer previously litigated the same issue with respect to the year 1941. Bramer v. Commissioner, 6 T.C. 1027, affirmed, 3 Cir., 1947, 161 F.2d 185, certiorari denied 332 U.S. 771, 68 S. Ct. 85, 92 L. Ed. 356. There is presented, accordingly, the additional issue, whether taxpayer (via plaintiffs) is now restricted as to that transaction by the doctrine of collateral estoppel: Commissioner v. Sunnen, 1948, 333 U.S. 591, 68 S. Ct. 715, 92 L. Ed. 898.
The facts relating to taxpayer's "First Cause of Action" are as follows:
Prior to May 13, 1931, taxpayer had a large margin account with the stock brokerage firm of Hornblower and Weeks.On this account he was indebted to that firm in a very substantial amount. As required by Hornblower and Weeks, taxpayer, who was without means to protect his margin account, posted as additional collateral 2,000 shares of common stock of National Steel Corporation obtained for this purpose from one William K. Frank. On or about May 13, 1931, the brokerage firm gave notice that it intended to close out taxpayer's undermargined account and to sell the National Steel stock which it was holding. Frank, rather than lose this stock, reclaimed it by paying to Hornblower and Weeks the sum of $84,000, its then market value. On the same date, taxpayer gave Frank his note for $84,000. Hornblower and Weeks sold out taxpayer's margin account at a heavy loss.*fn1
In 1942 and 1943, taxpayer paid to Frank $21,250 and $35,036.12 on account of his indebtedness in this transaction, and on his returns for those years he claimed these amounts as deductions from gross income. The Commissioner disallowed the deductions, which resulted in a deficiency for the taxable year 1943. The Commissioner took the position that taxpayer's loss was sustained, and therefore deductible, when the brokerage account was liquidated in 1931.
The facts relating to the second transaction, embraced in taxpayer's "Second Cause of Action" are as follows:
In 1929, taxpayer, William K. Frank and Lee B. Foster entered into a joint venture, called a syndicate, to purchase and sell the stock of International Rustless Iron Corporation. They were to share profits and losses equally, but Frank and Foster agreed to finance the syndicate through negotiating a loan with the Bank of Pittsburgh, N.A. In fact, Frank and Foster negotiated a loan with that Bank in the amount of $236,752.50, to purchase 60,000 shares of Rustless stock, the Bank receiving a note in that amount signed by the three syndicate members, and, as collateral, the Rustless stock and other securities supplied by Frank and Foster.
Between January 1, 1930, and July 14, 1930, the Bank sold 21,849 shares of the Rustless stock and applied the proceeds to reduce the debt of the syndicate to it. On his income tax return for 1930, taxpayer claimed a loss of $13,667.14, being one-third of the excess of the average cost of the said shares over the sales price.
On January 14, 1931, the Bank was owed $199,942.93. On that date, Frank and Foster each paid one-third of the syndicate obligation to the Bank, and taxpayer gave to the Bank his note for $66,647.64, representing his third of the obligation. The Bank retained 12,717 shares of the Rustless stock (being the taxpayer's third of the 38,151 shares held by the Bank after the 1930 sales), and also certain other securities which had been deposited with the Bank by Frank as collateral.
As of January 14, 1931, the Bank held two other notes from the taxpayer, each of which provided that property posted as security therefor was also security for any other liability of the taxpayer.
From October 3, 1932, to August 1, 1935, all dividends from Frank's securities collateralizing the taxpayer's note dated January 14, 1931, were credited by the Bank to the principal indebtedness represented by the taxpayer's two smaller notes, except a small sum which was credited to interest on his note of January 14, 1931.
Beginning May 22, 1935, the Bank foreclosed on Frank's securities and applied the proceeds to principal and interest on taxpayer's note of January 14, 1931. On August 5, 1935, the Bank sold taxpayer's Rustless stock for $816.67, and applied part to the final liquidation of his note of January 14, 1931, and the balance was paid to William K. Frank, Inc., to which company William K. Frank had previously transferred his interest in the aforementioned collateral.
By August 1, 1935, funds amounting to $101,051.11, coming from either sales of Frank's stock or dividends thereon, had been applied by the Bank in satisfaction of the taxpayer's indebtedness. On that date, taxpayer gave to William K. Frank his promissory note in the amount of ...