Fox did not ask Hafner whether the funds which he misappropriated were taxable income. Nor did he consult Hafner regarding the preparation of the statement or the claiming of any deductions on his

return.

On April 25, 1967, Fox was interviewed by agents of the Federal Bureau of Investigation (FBI) in connection with a reported robbery of the Bank of Springfield. Pursuant to his request, the agents met with him again on April 26, 1967. At this latter meeting, Fox asked about the relationship between the FBI and the Internal Revenue Service and was told they were in separate departments. Fox then told the FBI agents that he had a substantial amount of income from several sources which could not be traced by the Internal Revenue Service. One source of this income, he stated, was a nursing home in Iowa. The FBI agents then informed Fox of his constitutional right to remain silent. Fox declined to give any further information, stating that he did not want to risk being convicted of income tax evasion in order to clear himself of robbery of the Bank of Springfield.

OPINION

In the notices of deficiency, respondent determined that Fox realized income from embezzlements in the amounts of $30,500 in 1966 and $93,750 in 1967. The $93,750 embezzled in 1967 is a net figure. Respondent maintains that Fox embezzled $93,750 from the Bank of Springfield and $124,250 from the Bank of Otterville in 1967, but concedes that the $124,250 used to repay the Bank of Springfield is deductible under section 165 (c) (2). Respondent also alleges that Fox's deficiencies for both years were, at least in part, due to fraud with the result that Fox is liable for section 6653 (b) additions to the

tax.

As to the amounts of the deficiencies, petitioners make five arguments: (1) That the judgment of conviction of November 3, 1967, collaterally estops respondent from contending that Fox embezzled more than $10,000 from the Bank of Springfield in 1966; (2) that other sums were not embezzled in that year; (3) that the losses of both banks have been reimbursed and, consequently, petitioner is not taxable on any of the embezzlements; (4) that the surrender of the bank stock to the Otterville Investment Corp. resulted in an ordinary

SEC. 165. LOSSES.

(c) LIMITATION ON LOSSES OF INDIVIDUALS.—In the case of an individual, the deduction under subsection (a) shall be limited to

(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business;

See Rev. Rul. 65-254, 1965-2 C.B. 50.

loss; and (5) that petitioner Nancy A. Fox is relieved by section 6013(e) of any liability for tax on the embezzled funds. Finally, Fox denies that any part of the deficiencies for either year was due to fraud.

Petitioners have the burden of proving that respondent's determinations of the amounts of the deficiencies are erroneous. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142, United States Tax Court Rules of Practice and Procedure. However, respondent has the burden of establishing his allegations of fraud. Sec. 7454 (a). We must weigh the evidence accordingly.

1. Collateral Estoppel (1966)

Fox is correct in his assertion that he was indicted and convicted in criminal docket No. 22525 of taking only $10,000 in 1966. However, respondent is not estopped by the judgment of conviction in that proceeding from determining that Fox embezzled additional amounts in that year. That judgment of conviction did not purport to deal with any embezzlements not pleaded in the indictment.

The general principle of collateral estoppel or estoppel by judgment is that a fact decided in an earlier suit is conclusively established between the parties and their privies in a later suit, provided that such fact was necessary to the judgment of the first suit. Hyman v. Regenstein, 258 F.2d 502, 509-511 (C.A. 5, 1958), certiorari denied 359 U.S. 913 (1959). Once the issue is actually determined, it cannot be relitigated between the parties, even in a suit on a different cause of action. United States v. Burch, 294 F.2d 1, 5 and fn. 4 (C.A. 5, 1961); John W. Amos, 43 T.C. 50 (1964), affd. 360 F.2d 358 (C.A. 4, 1965). But the principle applies only to facts essential to the judgment, as opposed to mere evidentiary facts. Commissioner v. Sunnen, 333 U.S. 591 (1948); John W. Amos, 43 T.C. at 54.

The only facts essential to petitioner's conviction in criminal docket No. 22525 on the counts involving misappropriations in 1966 were the facts relating to the taking of the two sums of $5,000 each. Whether other sums were misappropriated was not a fact essential to the court's judgment. Therefore, collateral estoppel or estoppel by judgment does not foreclose respondent's determination that other sums were embezzled in 1966.

2. The Amount of the 1966 Embezzlement

Fox's contention as to the total amount of the embezzlements, apart from the estoppel-by-judgment argument, discussed above, is that the record does not show any 1966 embezzlements other than the two $5,000 items for which he was indicted and convicted. Fox concedes that

$124,250 was embezzled from the Bank of Springfield but maintains that only $10,000 was taken in 1966 and the remainder in 1967.

The argument that respondent has not shown that Fox's embezzlement income in 1966 exceeded $10,000 misconceives the burden of proof. As stated above, respondent determined that Fox embezzled $30,500 in 1966, and Fox has the burden of proving that respondent's determination is erroneous. He has offered no evidence, other than the judgment of conviction in criminal docket No. 22525, to show that only $10,000 was embezzled in 1966. That judgment has no probative value in deciding whether Fox embezzled other sums in 1966. In the absence of evidence to the contrary, we must sustain respondent's determination that the 1966 embezzlements amounted to $30,500.

3. The "Repayments" of the Embezzlements (1966 and 1967) Petitioner's argument, based on Wilbur Buff, 58 T.C. 224 (1972), on appeal (C.A. 2, Dec. 11, 1972), is summarized in his reply brief in these words:

The basic case can be stated as follows: "A" was an officer at the Bank of Springfield, Illinois in 1966 and 1967. “A” embezzled $124,250.00. (Of this amount, only $10,000.00 was embezzled in 1966. The rest in 1967.) "A" used the money to buy the controlling stock in the Bank of Otterville, Missouri. Then “A” paid the money back to the Bank of Springfield by writing drafts on the Otterville Bank in the amount of $124,250.00. Then the bank examiner at the Otterville Bank required "A"s bonding company to pay the Bank of Otterville $124,250.00 and Otterville was paid up. The total of funds embezzled in 1967 amounted to $124.250.00. This amount was embezzled at Springfield and paid back. The same amount was embezzled at Otterville and paid back. "A" embezzled $124,250.00 on two occasions. The money was paid back both times. This money was never income to "A". All of the facts are stipulated. All the facts are established by Court judgments.

The argument lacks merit. In Wilbur Buff, supra, the taxpayer embezzled moneys from his employer, and in the same taxable year the taxpayer and his employer agreed that the amount taken would be treated as a judgment debt due from the taxpayer. Holding that the taxpayer did not realize taxable income in the year of the embezzlement, this Court said (58 T.C. at 232):

Respondent offered the testimony and report of a certified public accountant who traced the various transactions whereby the Bank of Springfield's funds were embezzled. The report shows embezzlements of $30,500 in 1966. It was admitted over the vigorous objection of Fox's counsel on grounds of the hearsay and best-evidence rules. While, in our opinion, the report is admissible (see McCormick, Evidence, secs. 237-238 (2d ed. 1972); and 4 Wigmore, Evidence, sec. 1230 (Chadbourn rev. 1972)), it is not essential to our conclusion that respondent's determination as to the amount of the 1966 embezzlement must be sustained.

In the instant case, the embezzlement of funds by the petitioner, his recognition of the obligation to repay the embezzled funds, and the making of arrangements for the repayment of those funds, all took place within the same taxable year. Furthermore, in the instant case, there was a consensual recognition of an obligation to repay the embezzled funds in that the petitioner, at the request of his employer, confessed judgment for the amount due.

*** Where there is "consensual recognition" of indebtedness within the same taxable year, formalized by a confession of judgment, such a transaction does not result in the realization of taxable gain.

Thus, the crucial fact in the Buff decision is the consensual recognition of a debt in the same taxable year as the embezzlement. The significance of that fact lies in the general rule that each taxable period is to be treated as separate and independent, and items of income and deductions for one year may not be offset and adjusted in computing the tax for another year. Burnet v. Sanford & Brooks Co., 282 U.S. 359 (1931). The agreement by the employer in Buff to recognize and accept the confession of judgment before the end of the tax year in which the embezzlement occurred was found to prevent the realization of taxable income in that year.

In the instant case, Fox in 1966 neither repaid nor agreed to repay any of the money he embezzled from the Bank of Springfield in that year. The repayment of those embezzlements entitled him to a deduction in 1967, but did not extinguish the income he realized in 1966. The Buff case provides no support for petitioner.

As to 1967, respondent allowed petitioner a deduction under section 165 (c) (2) for the repayments to the Bank of Springfield of $124,250, leaving net embezzlements in that year in the amount of $93,750. Petitioner argues, however, that he had no net embezzlement income in 1967 because of the reimbursement by Western of the Bank of Otterville's loss pursuant to the indemnity bond. This argument is also without merit.

The legal ground for treating misappropriated funds as income to the embezzler was explained in James v. United States, 366 U.S. 213, 219-220 (1961), as follows:

When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, "he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent." North American Oil v. Burnet, supra [286 U.S. 417 (1932)], at p. 424. In such case, the taxpayer has "actual command over the property taxed-the actual benefit for which the tax is paid," Corliss v. Bowers, supra [281 U.S. 376 (1930)]. This standard brings wrongful appropriations within the broad sweep

532-904-74- -46

of "gross income"; it excludes loans. When a law-abiding taxpayer mistakenly receives income in one year, which receipt is assailed and found to be invalid in a subsequent year, the taxpayer must nonetheless report the amount as "gross income" in the year received. United States v. Lewis, supra [340 U.S. 590 (1951)]; Healy v. Commissioner, supra [345 U.S. 278 (1953)]. We do not believe that Congress intended to treat a law-breaking taxpayer differently.

Thus, the decisive consideration is the receipt of the misappropriations by the embezzler in the tax year, not the loss by the embezzler's victim. The mere fact that Western, the bonding company, reimbursed the Bank of Otterville did not relieve Fox of the receipt of taxable income in 1967.

4. The Loss Sustained on the "Surrender" of the Bank Stock (1967)

Petitioner is entitled to a loss deduction on the surrender of the Bank of Otterville stock. In the notice of deficiency for 1967, respondent determined that petitioner "sustained a capital loss of $58,250.00 in a stock purchase contract of common stock of the Bank of Otterville" and that under the capital loss limitation provisions in section 1211 (b), petitioner is limited to a maximum loss deduction of $1,000. The capital loss limitation of section 1211(b) is applicable to the instant case only if petitioner's losses arose from the sale or exchange of a capital asset. Sec. 165 (f). Since there is no apparent disagreement between the parties over whether the bank stock was a capital asset in petitioner's hands, the controversy centers on whether the surrender of the stock to the Otterville Investment Corp. was a sale or exchange. Respondent argues that it is well settled that the sale or exchange of a capital asset need not be a voluntary transaction to come within the capital loss limitation provisions of the Code, citing Helvering v. Hammel, 311 U.S. 504 (1941). In Hammel, the Supreme Court held that a sale following a foreclosure on a secured interest in land, i.e., a forced sale, should be treated no differently than a voluntary sale of the same asset for purposes of the capital gain and loss provisions of

SEC. 1211. LIMITATION ON CAPITAL LOSSES.

(b) OTHER TAXPAYERS.

(1) IN GENERAL.-In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) whichever of the following is smallest :

(A) the taxable income for the taxable year,

(B) $1,000, or

(C) the sum of

(1) the excess of the net short-term capital loss over the net long-term capital gain, and

(11) one-half of the excess of the net long-term capital loss over the net shortterm capital gain.