Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 71 C 2207 BERNARD M. DECKER, Judge.
Fairchild, Pell and Stevens, Circuit Judges.
Plaintiffs, Frank C. Howard and Nancy Howard, filed a joint income tax return for the year 1965 in which they claimed a $99,900.00 theft loss.*fn1 26 U.S.C. § 165. The Internal Revenue Service investigated this claim, but made no objection before the statute of limitations ran.*fn2 Plaintiffs then sought a refund for the years 1962 and 1963 on the ground that the 1965 loss created a net operating loss carryback. 26 U.S.C. § 172. This time, however, the IRS determined that plaintiffs' 1965 loss was occasioned by a nonbusiness bad debt, 26 U.S.C. § 166, and not by theft; thus, it denied the refund. 26 U.S.C. § 172(d). Plaintiffs commenced an action pursuant to 28 U.S.C. § 1346(a) (1), and, after a bench trial, the district court upheld the Commissioner's determination.
Two questions are presented on appeal. First is whether the IRS is collaterally estopped from denying the net operating loss carryback because it had already "approved," by not disallowing, the 1965 loss. Second is whether the evidence demonstrates that plaintiffs' loss resulted from a theft. We answer both questions in the negative and, accordingly, affirm the judgment below.
Plaintiffs' initial contention is that the Commissioner's action concerning the 1965 claim was equivalent to a judgment; thus, the doctrine of collateral estoppel prevents him from "re-determining" the nature of this loss. See Commissioner v. Sunnen, 333 U.S. 591, 92 L. Ed. 898, 68 S. Ct. 715. Assuming, but by no means deciding, that the Commissioner's review of the 1965 return was tantamount to an approval of the claimed theft loss, we must nevertheless reject plaintiffs' argument.
Professor Moore has correctly observed:
It is axiomatic to the doctrines of res judicata and collateral estoppel that only judicial decisions are given conclusive force in subsequent legal proceedings. Thus determinations made by the Commissioner of Internal Revenue are not judicial in nature but administrative and are not res judicata to bind him for the same taxable year or for subsequent years.
1B J. Moore, Federal Practice P 0.422, at 3403 (2d ed. 1974); see Burnet v. Porter, 283 U.S. 230, 75 L. Ed. 996, 51 S. Ct. 416; Commissioner v. Newport Industries, Inc., 121 F.2d 655, 657 (7th Cir. 1941); Bonwit Teller & Co. v. Commissioner, 53 F.2d 381, 384 (2d Cir. 1931), cert. denied, 284 U.S. 690, 52 S. Ct. 266, 76 L. Ed. 582.*fn3 Accordingly, courts have consistently allowed the IRS to reconsider a taxpayer's liability in situations analogous to the present one. E.g., Pacific Transport Co. v. Commissioner, 483 F.2d 209, 214-15 (9th Cir. 1973), cert. denied, 415 U.S. 948, 94 S. Ct. 1469, 39 L. Ed. 2d 563, 42 U.S.L.W. 3485 (U.S. Feb. 26, 1974); Phoenix Coal Co. v. Commissioner, 231 F.2d 420, 421-22 (2d Cir. 1956); Commissioner v. Van Bergh, 209 F.2d 23 (2d Cir. 1954); see 26 U.S.C. § 6214(b).
Plaintiffs' second contention is that the 1965 transaction with John Laures was an embezzlement of $100,000.00 and, consequently, a theft loss within the meaning of 26 U.S.C. § 165.*fn4 After having considered all the evidence in this case, the district court concluded:
It is impossible under this record to make any finding based upon credible evidence that a theft occurred as defined by the Illinois statutes. . . . The evidence furnished by plaintiffs does not establish that Laures obtained possession of plaintiffs' stock or its proceeds by deception, with the intent to deprive plaintiffs permanently of the use of their property.
In our opinion, the district court's conclusion is most certainly not clearly erroneous and must therefore be upheld. Fed. R. Civ. P. 52(a).
In 1965 John Laures needed additional working capital for Concrete Maintenance Products, Inc. (CMP), a company which he managed. He approached plaintiffs, who were his friends and business associates, and asked if he could sell their 100,000 shares of CMP stock (at $1.00 per share) to raise the necessary capital. In return Laures promised to replace the stock at some future (unspecified) date with his own and, if possible, to induce the company to issue plaintiffs convertible debentures. Plaintiffs agreed.*fn5 They gave Laures the shares to sell, which he did, and then endorsed the proceeds of this sale to him. Although Laures initially deposited the entire $100,000.00 in his personal checking account, $50,000.00 ...