705 F.2d 1418 | 5th Cir. | 1983
“If a client asks you in any but an extreme case whether, in your opinion, his sale will result in capital gain, your answer should probably be, T don’t know, and no one else in town can tell you.’ ”1
Sadly, the above wry comment on federal taxation of real estate transfers has, in the twenty-five years or so since it was penned, passed from the status of half-serious aside to that of hackneyed truism. Hackneyed or not, it is the primary attribute of truisms to be true, and this one is; in that field of the law — real property tenure — where the stability of rule and precedent has been exalted above all others, it seems ironic that one of its attributes, the tax incident upon disposition of such property, should be one of the most uncertain in the entire field of litigation. But so it is, and we are called on again today to decide a close case in which almost a million dollars in claimed refunds
FACTS
The trial court, sitting without a jury in this taxpayer’s suit for refund, found the following facts:
During 1973, John D. Byram, the taxpayer, sold seven pieces of real property.
None of the properties ’ sold was platted or subdivided. Byram devoted minimal time and effort to the sales in question, occupying himself chiefly with his rental properties. Byram’s income for 1972 and 1973 included substantial amounts of rental income and interest income.
The district court’s findings do not reflect the following additional facts, which apparently are not disputed by the parties. From 1971 through 1973, Byram sold 22 parcels of real • property for a total gross return of over $9 million and a net profit of approximately $3.4 million. The seven properties at issue in this case sold for approximately $6.6 million gross, resulting in a profit of approximately $2.5 million. Six of the seven properties were held by Byram for periods ranging from six to nine months, intervals just exceeding the then-applicable holding periods for long-term capital gains. The seventh property had been held for two years and six months.
Although, as noted above, Mr. Byram received substantial rent and interest income in 1973, nevertheless his rental activities for that year resulted in a net tax loss of approximately $186,000. He received rental income from only one of the seven properties sold in 1973. The record does not reflect the exact relative amounts of income attributable to the sales in question and Byram’s other activities.
' Certain facts are disputed by the parties. The government asserts in its brief that Byram had entered into contracts to sell at least three of the seven properties in issue before he actually acquired them. Byram first responds that the record reflects only two such instances, not three; and at oral argument the government appeared to concede the point. As to those two transactions, Byram asserts that he acquired the right to purchase the properties by executing a contract before he entered into a contract to sell them; it was only closing on the purchases that postdated his contracts to sell. Finally, the government asserts, and Byram denies, that by virtue of By-ram’s civic activities in Austin, Texas, By-ram’s business of selling real estate was well-known in the community.
Based on its subsidiary findings indicated, the district court made ultimate findings that Byram held each of the seven properties for investment purposes and not primarily for sale to customers in the ordinary course of his trade or business. Judgment was therefore entered granting Byram the capital gains treatment that he sought. The government brought this appeal.
In a 1972 transaction unrelated to his real estate sales, Byram sought construction financing for an apartment and office building. Because there was a possibility that the interest rate required by the lenders would violate Texas usury laws if Byram borrowed the money individually, he formed a wholly-owned corporation, Byram Properties, Inc. (the “corporation”), to obtain financing by executing certain notes. This was the corporation’s only function. The corporation was the principal obligor; Byram personally guaranteed payment of
I.
Profits derived from the sale of “capital assets,” known as “capital gains,” are entitled to favorable tax treatment under the Internal Revenue Code (the “Code”). See 26 U.S.C. §§ 1201,1202. The term “capital asset” is defined in relevant part as “property held by the taxpayer,” not including property held “primarily for sale to customers in the ordinary course of [the taxpayer’s] trade or business.” Id., § 1221. The district court found that By-ram “was not engaged in the real estate business” during the relevant years and that each of the seven properties in issue was held “for investment purposes and not primarily for sale to customers in the ordinary course of [Byram’s] trade or business.” Accordingly, the district court held that By-ram was entitled to treat the profits from his 1973 sales as capital gains and ordered an appropriate refund. Our first task is to decide the correct standard by which to review the district court’s principal finding
The question whether the characterization of property as “primarily held for sale to customers in the ordinary course of [a taxpayer’s] trade or business” is an issue of fact or one of law has engendered tremendous controversy and conflict both in this
The ultimate fact doctrine, first embraced by our court in Galena Oaks Corp. v. Scofield, 218 F.2d 217 (5th Cir.1954), posits that review of ultimate facts is not constrained by the clearly erroneous rule since though factual in nature, these issues are also the ultimate ones for resolution in a case and must be determined by a process of legal reasoning from subsidiary facts. Id. at 219-20. Accordingly, in Suburban Realty we observed that a taxpayer’s holding purpose is “primarily factual,” but that it is not a “pure” question of fact. 615 F.2d at 180-81 and n. 27. Though we stated that a lower court’s finding of holding purpose must be followed unless clearly erroneous, id. at 185 n. 41, we also maintained that our review of the “ultimate conclusion” in such cases is plenary. Id. at 181 n. 28. Thus, although Suburban Realty purported to clarify our role in capital gains cases, the actual dynamics of appellate review remained unclear.
Fortunately, it is unnecessary once again to traverse the conceptual thicket of ultimate and subsidiary facts so carefully husbanded by this court through the years. The Supreme Court has levelled it. Pullman-Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982).
In Swint, the Court reviewed a decision of this court holding that by setting up and perpetuating a particular seniority system, an employer and two unions had discriminated against black employees in violation of Title VII of the Civil Rights Act. 42 U.S.C. § 2000e-2(h). In order to establish discrimination in the operation of a seniority system, it is necessary to prove discriminatory intent. Id.; Swint, 456 U.S. at 275-277, 102 S.Ct. at 1783-1784, 72 L.Ed.2d at 72-73. Analyzing the issue in the manner suggested by this court,
Reversing that decision and rejecting our authorities on which it rested, the Supreme Court held that our accepted rule allowing de novo review of ultimate facts
The Court recognized the “vexing nature of the distinction between questions of fact and questions of law,” and noted that Rule 52 provides little guidance in drawing the
Though the characterization of issues as ones of law or fact may be difficult in some cases, the present case is not one of them. The issue of holding purpose under the Code, like the issue of discriminatory purpose under Title VII, is a pure question of fact. That this is so was made clear by the Court in Swint:
Treating issues of intent as factual matters for the trier of fact is commonplace. In Dayton Board of Education v. Brinkman, 443 U.S. 526, 534, 61 L.Ed.2d 720, 99 S.Ct. 2971 [2977] (1979), the principal question was whether the defendants had intentionally maintained a racially segregated school system at a specified time in the past. We recognized that issue as essentially factual, subject to the clearly erroneous rule. In Comm’r v. Duberstein, 363 U.S. 278, 4 L.Ed.2d 1218, 80 S.Ct. 1190 (1960), the Court held that the principal criterion for identifying a gift under the applicable provision of the Internal Revenue Code was the intent or motive of the donor — “one that inquires what the basic reason for his conduct was in fact.” 363 U.S., at 286, 4 L.Ed.2d 1218, 80 S.Ct. 1190 [at 1197]. Resolution of that issue determined the ultimate issue of whether a gift had been made. Both issues were held to be questions of fact subject to the clearly erroneous rule. In United States v. Yellow Cab, 338 U.S. 338, 341, 94 L.Ed. 150, 70 S.Ct. 177 [179] (1949), an antitrust case, the Court referred to “findings as to the design, motive and intent with which men act” as peculiarly factual issues for the trier of fact and therefore subject to appellate review under Rule 52.
Swint, 456 U.S. at 287-288, 102 S.Ct. at 1789-1790, 72 L.Ed.2d at 79-80.
The purpose for holding property, like the purpose for maintaining a seniority system at issue in Swint, is a question of intent and motive.
The record and the district court’s findings of fact indicate that in determining Byram’s holding purpose, the court considered all.the factors this court has called “the seven pillars of capital gains treatment”:
(1) the nature and purpose of the acquisition of the property and the duration of the ownership; (2) the extent and nature of the taxpayer’s efforts to sell the property; (3) the number, extent, continuity and substantiality of the sales; (4) the extent of subdividing, developing, and advertising to increase sales; (5) the use of a business office for the sale of the property; (6) the character and degree of supervision or control exercised by the taxpayer over any representative selling the property; and (7) the time and effort the taxpayer habitually devoted to the sales.
United States v. Winthrop, 417 F.2d 905, 910 (5th Cir.1969). Recent cases have placed particular emphasis on four of these factors, noting that frequency and substantiality of sales is the most important factor, and that improvements to the property, solicitation and advertising efforts, and brokerage activities are also especially relevant considerations. Biedenharn Realty, 526 F.2d at 415-16; Suburban Realty, 615 F.2d at 176. At the same time, it has been repeatedly emphasized that these factors should not be treated as talismans. Winthrop, 417 F.2d at 911. Rather, “each ease must be decided on its own peculiar facts.... Specific factors, or combinations of them, are not necessarily controlling.” Biedenharn Realty, 526 F.2d at 415 (quoting Thompson v. Commissioner, 322 F.2d 122, 127 (5th Cir.1963)).
The district court found most of the Winthrop factors absent in Byram’s case. Byram made no personal effort to initiate the sales; buyers came to him. He did not advertise, he did not have a sales office, nor did he enlist the aid of brokers. The properties at issue were not improved or developed by him. The district court found that Byram devoted minimal time and effort to the transactions.
Mr. Byram has presented us with a close case. Had we been called upon to try or retry the facts, perhaps we would have drawn different inferences than did the district court. However, Swint has relieved us of that duty. Our review of the evidence convinces us that the district court was not clearly erroneous in finding that Byram held his properties for investment and not for sale in the ordinary course of his trade or business.
II.
Byram’s sole argument on his cross-appeal is that Treas.Reg. § 1.163-l(b) entitles him to deduct personally the interest he paid on behalf of his corporation.
Byram’s contention is that his corporation held only bare legal title to the apartment and office building as a financing device and that he is the equitable owner of the property entitled to interest deductions under the regulation. We considered and rejected this argument in Abdalla v. Commissioner, 647 F.2d 487, 503-04 (5th Cir.1981).
It long has been settled in our circuit that a taxpayer is entitled to deduct interest
The judgment of the district court is
AFFIRMED.
. Comment, Capital Gains: Dealer and Investor Problems, 35 Taxes 804, 806 (1957) quoted in 3B Mertens, Law of Federal Income Taxation § 22.138 n. 69 (Zimet & Weiss rev. 1958); Biedenharn Realty Co. v. United States, 509 F.2d 171, 175 (5th Cir.1975), rev’d en banc, 526 F.2d 409 (5th Cir.), cert. denied, 429 U.S. 819, 97 S.Ct. 64, 50 L.Ed.2d 79 (1976); Thompson v. Commissioner, 322 F.2d 122, 123 n. 2 (5th Cir.1963); Cole v. Usry, 294 F.2d 426, 427 n. 3 (5th Cir.1961).
. Sally A. Byram is a party in this case only because joint returns were filed for the years in question. Therefore, our references to the “taxpayer” or “Byram” are to John D. Byram.
. In Suburban Realty Co. v. United States, 615 F.2d 171 (5th Cir.), cert. denied, 449 U.S. 920, 101 S.Ct. 318, 66 L.Ed.2d 147 (1980), we recognized that the Code definition of “capital asset” gives rise to at least three inquiries:
(1) was taxpayer engaged in a trade or business, and, if so, what business?
(2) was taxpayer holding the property primarily for sale in that business?
(3) were the sales contemplated by taxpayer “ordinary” in the course of that business?
Id. at 178 (footnote omitted).
In many situations, these questions are analytically independent. For example, it will oftentimes be beyond dispute that a taxpayer is engaged in the real estate business with respect to certain properties, yet other properties may not be held primarily for sale in that business, or particular sales may be outside its ordinary scope. See, e.g., Wood v. Commissioner, 276 F.2d 586 (5th Cir. 1960); Maddux Construction Co. v. Commissioner, 54 T.C. 1278 (1970). However, in the present case the three statutory questions tend to merge into one, because the existence of a business, Byram’s holding purpose, and the “ordinariness” of sales must all be determined by characterization of the same transactions. Moreover, because we decide below that Byram’s holding purpose must be treated as an issue of fact, and that the district court’s finding is not clearly erroneous, the holding below must be left undisturbed and we need not address related questions arguably posed by the statute.
. See Suburban Realty, 615 F.2d at 180, collecting cases treating the issue as one of law, e.g., Houston Endowment, Inc. v. United States, 606 F.2d 77, 83 (5th Cir.1979); United States v. Winthrop, 417 F.2d 905, 910 (5th Cir.1969); Galena Oaks Corp. v. Scofield, 218 F.2d 217 (5th Cir.1954); and another line of cases treating the question as essentially factual, e.g., United States v. Burket, 402 F.2d 426, 429 (5th Cir.1968); Thompson v. Commissioner, 322 F.2d 122, 127 (5th Cir.1963).
. Three other circuit courts of appeals treat the issue as one of fact. Philhall Corp. v. United States, 546 F.2d 210 (6th Cir.1976); Brown v. Commissioner, 448 F.2d 514 (10th Cir.1971); Municipal Bond Corp. v. Commissioner, 382 F.2d 184 (8th Cir.1967). Two circuits treat it as a question of law, following our cases that so hold. Turner v. Commissioner, 540 F.2d 1249 (4th Cir.1976); Jersey Land & Development Corp. v. United States, 539 F.2d 311 (3d Cir.1976). In other circuits, the issue is apparently unsettled. Compare Sovereign v. Commissioner, 281 F.2d 830 (7th Cir.1960) (fact question) with Hansche v. Commissioner, 457 F.2d 429 (7th Cir.1972) (treats question as open); compare Estate of Segel v. Commissioner, 370 F.2d 107 (2d Cir.1966) (applies clearly erroneous standard) with In re Joseph Kanner Hat Co., 482 F.2d 937 (2d Cir.1973) (bankruptcy case; dicta that de novo review applies). See also Cruttenden v. Commissioner, 644 F.2d 1368 (9th Cir.1981) (open question); Parkside, Inc. v.
. In James v. Stockham Valves & Fittings Co., 559 F.2d 310 (5th Cir.1977), cert. denied, 434 U.S. 1034, 98 S.Ct. 767, 54 L.Ed.2d 781 (1978), we identified four factors that the Supreme Court has focused on in examining the issue of discriminatory purpose. Id. at 352; International Brotherhood of Teamsters v. United States, 431 U.S. 324, 355-56, 97 S.Ct. 1843, 1864-1865, 52 L.Ed.2d 396 (1977). At the same time, we emphasized that “the totality of the circumstances in the development and maintenance of the system is relevant to examining that issue.” 559 F.2d at 352.
. The Court traced the history of the ultimate fact doctrine in our circuit from its inception in Galena Oaks Corp. v. Scofield, supra, a case dealing, like that before us, with holding purpose in the capital gains context, through application of the doctrine in Title VII cases to the issue of discriminatory purpose. 456 U.S. at 286-287 n. 16, 102 S.Ct. at 1788-1789 n. 16, 72 L.Ed.2d at 78-79 n. 16.
. See Baumgartner v. United States, 322 U.S. 665, 64 S.Ct. 1240, 88 L.Ed. 1525 (1944); see also Swint, 456 U.S. at 286-287 n. 16, 102 S.Ct. at 1788-1789 n. 16, 72 L.Ed.2d at 78-79 n. 16.
. We have uniformly held that the statutory exception for property “held” for safe to customers, 26 U.S.C. § 1221, requires an inquiry into a taxpayer’s intent. See, e.g., Suburban Realty, 615 F.2d at 182-85; Biedenharn Realty Co. v. United States, 526 F.2d 409, 422-23 (5th Cir.) (en banc), cert. denied, 429 U.S. 819, 97 S.Ct. 64, 50 L.Ed.2d 79 (1976). Moreover, the fact that the taxpayer’s subjective state of mind is not controlling and an objective inquiry must be made by the court does not render the issue any less one of intent or any less factual. See Commissioner v. Duberstein, 363 U.S. 278, 286, 290-91, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218, 1225, 1228 (1960).
. In application, these “pillars” have come more nearly to resemble the walls of a maze. See, e.g., Suburban Realty, 615 F.2d 171; Biedenharn Realty, 526 F.2d 409.
. This factor has been slighted in recent cases, not because it is unimportant, but because it was irrelevant to our consideration of the activities of large corporate organizations. See e.g. Suburban Realty, 615 F.2d 171; Houston Endowment, 606 F.2d 77; Biedenharn Realty, 526 F.2d 409. However, in a case like the present one, where the government seeks to show that an individual taxpayer is holding property for sale in a certain business, the quantum of that individual’s activity becomes very relevant. Long before the proliferation of tests and factors engulfed the capital gains field, this court made the common sense observation that the word “business” means “busyness; it implies that one is kept more or less busy, that the activity is an occupation.” Snell v. Commissioner, 97 F.2d 891, 892 (5th Cir.1938); see also Stern v. United States, 164 F.Supp. 847, 851 (E.D.La.1958) (“[A] court should not be quick to put a man in business .. . simply because he has been successful in earning extra income through a hobby or some other endeavor which takes relatively small part of his time.”) aff'd 262 F.2d 957 (5th Cir.), cert. denied, 359 U.S. 969, 79 S.Ct. 880, 3 L.Ed.2d 836 (1959). The district court was entitled to give great weight to Byram’s time and effort devoted to sales in determining whether he held his property for sale in the ordinary course of his business.
. Although only the seven sales completed in 1973 are at issue in this case, prior years’ activities are relevant to the characterization of the 1973 transactions. See Thompson v. Commissioner, 322 F.2d 122, 127 (5th Cir.1963).
. A variation of the argument based on short holding periods is that Byram’s execution of contracts to sell two properties before acquiring title to them indicates lack of investment intent. The record shows that Byram contracted to purchase one of the properties and a portion of the other before engaging to sell them. See Record, Volume IV, p. 304-07, 310; Plaintiffs’ Exhibits 15, 19, & 20. For these, the timing of passage of title is irrelevant for our purposes. Even if we assume that Byram contracted to sell the remaining portion of property before acquiring it, our view of the district court’s finding remains unaltered. Though this fact undoubtedly favors the government’s position, the district court reasonably could have found it outweighed by the other evidence.
. The district court found that the corporation was not a sham, that it was formed for the valid business purpose of avoiding state usury laws, and that it therefore could not be disregarded as a separate taxable entity. The district court also found that the corporation did not function as Byram’s agent. See Roccaforte v. Commissioner, 77 T.C. 263 (1981), appeal filed No. 82-4048 (5th Cir. Feb. 4, 1982). Relying entirely on the indicated regulation, Byram does not dispute these findings, and we do not review them.