Fritz THOMPSON and Dora M. Thompson, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 20074
United States Court of Appeals Fifth Circuit
Aug. 20, 1963
Rehearing Denied Sept. 26, 1963
322 F.2d 122
On the appeals from the fixation of $11,800 per month as the amount payable by the Trustees for use and occupation, we do not think the record was adequate for a final determination. See S & W Holding Co. v. Kuriansky, 317 F.2d 666 (2 Cir. 1963). We vacate so much of the order and remand for further hearing on that issue. Meanwhile the Trustees shall pay at that rate for July and August on account and without prejudice, such payment to be made on or before August 31.
The question whether the Trustees shall be entitled to reimbursement from the property for services rendered need not be passed upon by us until the Distriсt Court has taken further action; the order simply reserves jurisdiction in that respect, and we affirm it on that basis. There is likewise no reason for us now to pass upon the portion of the order which states that the Trustees may, if so advised, apply to the District Court for an order directing the landlord to return amounts in excess of $11,800 paid for use and occupation for March, April, May and June, 1963. No determination of the Trustees’ right so to recover has been made, and the entire issue may become moot as a result of our vacating the order fixing $11,800 per month as the amount payable for use and occupation.
We dismiss the appeal of Albert Mintzer from the order finding his plan of reorganization unfeasible; we read the opinion as having passed on this only as an incident to the action taken with respect to the lease, which, broadly speaking, we approve.
The mandate will issue forthwith. No costs on appeal.
Hutcheson, Circuit Judge, and Lumbard, Chief Judge, dissented in part.
Michael I. Smith, Atty., Dept. of Justice, Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Crane C. Hauser, Chief Counsel, Rollin H. Transue, Atty., I.R.S., Washington, D. C., for respondent.
Before HUTCHESON, Circuit Judge, LUMBARD, Chief Judge,* and BROWN, Circuit Judge.
JOHN R. BROWN, Circuit Judge.
On Taxpayer‘s1 appeal from an adverse judgment of the Tax Court, two questions are presented. The first is the old, familiar, recurring, vexing and oftimes elusive2 problem of the treatment of proceeds of sales of subdivided lots as capital gains or ordinary income. Second, a completely novel problem never before presented and unlikely ever to arise again has to do with the treatment of a parity price support loan as income in the year received even though the loan is redeemed prior to the expiration of the tax year, and the wheat is not sold by the Taxpayer-farmer until the following year.
I.
As to the capital gains issue, the tax years involved are 1957 and 1958. The lots sold were the near tail end residue of a 100-acre tract in Borger, Texas, which Taxpayer admittedly bought as an investment in 1942 for the sum of $5,
Borger, Texas, was an oil boom town, perhaps on the wane. But it was hemmed in by four substantial landowners. Taxpayer through a judicious purchase got a 100-acre tract from one of them in 1942. Though concededly purchased as an investment, including the prospect of ground rents from a large number of squatters living in shanties, it was not long until Taxpayer commenced to sell lots. In the meantime with the ill wind of war, fortune struck Borger. In August 1942 the Government began construction of the synthetic rubber plant operated by Phillips Petroleum Company. By 1943 there was an influx of construction workers and an unexpected housing shortage. Anticipating the imminent enactment of a city ordinance requiring the filing of dedication plats for all property within the city being sold or leased for residential purposes, Taxpayer filed the first one as to Unit 1 in 1944.4
Thus began what Taxpayer now describes in conclusory terms as the “liquidation” of his investment. Among the early purchasers in Unit 1 were many of the so-called squatters. Within a yеar or so, Taxpayer was besieged by a representative group of respectable business leaders who importuned him to open up much needed residential areas for homesites suitable to their station. Taxpayer left it to this group to indicate the area preferred by them, and this resulted in the dedication of Unit 2 (see note 4, supra). Without a doubt, disposing of the lots was a simple matter for more than one-half of the lots in Unit 2 were subscribed to before the plat was filed. But parenthetically it warrants a comment that merely because business was good, indeed brisk, does not make it any less in the ordinary course of such a gоod business. Unit 3, platted and dedicated in 1947 (see note 4, supra) likewise resulted from circumstances similar to those surrounding Unit 2. In March 1948, the southern-most 1/4 of the tract was platted as Unit 4.
These instruments of dedication (note 4, supra) also contained extensive restrictions as covenants running with the land, and showed in precise detail the areas covered by each Unit, the blocks and lots by number dedicated streets, utilities and so forth. As to Units 1, 2 and 3, Taxpayer spent a considerable sum on improvements.5
However characterized as capital gains versus ordinary income, the sales were
While sales were brisk, it is unquestioned that there was no organized sales program. There was never any advertising. No signs were posted. No real estate agents were used or paid. Taxpayer had no other real estate which he was selling (or purchasing for resale). Prices were fixed for lots generally on a pretty uniform price per front foot. He never haggled. He stated his price. If the price was agreed to, he sold; otherwise not. These real estate activities took little of his time.9
The record, however, hardly bears out the insistence of the brief that Taxpayer was just a farmer. He was a man of many parts, obviously an important figure in the community with a sense of civic responsibility as the very dealings in these lots reflected. Equally obvious, he was a good businessman who had a variety of business interests. Income came from such activities as County Commissioner for a number of years, a farmer, owner of rental apartments, cattle purchases and sales, oil and gas rentals, and the like. In the fifteen-year span (1944-1958) out of gross income of nearly one million dollars, nearly 50% came from these real estate transactions, less than 15% came from farming.10 We emphasize this not because his fortuitous 1942 purchase of this tract for $5,000 penalizes his right to claim capital gains. Rather, it is to point out that he was a man of many (and successful) businesses. One may well have been that of real estate sales whether he thought himself in it or not.
On these facts which we have severely capsulated, the Taxpayer asserts that under the standards laid down in our cases, not the least of which is Cole v. Usry, 5 Cir., 1961, 294 F.2d 426, and Barrios’ Estate v. Commissioner, 5 Cir., 1959, 265 F.2d 517, the Tax Court decision is not merely clearly erroneous, but positively wrong as a matter of law. Taking these decisions and the factors set forth with much precision in Smith v. Dunn, 5 Cir., 1955, 224 F.2d 353, Taxpayer applies a color test to match element by element against the record of this case. Absence of advertising, solicitation, high pressurе sales methods, or improvements such as installation of streets, plus an awesome record of sales continuity in some are emphasized. After the completion of this countdown, Taxpayer urges that, as in those decisions, we must hold these sales to be capital gains as a matter of law.
We think it fraught with less hazards for us to emphasize affirmatively the things we regard as significant. The first of these is that while technically only the tax years 1957-1958 are involved an understanding of the transactions in those years not only permits, but demands, an understanding of all that went on before. The Government overwhelmingly proved out of the mouth of Taxpayer himself that except for insignificant differences, such as sidewalks in Units 1, 2 and 3 and no sidewalks in 4, grading in the former but none in the latter, what the Taxpayer was dоing in 1957-1958 was exactly the same as he had been doing for the previous 13 years. It is true that the number of sales was small in 1957 and 1958, but the reason is equally plain—either the “liquidation” program or the “sales” program was so successful that the shelves were nearly empty.
With 1957-1958 tied into 1945, into 1947, or to any of the other years, Taxpayer‘s own testimony was more than sufficient for the Tax Court to draw the critical inference, legal, factual or both. By his own words, he reaffirmed what his conduct had already demonstrated that he never “refused to sell” any lots, was “always willing to quote a price,” was “always willing to sell if the [applicant] met” his price, and his “whole purpose оf ever subdividing was to sell * * * what I could sell.”
Essential as they are in the adjudication of cases, we must take guard lest we be so carried away by the proliferation of tests that we forget that the statute excludes from capital assets “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”
In contrast to many of the former decisions where changed conditions occurred which made it desirable or necessary for a person to dispose of property acquired previously for some other purpose, the circumstances here justified the Tax Court‘s finding that there was no objective basis for concluding that Taxpayer was engaged merely in a “liquidation” of his investment. To be sure, he was trying to make money off of it, as the law certainly permits. Equally true, the law permits an owner to reap all of the profits which a rising market, a near monopoly, or other economic circumstances bring about. The liquidation, if it really is that, may therefore be carried out with business efficiency. Smith v. Commissioner, 5 Cir., 1956, 232 F.2d 142, 145. But what was once an investment, or what may start out as a liquidation of
The Tax Court‘s decision on this phase is therefore affirmed.
II.
Concerning the problem under
The Tax Court determined that the CCC loan was taxable as income in 1958 even though the loan was repaid and the wheat redeemed before the end of the taxable year. Considering the background of this legislation, we do not think that the result urged by the Government and sustained by the Tax Court is essential to achieve the end sought by § 77. Worse than that, it opens up new and vexing problems—conceptual and administrative—perhaps requiring the judicial creation of a new and counter-fiction to offset this consequence of the congressionally created fiction that a loan is income.
This section was not enacted as a revenue measure. It was not passed to increase the revenue. Indeed, in operative effect, its consequence is just the opposite. Rather, a very small piece to fill out a beneficent and comprehensive program of farm relief, it was enacted to overcome an unintended, but conceptually inescapable, adverse effect on the objects of congressional aid. Under farm legislation the so-called crop loans
The Government asserts that since the legislative history treats the receipt of the loan “as though such commodities had beеn sold,” the taxable event is the receipt of the loan regardless of what takes place thereafter during the tax year. Besides this fragment of legislative history, it also asserts that the election requirement shows a congressional purpose to exact consistency of farmers, so that they may not play fast and loose as shifts occur in these sensitive commodity markets.
But the Government‘s construction is certainly not necessary to effectuate the purpose of the election. This, as is generally true in similar elective options, relates to successive tax years. Of course the Taxpayer faithfully adhered to his еlection. As to wheat put in loan and not redeemed in 1958, he included the loans as income in his 1958 return.
Actually, the construction now asserted would defeat the paramount aim of Congress. Farm legislation was intended to give farmers a free ride of the market. However, the inescapable income tax rulings prevented that when the loan and the redemption (or foreclosure) overlapped two tax years. This was the problem, and the only problem. There was no problem as to a loan received and repaid within the same year. If the Government‘s view is accepted, it means that as to an area in which there was nо problem, Congress has unwittingly withdrawn from that farmer the right to ride the market to the year‘s end. Thus an amendment to the Revenue Code designed to “avoid this harsh result” (see note 18, supra) becomes itself a new instrument to frustrate the predominate goal of agricultural relief.
Moreover, to follow the Government‘s thesis, judicial tinkering is required to avoid yet a further and more awesome hardship. Here the wheat redeemed in 1958 was sold within a few weeks because of market conditions in 1959. The price was just slightly better than the amount of the former loan. The Taxpayer returned this as income in 1959. Being the sale of a commodity, it surely was income. How is it to be treated? The Government‘s reply is an easy one. Applying literally the “as if” aspect of § 77 the loan in 1958 was a vicarious “sale.” When the loan was redeemed there was another “as if” transaction with the tables now reversed—the farmer now being the buyer, the CCC the seller. This gave the Taxpayer a new cost basis equivalent to what he “paid” for wheat he never really did sell and which belonged to him all the time.
The facts in simple outline convince us that Taxpayer is right. At year end 1958 Taxpayer had the wheat. He did not have money. In 1959 he had money, but no wheat.
We therefore reverse the Tax Court decision as to this aspect.
Affirmed as to part I.
Reversed as to part II.
HUTCHESON, Circuit Judge (concurring in part and dissenting in part).
I respectfully, but nonetheless emphatically, dissent from the majority‘s affirmance of that part of the decision of the Tax Court relating to the capital gains issue. (PART I)
The majority‘s decision is so patently at variance with the plain meaning and intent of the statute and the established law of this court that a lengthy elaborаtion of my views will be unnecessary. As pertinent to this case, the statute denies capital gains treatment to profit resulting from the sale of “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”
But this court has frequently had occasion to consider that statutory provision, and, in so doing, it has articulated and developed a consistent and reаsonable body of law to govern its application. Under those established principles, it is evident that the majority here reaches an incorrect result. E. g., Cole v. Usry, 5th Cir., 1961, 294 F.2d 426; Barrios’ Estate v. Commissioner, 5th Cir., 1959, 265 F.2d 517; Thomas v. Commissioner, 5th Cir., 1958, 254 F.2d 233; Smith v. Dunn, 5th Cir., 1955, 224 F.2d 353; Goldberg v. Commissioner, 5th Cir., 1955, 223 F.2d 709. Indeed, the facts in both Cole and Barrios’ Estate—in both of which, the taxpayer prevailed—are so similar to those of the present case as to compel reversal of the Tax Court.
These and similar cases are dismissed by the majority with the cavalier statement that: “In this prolific field, it would be bootless to attempt a case-by-case distinction. It would be foreboding and unrewarding.” It would of course, be
The majority, in its opinion, tacitly admits that it is not following the law as established in this circuit. The majority gives no reason for not doing so. Absent a compelling reason to change the law, I think that parties have a right to rely on, and the court has a duty to follow, the law as already developed. This case stands alone in this Circuit in its result. I trust that it will continue to do so.
Because the Tax Court‘s findings resulted from an erroneous view of the law, those findings are clearly erroneous, and I would reverse its decision relating to the capital gains issue.
LUMBARD, Chief Judge (concurring and dissenting).
Although I concur in all that Judge Brown says in Part I of his opinion, I dissent as to Part II. As the taxpayer made his election under
I would affirm the decision of the Tax Court that the taxpayer realized income in 1958 to the full extent of his loan receipts from the Commodity Credit Corporation.
Fred L. NELSON, Appellant, v. D. M. BATSON, Appellee. No. 18426. United States Court of Appeals Ninth Circuit. Aug. 19, 1963.
Notes
| Unit | Dedication Filed of Record |
|---|---|
| 1 | November 1944 |
| 2 | October 1945 |
| 3 | March 1947 |
| 4 | March 1948 |
| Item | Cost |
|---|---|
| Leveling, grading and filling | $39,663.00 |
| Paving sidewalks | 7,600.00 |
| Paving streets and alleys | 18,235.00 |
| Drainage facilities | 1,705.00 |
| Other | 13,297.00 |
| Total | $80,500.00 |
| Year | Unit 1 | Unit 2 | Unit 3 | Unit 4 | Total |
|---|---|---|---|---|---|
| 1944 | 5 | 1 | 6 | ||
| 1945 | 49 | 10 | 59 | ||
| 1946 | 63 | 54 | 1 | 118 | |
| 1947 | 14 1/2 | 9 | 23 1/2 | ||
| 1948 | 9 1/2 | 14 1/2 | 4 | 28 | |
| 1949 | 6 1/2 | 11 | 5 | 22 1/2 | |
| 1950 | 2 | 27 | 3 | 32 | |
| 1951 | 1 | 10 1/2 | 9 | 20 1/2 | |
| 1952 | 1 1/2 | 3 1/2 | 4 | 9 | |
| 1953 | 1 | 4 | 2 | 7 | |
| 1954 | 1 | 1 | 2 | ||
| 1955 | 5 | 5 | |||
| 1956 | 2 | 1 | 13 | 16 | |
| 1957 | 8 | 12 | 20 | ||
| 1958 | 4 | 4 | 8 | ||
| Total | 120 | 110 1/2 | 92 | 54 | 376 1/2 |
| Year | Gross Sales | Expenses and Cost of Lots | Net Profit |
|---|---|---|---|
| 1944 | $ 1,475.00 | $ 987.55 | $ 487.45 |
| 1945 | 22,566.50 | 10,790.95 | 11,775.55 |
| 1946 | 60,639.20 | 34,258.38 | 26,380.82 |
| 1947 | 28,850.00 | 15,087.67 | 13,762.33 |
| 1948 | 36,959.30 | 17,737.13 | 19,222.17 |
| 1949 | 29,451.50 | 11,761.05 | 17,690.45 |
| 1950 | 56,045.00 | 39,345.31 | 16,699.69 |
| 1951 | 36,853.75 | 19,988.65 | 16,865.10 |
| 1952 | 20,750.00 | 11,501.82 | 9,248.18 |
| 1953 | 25,035.00 | 17,276.75 | 7,758.25 |
| 1954 | 4,000.00 | 2,226.55 | 1,773.45 |
| 1955 | 13,850.00 | 3,998.50 | 9,851.50 |
| 1956 | 34,550.00* | 12,498.51 | 22,051.49 |
| 1957 | 51,700.00* | 13,660.61 | 38,039.39 |
| 1958 | 41,975.00* | 8,343.89 | 33,631.11 |
| $464,700.25 | $219,463.32 | $245,236.93 |
| Year | No. of Sales | From | Total Lots | Gross Sales | Net Profit | |
|---|---|---|---|---|---|---|
| Unit 4 | Unit 3 | |||||
| 1957 | 6 | 5 | 1 | 20 | $51,700.00 | $38,039.39 |
| 1958 | 4 | 3 | 1 | 8 | 41,975.00 | 33,631.11 |
| 10 | 28 | $93,675.00 | $71,670.50 | |||
| Salary | $ 62,007.63 |
| Rental property (apartments) | 65,975.44 |
| Farm (except cattle) | 128,528.82 |
| *Cattle sales | 173,816.34 |
| Ground rents | 12,129.54 |
| Oil and gas rentals | 1,096.00 |
| Oil and gas royalties, bonuses | 12,911.49 |
| Miscellaneous income | 7,352.37 |
| Fees from Phillips Pet. Co. | 8,297.60 |
| Interest | 14,598.06 |
| Real Estate (gross sales price) | 464,700.25 |
| Total | $952,313.54 |
Summary of Figures Agriculture Department on Loans in Price Support of Wheat
(1,000 Bushel)| Year | Total Production | Owned by CCC | Loans | Percent of Crop Loans and Purchases | Deliveries to CCC |
|---|---|---|---|---|---|
| 1956-1957 | 1,005,397 | 950,723 | 234,888 | 25.5 | 148,466 |
| 1957-1958 | 955,740 | 823,946 | 223,563 | 26.8 | 193,000 |
| 1958-1959 | 1,457,435 | 834,921 | 564,533 | 41.8 | 510,989 |
The “Producer‘s Note and Loan Agreement” (form CL-B(1-15-58)) executed by Taxpayer in this record carried out this statutory plan. See Paragraph 10 (a) “Any holder of the producer‘s note shall look solely to the pledged commodity for satisfaction of such note, plus charges and interest [except for fraudulent misrepresentation].” Subparagraph (c) “Upon the maturity and nonpayment of the producer‘s note” CCC may pool the grain and (d) “If the pledged commodity is disposed of other than through a pool, the producer shall be paid the higher of (i) any оverplus remaining from the sales proceeds * * * after deducting [the loan and charges] or (ii) the amount by which the settlement value of the pledged commodity may exceed the principal amount of the loan * * *.” And under (e) if the commodity is pooled, the producer ratably participates with other producers whose commodity has been pooled.