Rolland L. King and Arlene P. King v. United States

MORGAN, Circuit Judge. LEWIS R. re- appeal This matter on involves a tax judge suit fund submitted district on facts. The primarily stipulated taxpayer alleged overpayment of taxes in the amount $64,348.04 on from the sale of income corporate judge stock. The district below found that in corporations question collapsible corporations were under Section 341 of Internal Revenue Code and that by the income from sale of a ordi- major stockholder should be treated as nary Despite plaintiff’s income. conten- tions that should have been income affirm deci- capital gain, treated we sion lower court.

Plaintiffs, wife, King and Rolland L. his brought P. King,1 Arlene this action in seeking federal district a for court refund they overpaid taxes claim 1969 1970. Although and taxes paid had been on income in at question capital rate, gains the Commissioner of Internal Revenue on determined audit the income long-term was not entitled to gains defi- treatment and issued a notice. ciency paid Plaintiffs the deficien- for cy, simultaneously but filed a refund overpayment.

The corporations question in included Company, Gate Water and Sewer South the taxpayer percent which was a 50 stock- holder; Company, Greater Sarasota Sewer brought 1. This action principal litigant, opinion in the of both names refers hereafter King they King and taxpayer. his wife because in- filed their as the jointly. King come tax return Because is the percent plant comple- a 50 the individual lots. After taxpayer which Utilities, stockholder; Inc., tion, these lines were South conveyed Gate Gulf Water Development South Gate percent a 45 stock- Gate taxpayer which the In Inc., without of consideration. holder; Smith, payment King & Development developing South Gate ceased was a stockholder. taxpayer percent May year, King and in of the same found deficiency A was also tax all of stock in South Smith sold their taxpayer paid by Commissioner Works Corp., Gate Water to Water General the sale owned income from an corporation engaged unrelated a major which the trust operation Part utility systems. of several interest. beneficial purchase price paid closing at King partner and his Smith period paid and the remainder was over 1954 to Smith, King & Inc. devel- formed new upon time based the number of cus- op residential area east Sarasota to the system. tomers connected During known as Forest Lakes. its first a re- County instituted 1958 Sarasota option an year corporation bought quirement developments that all residential purchase 1200 acres east Sarasota system. must be sewer serviced central $2,000 (hereinafter referred per acre to as King incorporated the Greater and Smith Smith, option). King Maid Minute satisfy Company Sarasota Sewer Inc. the end developing property ceased requirement develop- for their real estate because the King individuals ments, owning each corporation, formed Smith had another corporation. stock The Development Company, South Gate Inc. from Sarasota obtained a sewer franchise (hereinafter De- referred to as South Gate County covering parts Gate South velopment), in March of 1955 continue and other areas of Sarasota and subdivision development projects. By real estate system. disposal built a and central plant subject of 1956 the to the Min- March land sever- Development South Gate constructed Smith, option King ute Inc. Maid stations systems, al lift sewage collection had value greatly primarily increased in area of its appurtenances and other in the real because of the success of the estate development within the Sarasota Greater developments of the At this corporation. were systems Sewer franchise. These Co. time taxpayer partner his Smith disposal plant and central connected to Smith, sold of their stock &King all Inc. Co. and system of Greater Sarasota Sewer D. H. approximately one Burk for to the conveyed sew- completion after $1,673,000.00, with most of the In 1965 company er without consideration. price payable over time as the remainder of stock in King sold all of their and Smith A option Minute Maid was exercised. to Florida Greater Sewer Co. Sarasota exercised, part option been had (hereinafter Company referred Cities Water of the land sold to having some been South Cities), of a subsidiary to as a com- Florida Development. Gate In because of a pany operates private utility several requirement developments that residential payment was made at systems. Part of the supply, King have a central water closing was scheduled to and the remainder a utility corporation, Smith formed South paid semiannually on the number based Inc. Company, (here- Gate Water & Sewer system. of connections made Water), to as inafter referred Gate South developed supply water to the areas King, with three oth- taxpayer along The Development. King South Gate Smith Utili- parties, er formed 1960 Gulf Gate percent each the stock ties, owned in the (hereinafter to as Gulf Inc. referred utility corporation, which obtained water Utilities) King in which Gate the county franchise from and constructed The percent stockholder. plant. Develop- County central water Gate both a South obtained from Sarasota covering lines an area

ment constructed the water that were water franchise and sewer city as the Gulf water from Gate Water of land known carry the South south taxpay- in which Corporation, Development area. Utilities built a cen- Gate Gulf Gate er at that time was a 25 sharehold- sewage plant to which sew- tral water and lines from taxpayer reported distribution er. The the income age collection and water developers were con- trust as built real estate the sale and the King Company The R. L. back- gain. Having nected. set out the factual two Development Corporation, First involved in this ground of the transactions King was a 50 and case, rations in which legal we now turn to the issues before sew- respectively, built percent stockholder the court. these to and water lines and connected age Utilities. I. plants the central Gulf Gate development compa- completion After these A threshold issue crucial to the out appurtenances nies the lines and conveyed question involves the appeal come of this charge. without to Gulf Gate Utilities proof. burden of In the Commissioner’s of Gulf December of 1965 the stockholders theory statutory deficiency, notice of corpora- Gate Utilities sold the stock was that the upon by government relied Cities, method of using tion to Florida was construc income from the sale of stock payment plan payment similar parties taxpayer. tive dividends to the stock. Co. Greater Sarasota Sewer theory, on this but engaged discovery government three weeks before trial In mid-December of 1965 both Greater theory changed theory of defense to a Co. and Gulf Gate Utilities Sarasota Sewer insisted taxpayer filed consents with the Internal Revenue based on section 341. The 341(f) proof of the Internal he not bear the burden of under section should Service 2 of that theory, Revenue to have subsection new and with an regarding Code provision apply to the assets of the pretrial stipulation amended consents, effective, would tion. These if attempted proof to shift the burden the sale of stock prevent from government. stipulation indicated income un- being from treated proof have the burden of plaintiffs “[t]hat 1968,1969 In the der section 341. iss except on each issue the income reported light When considered in ue.”2 utility all three from the sale of stock of however, stipulation, language entire Smith, King capi- and Inc. as companies The full states that ambiguous. stipulation gain. tal “[tjhere disagreement plain is no ... [t]hat proof tiffs have the burden of issue each overpayment The also claims taxpayer except possible A utility stock issue.” of trust in which taxes on the sale interpretation stipulation, urged of this beneficial taxpayer owned a 45 by government, parties is that the could taxpayer interest. The and three other proof agree not on who had the burden parties operated created a trust Although utility on the stock issue. it Compa- Bank & Trust through the Sarasota (nor apparently not clear to this court ny, acquired Account No. 398. The trust by stip was intended parties) what lying land east approximately 390 acres of ulation, we not make that determina need developing Shopping of the then Gulf Gate parties’ tion. A court is not bound Between 1961 and 1962 Center. law, when stipulations particularly those quantities prop- the trust sold small v. stipulations are erroneous. Swift & Co. Board, erty County to the Sarasota School Co., 281, 289, 243 Hocking Valley Ry. U.S. the Hillsboro and the R. L. Enterprises, 287, 289, (1917); Equi 37 61 L.Ed. 722 S.Ct. King majority Co. with v. table Life Assur. of United States being January sold in of 1963 to the First Soc. disagreement following utility except is no as to the There The words “on each issue taxpay- stock issue” were handwritten issues of law: proof attorney (A). typed copy plaintiffs er’s over the and initialed have the burden of That parties. stipulation except both issue. The in final form on each issue stated: 259 (5th 1977), 978, Cir. MacGill, 983 F.2d 551 Other courts have held that (5th 1977). 1065 Cir. F.2d denied 554 reh. burden remains on the even taxpayer when relied on an dif entirely the Commissioner opinion in his judge The district theory deficiency ferent at the time the had the burden plaintiffs found was made. assessment Blansett v. United the fact regardless issues on all proof States, (8th 1960); Roy 283 F.2d 474 Cir. theory changed its had government States, supra, 218 F.2d 164. bark v. United Although the trial. deficiency before Tax Court separate appeals In from two shift for a provide rules Tax Court Commissioner, 410 decisions, v. situations,3 Cummings and in certain proof burden applied a v. 1969) Bernstein (5th have F.2d and decisions 675 Cir. lower court few held that have rule,4 1959), courts Commissioner, (5th several Cir. similar F.2d 879 267 not shift proof does the burden of that was similarly held it the Fifth Circuit where the suit a tax refund government assessment deficiency immaterial that a notice, e., i. deficiency theory basic theory. If the improper on an was based defi income, the amount any theo under deficiency appropriate v. Spangler See changed. not ciency have must be sustained. ry, the assessment (4th 1960); 665 Cir. Commissioner, 278 F.2d Circuit, Therefore, the rule in the Fifth (2d 928 273 F.2d Sidney v. court, is least in a tax refund suit in district 959, Sorin, aff’d. 29 T.C. Arthur 1960); Cir. government in theory shift D. Leland (2d 1959); 741 Cir. 271 F.2d pot burden of does shift before trial (5th 1044, 268 F.2d aff’d. T.C. Payne, 30 government. change If a proof to the Weaver, 25 T.C. 1067 W. H. 1959). Cf. Cir. hardship to the tax presents undue theory general from rule follows (1956). This the discretion of trial payer, it is within the nature suit is in tax refund rule that a parties, judge continue the case. received. had money of an action however, attempt stipulate should not 164, States, 218 F.2d v. United Roybark See because, as a matter of proof burden has 1954). (9th Cir. law, stipulation may be erroneous. overpay that an both proving burden of attempted to where the case amount of taxes made ment of stipulate the proof, burden of the court was Reynolds, Lewis overpayment. stipulation bound the erroneous (1932); 145, 76 L.Ed. 52 S.Ct. U.S. law remained on the plaint burden States, 422 F.2d 1055 Bicknell v. United iff.5 1970). (5th Cir. (8th 1961); States, Massingale 142(a), recently v. United

3. Tax Rule Court amended and (D.Ariz.1959); 1,May Am.Fed.Tax R.2d 995 provides: Sheldon effective Tauber, (1955); 24 T.C. 179 Estate of William peti- proof upon The burden of shall Hibbs, (1951). Beale 16 535 T.C. See also Hull tioner, except provided by as otherwise stat- (4th 1937); v. F.2d 87 260 Court; by ute except or determined Cir, Phinney, (5th 1965) v. 350 F.2d David 371 that, respect matter, in new increases (where assumed, deciding, the court without defenses, deficiency, plead- in and affirmative government the burden shifted when the answer, respon- upon ed in his it shall be ground on a defended different from that al- dent. leged deficiency notice). These decisions Inc., Club, Daytona See 69 Beach Kennel T.C. primarily relied on Tax Court decisions where a (1978) (where government 1015 conceded procedural applied. set of different rules When change position in its constituted new reviewing a tax refund case from the district matter, requiring in a shift the burden of court, by we are not bound Tax Court Rules proof). Emerson, But see of Zac 67 Estate T.C. apply- of Procedure and the cases Practice nor (1977) (where that, 612 court held where the ing rules. those theory new did not alter amount of the deficiency require presentation or Although new 5. undue claimed hard- and was ship evidence requiring proof, inconsistent a shift burden we defense, theory proof former the burden of primarily reiterate that the case was submitted shift). did not stipulated court, facts. It is not clear to the appellant argued, has not that additional States, 4. See Service Life Ins. Co. United change evidence would the result reached (D.Neb.1960), F.Supp. aff'd 293 F.2d 72 this decision. II- of the collapsible corporation provision of Section 341 of the Internal Revenue principle substantive matter on Code of 6 to the sale of certain corporate stocks to this appeal application court concerns the 6. 26 where from the sale or more than 6 months to the extent that it would be considered provided for the the sale or not a tions as Sec. 341. COLLAPSIBLECORPORATIONS. Gain if— structed, shall be deemed to have For view to— corporation) graph (3), corporation chase of of tion, tion” means a (b) Definitions.— the the sale or gust distribution made tion treated, distribution is treated part uidation of a (a) Treatment of Gain to Shareholders.— lapsible, corporation, person the cost of such produced, any (B) mined, struction, (A) (B) the realization of such shareholders of stantial (2) ers, erwise), or a distribution to its sharehold- tion ing, derived from such shareholders (A) (1) Collapsible corporation. (3) (2) (1) principally U.S.C. 341 purposes from— stock, noted) provide or or full Production or it 22, 1964, which, provisions it extent, the sale or a distribution in the sale [as before the realization or attributable to such manufacturing, constructing, produc- they section, in this holds production engaged to the extent it exceeds in property exchange purchasing produced, who amended part in the same manner as a § or for the whole or in or asset. exchange existed in the 1954 so formed or availed or payment under section property having for the production collapsible corporation, or exchange section, (whether the term of the taxable income to be purchased P.L. manufactured, constructed, paragraph property of this (1954). exchange in the property exchange shall, except of a by as follows: or property, 88^184, manufacture, partial holding property, be considered as Sec. under this part, by section) purchased property, capital “collapsible property. manufactured, (in collapsible corpora- exchange of such manufacture, described in liquidation (1), formed or availed property. in property of stock the hands of the 1(a), of stock 301(c)(3)(A), —For 78 Stat. or the hands of a a basis deter- of stock in a with a pertinent asset held for property, Code reference to complete liq- as otherwise property.— property Act of of, part of a sub- gain gain construc- purposes corpora- which is of a col- basis of (except or oth- 596] which stock, para- as con- con- from from pur- gain (but sec- Au- or to Amendments Act of 1606] corporation, holder with tion.—In the case of tion with of— stock poses not be at the time of such sale or years following chase. (e) chased; and factured, constructed, produced, year, gain facture, construction, production, (d) satisfied, tion, production, such the period specified means (1) (3) (2) which is or has been with the duction, subparagraph (A) therein (without regard than or (D) taxable course of its trade or (C) receivables from sales of marily (B) property other erly corporation if on hand at the (3) (A) corporation. the cost of structed, produced, (C) mined, determining [as completion Limitations on Exceptions Application is attributable to the ^[*] section, period Sales or of the of subsection unless more than 70 % Section 341 assets.—For if: unrealized receivables or property described in section considered to be a it holds property be included in the property gain property which is— added for sale to customers in the respect in whole or in respect section 1223 shall year; provided), except this section shall not or sale of ^[*] gain recognized during manufacture, construction, pro- ^[*] corporation if: shall be deemed to realized after in trade of the the term “section 341 assets” exchanges property property to whether the held for a described in this in this of a kind which would or to ^[*] to his stock in a $ !(: completion (a)(1), corporation gain purchase. any or Sec. manufacture, Application property (B). or ^[*] having P.L. business; any holding period by shareholder, if, paragraph part, by realized *. sale sfc collapsible corpora- manufactured, of stock.—For used a exchange, period purchased by 20(a), a inventory 85-866, corporation pri- or corporation, property ^[*] 3-year expiration such apply, of such manu- ^[*] jfc of a basis deter- apply— exchange begin described in fees, purposes close reference to of less than connection paragraph; Section.— Technical so manu- a taxable construc- has been of Sec- ^[*] the sum property a share- 72 Stat. of such $ ^[*] holding but no 1231(b) before except other prop- shall pur- pur- pur- of 3 con- of or graph of the net worth case of a percent of stock to the does not exceed an amount tion), gain nized to such other tion exchange the shareholder such shareholder of stock in such other corporation riod property by proportionate share of the assets of such outstanding shareholder of his whole or other than 20 owned such (ii) by sale or provision of such sale or stock or holder, percent exchange capital tion (i) by ation than assets described which would be subsection clauses the shareholder cent in value of such (C) percent (e) graph (5)(A) if the the during of which 3-year period more than 20 the assets alized ration paragraph (A)) which more section defined (B) (A) ue of the standing or prising shall not which related assets under clauses exchange value of the corporation, in if the if property, corporation the net unrealized 337(a), (but only 1231(b), 3-year shareholder who than 70 corporation, in the shareholder owns more such shareholder owned appreciation (other treating more than exchange asset nor treating would more than 70 in in percent in value of the (i) (e) such other assets of stock are, outstanding stock, of this value of the in service paragraph or loss shareholder preceding and within the apply as a sale assets period issuing corporation such part sold or were made— than assets described in property percent more in the hands if at the time percent or any in value (iii) the net unrealized any of and exchange owned of which property corporation, such were at chapter as other on which property gain outstanding corporation. in such (but proportionate any than 20 determination of corporation) percent exchanged, gain sale or or use owns, sale 3-year period (5)(A)), in stock, plus in would outstanding preceding 3-year pe- outstanding assets of the appreciation in sub- in value of the percent owns paragraph which is neither owns more equal shareholder (i) more than corporation only value of subparagraph exchange by other sale or be considered from would described any or the shareholder corporation (e) or at was not other of such sale of such to assets com- percent in value of more than assets similar be subsection owned if to 15 exchange by plus the net unre- exchange assets time (iii) para- stock outstanding during in value of under This or, under the assets exchange from the as a sale any share of the time (5)(A) whether appreci- stock stock than 20 owned, sale than 5 in sec- during within recog- of his share- (other under para- more such such time sub- sec- (A)) per- out- val- any (as or or of of if corporation, him such shareholder to term set, sets tion. with the amount (6) Net unrealized tion, exceeds (ii) (A) asset. sets ceeds (ii) paragraph preciation” (i) from (B) paragraph preciation” (i) not asset a vision from the sale which is neither set, be the unrealized from (i) (D) (C) (ii) asset, exceeds ty sidered whole or on all ness used in the paragraph (9)) ther in section cent the from the under shareholder who owns sale or (iii) (5) (A) and means, any corporation— (within portion described the fair market taken into account ***** For For the amount For the amount For paragraph Subsection on which on which there if there is net unrealized corporation, For respect (as ^{[******] [******]} (4), “net in any capital property adjusted unrealized adjusted unrealized exchange in purposes of purposes of fair market value of the with defined in purposes of this purposes equal purposes sale or sale sale or the term “subsection unrealized provision 1231(b); (5)(A), (5)(A), trade means, means, by which— any sale or in section chapter respect there asset nor meaning or other to such (5)(A)), appreciation (e) which, gain basis for by which— by which— used in the basis sale or exchange other or business of would the term “unrealized appreciation depreciation paragraph (9)), property value of such asset defined— appreciation defined.— assets of a with exchange of which of and . exchange is unrealized is unrealized of property subparagraph subparagraph any person would under value of appreciation" be considered outstanding term “unrealized part paragraphs this portion disposition of such disposition of such in the case 1231(b), in more than of property exchange respect respect be property asset nor determining gain determining as the hands of subsection, the of which would paragraph chapter paragraph property an amount trade in such (as gain which is nei- appreciation corporation, such asset. in such in such there (e) defined related asset, ex- described apprecia- deprecia- from any pro- stock of of stock * or busi- (A) (A) (1), any any proper- be means, asset” asset gain. shall only gain con- gain (but per- (8)). any ap- de- as- as- as- as- (2), in Eustice, Federal Income Taxation of er & J. primary purpose taxpayer.7 by (4th Corporations 341 is Shareholders of section 1112.04 provisions behind the Mertens, Law of Federal 1979); J. converting what Ed. 3B from prevent (Rev. 1980). Ed. 22.57 income into Income Taxation would otherwise H for such selling or The device utilized liquidating capital gain by collapsible cor- referted to as a purposes realization of corporation before stock of 341(b)(1) Bittk- as described poration,8 B. generally income. substantial See the Code. recognized subtitle. withstanding any tle, such asset. Such be treated as exceeds the Stock of poses of this subsection— any ed in (as ration), paragraph (3) applies, by period beginning with the date on which such of such consent is filed. manner as the by regulations prescribe) sions of shall section referred to as tion”) apply (other if such without provided. (f) term means ness.—For tion which is not a than a receivables or fees to tion. For land or date of paragraph (1), property asset” means (4) (A) (B) voluntary conversion, fair market value of such (2) Recognition gain. Except (A) but (1) (9) Property used in the trade or busi- defined in [as P.L. acquire time ^[*] apply “property Subsection paragraph in the case of In in the case of a only (b)(4)), than a sale to the to a sale of added consents property Consenting.Corporations.— then the amount which— 88-484, regard General.—Subsection paragraph (2) apply. general. under by consenting corporation (or, security interest), any adjusted owned ^[*] gain purposes to the extent purposes interest in real paragraph shall be treated as Secretary sale of stock referred to in any property used in the trade or business” other gain from the sale or any 78 Stat. described Sec. respect —The is not a (3), (at by, (f) ^[*] by, any holding period any basis of such asset shall made within the 6-month asset defined.—For (hereinafter such time and in such if a subsection shall be other stock of [l](a), provision (as of this of this sale, exchange, ^[*] “consenting corpora- term other asset. the amount to each sale of stock subject 596] (4)) consenting corpora- issuing corporation) capital — or his a transferee defined in subsec- to have the in section such provision Act of asset, which, and unrealized recognized Certain “subsection disposition, subsection, ^[*] subparagraph, (a)(1) disposed Such consent of this subti- delegate to an asset and is exchange in this sub- corporation August as as of the ^[*] realized, shall not (f) 1231(b), Sales of provid- of this therein option is not (other provi- or in- asset of at pur- may not- 22, (f) if 8. The Fourth Circuit in 7. This discussion of term investment 253 F.2d venture or or making is made use of to collapsible corporation discussion utility corporation effective consent of Gulf limitation rule under § consent was effective to the sale of stock of though court found the effective Sarasota to the South Sewer during filed under of such person (e)(8)(A)) ing corporation within beginning Paragraph poration. stock of a construction of within described (5) 5-year limitation as to shareholder.— than a paragraph respect set” includes from construction property paragraph (C) agreed land or menced (B) ufacture, tion, resulting from such date of “subsection one of utility corporations a consent was a transferee Property Special s)s Sewer, or sale, within project security gains any sold production. on a date on which a consent (by Gate Water and Greater Sarasota sale described (1) 5-year period ending paragraph corporation by construction, if such such (A), (A) any property Gulf Gate the court follows would (f) interest in real rule for corporations. Except subparagraph shall not any to what is in give consent filed under § under from the venture or application as well. any (4th property, asset” includes has commenced the term “subsection after the date of shareholder interest) consenting corporation collapsibility applies manufacture, 341(f)(5) as “a corporation which has Burge also filed as to meaning improvements manufacture, with Gate construction is com- construction.—If (1) land.—In the case appearance applied any apply because the district if! of another or Utilities, 1958), therein, with the view of described Utilities, Inc., described a shareholder respect production with 6-month (A). to find that the such other reality property apply (or any paragraph of subsection to the sale sfe the five described a which on the date production before Inc. Al- construc- resulting property any consent- to such Greater to that a mere project for the the ^[*] in sub- in sub- related period 341(f) (other (f) long man- year term only cor- sale any (2)) as- or of if,

263 that of the the court testimony taxpayer, is provisions The of 341(b)(1) section define place that took look to activities may corporation a collapsible corporation as “a infer- those activities draw the and from formed or availed of principally for the formed for corporation ence that manufacture, construction, of production or v. property. Payne the construction See property, for the purchase of property [or] Commissioner, 617, (5th 268 621 Cir. F.2d (in the hands corporation) of the 1959). subject to the judicial finding This property described in (3), paragraph ... review, erroneous on clearly standard (A) a view the sale or exchange of to— in this we find that case the determination its shareholders . .. before the Furthermore, clearly was not erroneous. realization by the corporation manufactur- that a language provides of section 341 ing, constructing, producing, or purchasing availed of the construction corporation the property of a part substantial of the collapsible.9 be may also deemed taxable income to be derived from such utility of the Although purpose the ultimate property, (B) the realization by such may provide have utili- corporations been shareholders of attributable to such services, at least corporations ty property.” 26 U.S.C. 341(b)(1). § utility for the of the availed of construction systems. foregoing on defini Based suggests Taxpayer further tion, first that the util taxpayer argues system utility the construction formed corporations question were ity corporation purpose incidental to the of the operation of the principally of time only period and consumed brief franchises, prop not for the construction of the entire light when considered is a Although purpose erty. stated Apparently the franchise length grant.10 likely one and most reasonable the one “principal this claim is based the word of incor corporations’ found in the articles 11 341(b)(1) as used and on ly” accept the court is poration, not bound as ex collapsible corporation definition of self-serving statements Treasury Regulation section plicated purpose corporation as to intent. The of a 341-5(b)(3). regulation provides I. from the of the cor is determined function sub- must be the construction poration, underlying not the motives Commissioner, in relation to the other activities stantial v. taxpayer. See Braunstein First, mis- 65, 1663, corporation. 757 the 374 83 10 L.Ed.2d U.S. S.Ct. quali- as restriction (1963); provision Estate of Van v. Commis reads the Heusden collapsi- sioner, 1966). (5th finding 119 In a fication for 369 F.2d Cir. clearly (a) regulation live case such as one where the ble. Subsection income, taxable, prior they completed not as should Sarasota Sewer taxed, long gains." dates, however, controlling be but as term not the These are initially holding collapsible corporation below dates because of our discussed idea was industry, primarily picture completion concerning used motion of construction. ventures, quickly spread but business other particularly building those in construction speculated that 11. At one time commentators Eustice, industry. supra See B. Bittker & J. “principally” modify the the word should However, 12.01. phrase “with a view several to.” “principally” now Abbott, courts have must (1957), 258 9. See J. D. aff’d T.C. 795 modify “manufacture, phrase read to (3rd be construction, 1958). Payne F.2d 537 Cir. also v. See Commissioner, 1959) production property.” (5th Far 268 F.2d 617 Cir. Commissioner, (where (2d Cir.) application the Fifth Circuit limited the ber 312 F.2d 729 phrase require 1867, “availed of’ 374 U.S. cert. denied 83 S.Ct. (1963); view “availed of .. . with the L.Ed.2d 1051 Mintz v. collapse to" the before a (2d 1960); Burge 284 F.2d 554 Cir. v. Commis income). realization substantial sioner, 765; supra, 253 F.2d Weil v. Commis sioner, (2d 1958). F.2d See B. plants of South 10. Construction on the central Eustice, supra, Bittker J. at 12-8. completed prior Water was Gate plant construction on the of Greater central being sewer only by pri describes and connections done provides that the regulation developers. will result the usually taxpayer’s argument, that vate The situations however, is not collapsibility appro- is or fail. The courts have finding that must priate. Furthermore, specific provision that minimal acts constitute sufficient ac the “/ají requirement the of con requires tivity satisfy cited the the construction, manufacture, See, pro- production or of e. property. time of the struction Commissioner, duction, activity (2d v. g., or . .. such Farber 312 F.2d 729 Cir.), other activities cert. 374 U.S. 83 S.Ct. substantial relation to the denied (1963) Treas.Reg. (payments 1.341- 10 1051 of corporation.” of the L.Ed.2d § (1955) added). The 5(b)(3) (emphasis regu- zoning permits payment fees for for to be for requiring activity utility lation is not substantial connections held sufficient length the of v. during finding collapsibility); the of time Abbott Com e., missioner, exist, (3d 1958)(con i. the may length of the franchise 258 F.2d 537 grant, agreement that the for land with simply activity but indicates tract sale of streets, of during must be substantial the time con- install sewers and utilities sufficient only the ac- Further During finding collapsibility). struction. the time of for a of more, 341(b)(2)(A) utility corpora- provision construction by tual the the of section tions,12the primary, finding collapsibility construction was the if of if the permits manufacture, activity of Dur- only, corporation. corporation “engaged not the construction, water of ing production property construction of the entire added). still a con systems, sig- (emphasis sewer construction was extent.” The enough corporations nificant of the activity activity of struction constructing consisted of the central water activity. to constitute substantial There- fore, plants utility systems and sewer of the provisions Regulations do of of con satisfy requirement sufficient not affect the decision of the court below. 341(b). struction under section In addition to our examination technical agreement regulation, under the we find in held that Recent cases have with the lower court that the construction is in development intangible property of water and systems of the sewer or con concept production cluded in the of incidental, crucial, but rather was of Estate of C. A. property. struction Diecks, operation (1975) (development of the of utility franchises. Without 117 T.C. the construction of water system the utilities’ and cable vision and related franchise meaning sewer systems, purposes utility production of within the property of accomplished. could corporations 341(b)(1)); Computer Corp., not be Sciences § finding The district court (1974)(development computer did not err T.C. treatment, re purposes for of income tax program preparation section formed, corporations question production turn was within of, or at least availed for We in this principally meaning 341(b)(1)). hold § construction of construction of property. case that addition to the utility system, development Taxpayer argues further production of intan system franchises activity utility corporations limited meaning of gible property within the building utility systems toward the 341(b)(1). § was not sufficient to constitute “construc corporation. challenge tion” The taxpayer The final definitional that the suggests corporation primarily only on the is based controver purchased 341(b)(1) requiring equipment phrase installed sial plants, central property, the bulk con that the etc. occur construction on the water utility systems’ exchange struction lines “with a view the sale or to” supra. suggests Taxpayer 12. See note 10 this construction is construction rele- vant under § systems, systems of substantial construction

stock before the realization gain by realization of along during with the construction of the entire income continued must ex- requisite view whether out taxpayer. system carried of the construction prior completion corporations private developers.16 ist or by production argued has to this Taxpayer emphatically 1.341.2(a)(3); Payne Treas.Reg. tion. See § never utility corporation court that a has supra, 268 F.2d 617. to be been held of argues the construction taxpayer that positions previ- not be of the could because e., i. the con- property by corporation, the disposed of the argued. We have ously sewer of central water and struction the arguments made under section technical time that prior was the plants, completed ap- 341(b)(1). Concerning taxpayer’s final How- the view to sell the stock existed.13 no in sets question the Code section peal, ever, court finding by the made the lower corporations sub- on the kinds of limitation the con- by and affirmed this court that Although section 341 ject provisions. to its con- the was the struction 117(m)) originally was de- (formerly section The water system. struction the entire tax abuses in the movie signed control completion plants of the central are dates industries, any corporation construction and on sub- controlling not because construction require- which satisfies the definitional parts system stantial of the water contin- may collapsible. ments be Tax Court lines ued as additional water and sewer Diecks,supra, 65 in Estate of C. A. T.C. main were constructed and connected to the corporation operat- that a vision held cable At one court least has held that system.14 collapsible. ing grant under a franchise lines, lines, the laying in that case cable two similarity The factual between the connecting and the of new customers corporations is obvious. Both the kinds con- activity continuous that constituted fran- and the services involve utility cable reasoning, We agree struction.15 that net- provide chises that from a centralized the particularly opinion of our that light homes. The ca- work services to individual corporations con- purpose utility utility providing and networks the ser- ble of utility systems. struction It is irrelevant and maintained the operated vice are private that constructed developers actually many utility corpo- corporations. Although lines, the system, connected them the may statutory re- satisfy rations not then to the utility transferred them circumstances of quirements, special rations. arrangements Such are common permit finding case this among developers utility real estate where Therefore, despite collapsible. tions were Nevertheless, systems are required. argument utility corpora- that a taxpayer’s construction private developer collapsible, never tion has been held to utility corpora- deemed construction agreement we find in with the lower court purposes tion for of section because corporations question satisfied utility corporation had as purpose and were statutory requirements the basic utility sys- function the construction collapsible corporations. indeed permit tem. This will not technical court arrangement involving de- construction to III. feat Where finding collapsibility.

corporations were formed or availed of cor Having concluded that the utility principally for the construction of under section porations supra. part corporations 13. See note 12 tions were for the most taxpayer controlling Al- which though interest. held supra. 14. See note 10 particular legal significance case, this ties” fact indicates “close Diecks, supra, 15. Estate of C. A. 65 T.C. at 123. utility corpora- developer between the tions. and the pri- case the record reveals that development companies transferring vate appurtenances utility corpora- lines and corporation, gain construction ar- taxpayer’s 341(b), we must consider limita- to the “constructed concerning exceptions and would still be attributed guments purpose section requirements. for property” basic definitional tions to the cites the 341(d)(2) taxpayer previously As we have 341(d)(2). section Under case, taxpayer least had the burden requiring limitation must be bur- the sale stock issues. This gain proof on to the constructed responsibility proving attributable den included the col- be deemed to assets gain order attributable amount lapsible. taxpayer argues property,19 constructed other than the fran- burden, attributable to the gain primarily carry this failing to connecting lists chises, the customer prevail on a theoreti- shall allowed not be gain was most Although some lines. of the limitation.20 application cal to these assets likely attributable exemption urging argument In a final Regulation Section Treasury corporation, treatment, sug- from may be “at- 1.341-4(c)(3)provides 341(e) is of section gests exception that the property to” constructed tributable 341(e) provisions section applicable. gain represented by appre- even when the provide excep- to primarily were enacted property.17 present In the ciation in other by held property where tions in situations gain or no have accrued case little would individuals, held would corporations, if the central without the construction of gain on its have treatment afforded attributa- system. gain water Because corporation con- The assets of a are sale.21 lists, franchises, ble and to the customer shareholder corporate sidered at and both the con- connecting lines was the result of significant level whether a to determine system, struction of the central water has occurred of assets increase in value gain assets was to the on these attributable ordinary upon income produce would utility property actually constructed appreciation sale. the net unrealized If Furthermore, corporations.18 construction assets, e., in- ordinary i. or the “tainted” to a other corporation be attributed may corporation hands of the come assets in the actually performed than the one that shareholders, 15 is more than or certain Farber, T.C. construction. See Jack 36 to percent, corporation not entitled 1963). 1142, (2d 729 aff’d 312 F.2d Cir. 341(e). relief under Thus, if the to the even attributed of section application devel- property private constructed Crucial 341(e) is the definition opers, and this construction was not deemed to a 1.341-4(c)(3) 341(f) Treas.Reg. (1955). 17. effective as to Gate consent Gulf § § supra. Appellant, 7 how- Utilities. See note held, 18. we have the actual construction As ever, clarify point concerning not did utility corporations con- not brief, 341(d)(3) reply apparently in his § corporations purposes struction of the for argu- argument. abandoned the Even if the Nevertheless, present § 341. we this more nar- Sewer, ment was made as to Greater Sarasota response argument. taxpayer’s row view in however, holding previous regarding our com- pletion indicates of construction that construc- (1959) Spangler, 19. aff’d See C. B. 782 T.C. system place denied, tion 665, 825, of the sewer took within 278 F.2d cert. U.S. years (1960); Raymond three before the date the sale of stock. 5 L.Ed.2d 54 S.Ct. G. (1957), Burge, 28 T.C. 246 aff’d 253 F.2d argument has not been that made (4th 1958). 341(d)(3) applied prevent collapsibility § Water because the South facts revealed Gate addition, appellant initially argued 20. that that of one of the water construction central 341(d)(3) exception prevent applied § plants completed was not South Water Gate collapsibility of Gulf because the Gate Utilities until The stock of the 1957. place years of stock took sale more than three comple- sold less than three after completion Appellant’s after of construction. tion of construction. Brief, p. Apparently, appel- 34. counsel for the lant to make misstated himself intended Eustice, supra, 12-26. Bittner & J. See B. argument regarding Sarasota Greater judge Sewer Co. because the deemed district assets,” found, statutory in sec- the district (e) as described As court “subsection Taxpayer of the statute. 341(e)(5)(A) corporations tion requirements his under sec- argument bases case Water satisfied as to the Gate were South 341(e) ground on the tion corporations, and Greater Sarasota Sewer e., (e), i. owned no corporations subsection exceptions and none of limitations income, assets, had and therefore ordinary treatment. applied prevent collapsible in subsection appreciation zero unrealized clearly court was erroneous The district However, erroneously (e) assets. correctly of fact conclud- findings in its held corporations position bases his collapsible. corporations these were ed that (e) assumption no subsection assets on the collapsibili- question turn to the We now utility- relate to “(t)hese they assets Smith, Inc. concerning King ty inventory, corporations have to be type ration. primarily property stock in trade course of ordinary sale to customers 341(e)(5)(A)(iii), business.”22 Under section IV. is a used in the or business23 trade this scenario As the first (e) produce if would subsection asset its sale Smith, corporations, King & development a more income in the hands of 15, 1954, January was formed Inc. The water than 20 shareholder. development, in real estate engage property be- systems and sewer were such acquired year the middle of it in the trade they cause used 1200 acres option Maid taxpay-

or business that in the hands of the Minute $2,000 income produced ordinary per er would have In March of of land at acre. that judge sale. The found upon district in the taxpayer 1956 the sold his stock devel- the was the business of taxpayer option at a time when the corporation clear- oping finding real estate. That is not corporation. the only significant the asset of erroneous; fact, in the everything ly asserts, the court be- government The record business trans- regarding taxpayer’s found, was a col- corporation low that the corporate sup- actions and involvements corporation option because the lapsible finding. that local ordi- ports Because the sale with a view to property purchased provide nances to utili- required developers the real- by its shareholders before of stock real the ty developments, services to estate corporation the of a substantial by ization business of estate was developing real be derived of the taxable income to part enough development broad to the include on the other property. Taxpayer, the from Thus, the utility systems. the from hand, “pur- that the was not argues option sale of the would have been property meaning of property within the chased” income in the ordinary taxpay- hands of the 341(b). “purchased” Because the section utility systems er. The by owned South “section only to property provisions apply Gate Water Greater Sarasota Sewer assets,” consid- arguments require these (e) were the subsection assets under defini- “section (3) defining of subsection eration 341(e)(5)(A)(iii). tion of section The tax- assets.” payer had the burden of to show that proof 341(e) statutory requirements the of section 341(b)(3) property includes Section Failing were met. to net show that the period for a less than three held appreciation utility sys- unrealized in the (A) corpora stock in of the which is trade tems was not less than 15 tion, that would worth, property or other of a kind corporation’s taxpayer net the can- 341(e). not claim the the sanctuary inventory of section be included properly in the Brief, Appellant’s Reply p. not in the inven- 22. at 4. ness which would be included tory taxpayer the and is not held taxpayer primarily Property for in the used in business is sale to customers the trade or 341(e) by 1231(b) utility sys- ordinary defined in to course of § § reference business. provisions 1231(b) property. present to Code. refer § in the case are such tems depreciable property busi- used in the trade or 1957), argument of his support hand the close if on Corporation asset. That held was not a section 341 (or) (B) option years; property taxable rights un- assignment of case involved the for sale to customers corporation primarily purchase ap- executory contract to der an trade or busi- course ordinary case the 1700 trailers. In that (B). proximately 341(b)(3)(A), ness ...” 26 U.S.C. contract was defendant conceded option arguably could present case held or property not stock and trade provisions of subsec- be included within customers, to corporation primarily for sale (A),24 property but we find that the tion trailers held that the 1700 and the court provisions reasonably more included in executory not subject to the contract held (B) of subsection inventory in the included property properly to for sale customers. corporation primarily holding pertained That corporation. clear the record that It is from case. Fur- in issue in this to matters not option purchase tion first to held thermore, corporation in Levenson With to it. develop in order theN itself, to sell contract attempting Development formation of Gate South present case whereas the to continue the 1955 the intended option land. selling purchase development through real estate for appropriate analogy The case more Smith, Inc. sell by having King ration & Van Heusden v. Estate of right option Develop- Gate South Tuttle, Judge where supra, 369 F.2d ment as the real estate was needed. Al- court, the single held that writing for the King though sold his stock land an option sale an Smith, Inc. in order raise after of proper- was a sale purchaser ascertained Development, one sale to South Gate corporation primarily sale ty properly the lower court found meaning of section within the to customers option primarily for held the 341(b).25 sale to customers in the course of Considering business. all the relevant fac- Having determined that Minute case, tors in we hold the one sale option was a 341 asset under Maid section Development followed short- South Gate 341(b)(3), we must address tax ly by sale of stock of the requisite that the view as payer’s argument justify finding was sufficient to the that the of stock did not exist. to sale sale option primarily the was held for to asserts, to his in a manner similar taxpayer customers. Estate of Van Heusden v. See corpora to the other arguments pertaining Commissioner, 369 at 123. supra, F.2d tions, Smith, Inc. was formed King that & develop the Taxpayer principally cites the case of Levenson v. for construction States, (N.D.Ala. rather for the pur- 157 244 ment of than F.Supp. property United government primarily argued, to the 24. The has as the lower for sale customers under exclu- held, assets, capital court the that doctrine of Corn Products sions to but nevertheless held Commissioner, 46, 20, capital v. Co. 350 76 S.Ct. in U.S. that the com futures issue were (1955), permits finding 100 L.Ed. 29 that a assets. of 341 The definition “section assets” option requires purchased as in trade property was considered stock be- be that the stock “hedge” against option trade, cause the held property as a primarily in held for to sale costs, e., supply taxpay- etc., land i. as a customers, position of land for to but similar the development. er’s real adopted estate Several courts one in Products could be and Com applied holding prop- have such a for rationale applied definition 341 assets” of “section erty capital to be other than a asset. Schlum- property so that could considered as stock be States, berger Technology Corp. v. United 443 property primarily in held for to trade or sale 1115, (5th 1971); F.2d 1121 v. Cir. Norton Unit- However, because of our subse- customers. States, 821, (Ct.C1.1977). ed 551 F.2d 826 quent holding need issue we not reach that and logic argument applied of the to a day. reserve another it for corporation unique ap- that no court has plied satisfy Corn Products the defi- doctrine to 25. of Van Heusden v. Estate nition of a “section 341 In Corn asset.” Prod- supra, Patterson F.2d at See also v. 369 expressly ucts the Court found that the assets - - Belcher, 289, 1962). (5th F.2d 294 Cir. 302 property were neither stock in trade nor held option As with was the with the option. by King Minute issue held chase of the Maid taxpayer ig- Smith, the arguments, Inc., whether the held previous property his & the possibility nores the primarily was held for sale Account 398 purchase “availed of” for the of to customers in the course busi- Regulation section option. Treasury Under ness. is formed or 1.341-2(a)(3), view to the with the requisite availed of to be The factors considered 341(b) if the sale described action pri property whether was held determining to circum- the stock attributable out in marily for to customers are set sale purchase. at the time of present stances Winthrop, 417 F.2d United States taxpayer King & At trial the testified (5th 1969), approved and in Biedenharn Smith, and undercapitalized Inc. was used States, F.2d 409 Co. Realty v. United earnings development from the early 819, (5th Cir.) (en banc), den. 469 U.S. cert. Maid project acquire option. to the Minute (1976). These S.Ct. 50 L.Ed.2d attributed to the The sale of stock was taxpayer’s purpose factors include the necessity develop- to raise for the money acquiring property; duration present at the project, ment situation ownership property; extent option. There- purchase time prop nature of efforts taxpayer’s to sell fore, at time requisite view existed extent, number, continuity and erty; of the sale because the sale was attributed sales; extent substantiality at the time of existing circumstances advertising subdividing, developing purchase. We hold that the district court sales; increase the use of a office business King its was correct in determination property; for sale of the character Smith, corporation, Inc. was a collapsible or control exercised degree supervision principally formed or availed of taxpayer representative over with a view of a section 341 asset and ef selling property; the time its the sale shareholders habitually fort that devoted to before the realization However, sales. the ultimate determina part income substantial of the taxable solely fac tion is not be made on these from the property. derived independent signifi tors which have no capital gain cance. The determination V. treatment must be based the situation makes Taxpayer argument the final entirety light policy and made Trust Account capital gain provisions. behind See was a 45 benefi- Winthrop, 417 F.2d supra, United States v. ciary, was a within hands asset 910-11; Realty Biedenharn Co. v. United the trust and attributable that the States, supra, at 415. 526 F.2d Because capital gain capital gain preference lower tax is a tax hands of the the trust. beneficiaries of Sec- arising not from the appropriate profits tion 1221 of the Revenue Code26 Internal business, of operation of a the definition capital a asset and states the definition of strictly asset must be construed and (1) specifically “prop- subsection excludes broadly applied. its Prod the exclusions Corn erty by taxpayer primarily held for sale Commissioner, 46, 52, v. 76 customers in the course ucts Co. 350 U.S. ordinary of Thus, here, 20, 24, (1955). trade or business.” the issue as 100 L.Ed. 29 the S.Ct. On inventory (1954). provision pro- taxpayer included of 26. 26 U.S.C. The in the the if on § pertinent part year, proper- vides in as follows: hand at the close of the taxable or ty taxpayer primarily held the for sale to subtitle, purposes “capi- For of term the ordinary customers in the of his trade or course property taxpayer tal asset” means held the business. (whether not with his connected trade or business), but does not include— (1) taxpayer in trade stock or other property properly of a kind which would be case, question conclud- initial is judge deal concern. The facts of this the district owned Account property ed that the which was to bear the burden of party to cus- held for sale property primarily was “utility on issue.” Neither proof the course of business. ordinary tomers in the ordinary case the that the party disputes was stated, court As we have the district the his proving burden of plaintiff bears in its clearly not erroneous determination a tax What then entitlement refund. in the the was business case make the happened in this that would held development. property The real estate rule well-accepted inapplicable? within three by Account was sold ap- important fact is that The most development primarily to real estate properly was pellant-taxpayer unable major in which the was rations government’s prepare his case because in- the circumstances shareholder. Under constantly theory liability tax closely corporations, ad- related volving original posi- changing. government’s The the trust vertising activity by and sales tion, collapsible, were corporations that the Considering the account were unnecessary. during the adminis- totally abandoned Winthrop situation under factors process replaced trative review have appears in its entirety, from the sale position proceeds investment, rather been held not for but of stock was income under Code ordinary the ordi- primarily for sale to customers in regulates which transactions nary The court course business. district corporations. This second between related clearly in its determina- not erroneous ad- theory during also abandoned trust was tion that the govern- process. ministrative review Burgher Camp- not a capital asset. See deficiency “ninety ment next issued bell, (5th 1957); Brown v. 244 F.2d Cir. which day” letter it asserted 1971). (10th 448 F.2d 514 corporate stock receipts from the sale of Having corporations concluded taxable constituted constructive dividends in the collapsible case were and that interrogato- ordinary By way income. income from trust account was plaintiff next to have ry, attempted income, the lower court is the decision of explained. The liability new theory AFFIRMED. refused, no stating that it had government obligation juncture, to do so. At the next FAY, dissenting: Judge, Circuit pre-trial government stipulation, majority’s I respectfully dissent from the theory constructive dividend abandoned the opinion, except its recitation of the facts the- previously to its discarded reverted and its treatment of Trust Account corporations. apparent ory with which I concur. of its continu- recognition of the unfairness PROCEDURAL MATTERS theories, government shifting ous the burden of Appellant procedural stipulated raises number of that it would bear issues, Taxpayer in the proof some which dealt with stock issue.1 continuance, great majority opinion, give me then moved the court for a party, government, Though ultimately concluding resolu- other in this case the bears that the unnecessary, majority remaining tion of the issue on the issue. is burden says stipulation as to the burden majority meaning concludes that proof unable, however, “ambiguous.” I am stipulation need because resolved slightest ambiguity to discern even parties’ stipula- not bound “[a] court stipulation. things One of the which both Opinion that at 258. While tion law. ...” parties agreed stipulation law, the was “[t]hat begs is a the correct statement of the it plaintiffs proof have the burden of on each unfairly question appellant was sur- of whether except utility issue the stock issue.” Since prised by failure indicate the District to Court’s only action, parties there two are to this stipulation it that would not be followed. agreed party appellant that the bur- one would bear Had been aware of the court’s deci- one, proof stipula- sion, likely den quite on all but have issues it his case would that by negative pregnant presented differently. tion indicates been case, pre-tri- its it is all too clear to me that things other arguing among the con- was directed toward discovery al Internal Revenue Service was determined liability, not theory of structive dividend taxpayer one impose liability to tax on this That mo- theory. latest government’s The manner in which it way or another. was denied. tion theory, to aban- leap-frogged theory from pro- as were doning quickly they each as trial, prior but to to the Subsequent dizzying in- have been as order, judge posed, district must of an entry Moreover, he would letter that parties by formed both as it is to me. In that letter the government. rule for the clarify to narrow and taxpayer’s efforts appellant- stated its conclusion court purpose possible for the of a settle- issues his satisfy had failed to burden coopera- total lack of ment were met with a parties’ stip- ignoring proof, apparently The District government. tion proof as to the on the ulation burden in appel- aware of all this Court was made on to The court went utility stock issue. beyond It is lant’s motion for continuance. say requesting it was that counsel the court would understanding why my opinion government prepare proposed what, deny in view of circumstances letter, with that counsel consistent case, reasonable re- totally was such a days have ten after appellant for would ig- quest. proceeded To have to trial In receipt respond. thereof within which to parties’ stipulation as to burden nored during the ten its letter the court said that informing least proof, without at “I will await action....” day period, decision, compounded of that parties Nonetheless, was en- proposed opinion in which the tax- inequitable position tered as the order of the court on the same himself. “shell payer found Carnival counsel for the day it was delivered they have entertaining be but games” may 2, 1979. The ten government, February legal process. Finally, no place day period appellant earlier afforded which was opinion enter a memorandum meaningless. Additionally, rendered with the court’s in- partially inconsistent with opinion memoranda was inconsistent and to do drafting party, structions to govern- ruling the court’s earlier for appellant prior so to the time which ment, companies, utility as to one of the rendered trial respond, was allowed what government because the corrected one familiar unfair. No fundamentally ruling. Needless to clearly was a erroneous the tre- ignore can existing with caseloads court, letter dat- say taxpayer’s under pressures mendous constraints and 9, 1979, that as well February ed in which However, that judges operate. which trial raised, as other relevant issues were allowed should not and must be mooted the court’s earlier action. compro- procedures justification great majority opinion goes In play. my of fair principles mise basic lengths explain its affirmance has occurred here. opinion, that case, partic- handling District Court’s I will not ularly proof the burden of issue. UTILITY STOCK take with conclusion that my issue brothers’ is whether case The central issue in this justifiable. what transpired legally corporations taxpay- in which certain issue, believe, there I is not whether collapsible, were major er was a shareholder the rules of compliance was technical income on thereby giving rise to fundamental procedure, the issue is one of majority therein. The the sale of the stock our fairness on which those rules and entire they holds that No indi- process notion of due are based. disagree. I tions. required be vidual or should collapsibility requirements of The basic tax, govern- pay particularly when the section 341 are that under without deficiency, ment demands a construction of” for the “formed or availed theory of liabili- government explaining the view” to “with a ty on which that tax is to be assessed. The ma- appellant. to the tally unrelated stock before exchange of the or the sale plant sewer that a water and so reasons jority from the income realizing the unless it pun) utility (pardon in a without The stock is construed. or purchased sewer lines run- to water and to be col- is connected which is determined corporation There- businesses. residences and ning tainted. to however, irrevocably not, lapsible as an viewed fore, facility must be exemptions certain provides The statute complete which is part of recognition system, no entire which, allow applicable, if complete. the stock. until all is upon the sale capital gain exemption is the to this case importance Of at first appeal having some Though whereby the 341(d)(3), in section provided if followed to majority position, glance, inappli- 341(a) made provision of section conclusion, results achieve would logical its in a stock from the sale of cable to scope of the stat- the intended beyond far which is realized corporation collapsible sewer water and simply, in the ute. Put comple- following the three or more years meaning “construction”, within business the tax- appeal, construction. On tion of For exam- 341, end. might never of section things, that sec- asserts, among other payer corporation that in 1950 ple, assume 341(b), defining collapsible tion services and sewer provide water formed to time tions, at the is not satisfied because area south was a rural what at the time to “availed of” there corporation each part As city of Atlanta. stock,2 alternatively no “view” to sell license, utility its to obtain agreement because, at exemption is available provide would it corporation promised more place, stock sale took the time the a five mile living in persons all services to the com- since passed had years than three now or plant who radius persuaded by of construction. I am pletion time As such services. required future positions. both of these mile radius the five the area within passed in 1965 developed, until appel- became plant responds majority opinion twenty percent developable area simple state- with three arguments lant’s had had corporation utility cor- inhabited. regarding of the law ments except development do with that (1) requisite nothing porations. They are: lines needed and sewer lay the water any prior at time may “view” exist For the construction; the residents. (2) services to provide construction completion in that area development last bit next ten until the absolute completed is not chose to standstill, people finished; because (3) the construction came to of work is building city. In 1975 to another live north of the can be attributed party of one area serviced returned to the innocent business seemingly From these party.3 This corporation. my hypothetical comes the conclusion that statements4 however, told time, corporation present to sell would be requisite “view” the services provide sold it would were builders appellant’s if the this case license, private de- but the sewer lines required water and any at time while the the sewer provide appel- would have velopers and connected to being built develop their lines. Anxious the fact and water plant, despite lant’s central The area agreed. out the builders being property, carried such construction was that one appeared it popular whom were to- became developers, some of private precedential sup- majority offers 3. While in the aca- 2. There has been much discussion propositions, is of- interpreta- port none community proper the first two demic as to the clear for that is example, the third. The reason “availed fered for For does tion of section 341. may Though be the case that modify purchase” it or “with to me. of” “construction rate, Circuit, can be at- circumstances construction certain a view” or both? parties, is inconceivable it agreement tributed to related must there is con- be attributed the can See that one “with a view” to sale. be “availed of’ that had (5th Ivey, struction done another States v. 294 F.2d United former. with the 1961); Payne to nor involvement no relation 268 F.2d Cir. (5th 1959). supra. see note 3 4. But be developable area should evaluated This notion separately. hundred the looking within two three completed would be at the individual assets of the meantime, the as a years. corporation corporation In the the stockholders in rather than collapsible whole is new to the corporation approached the were not law of utility with the corporations, at least utility respect sell stock to a large their state-wide year partic- three and makes exemption,6 and it company. The offer seemed reasonable the ular sense in a case such as which this in agreed the stockholders to the sale. Fol- as con- alternative is to view construction lowing legal analysis majority the ad infinitum. In the tinuing addition to opinion, the the stock- recognized exemption conclusion the section holders would be income because ordinary assets, 341(d)(3) ap- to certain applies the was This corporation collapsible. would proach justifies also the conclusion that (1) despite utility be true the facts that the the time was com- plant construction never corporation was involved devel- pleted no “view” the stock there was to sell estate, opment (2) real the and, therefore, col- the not was engaged utility was business actively the would be lapsible. While this conclusion the stock twenty-five years before was justified, given the evidence absence of sold, (3) no whatsoever took construction to contradict presented government the (4) place year for a ten and period, the was no such appellant’s assertion that there water line and sewer construction took “view”, applica- I conclusion the my rest on place exclusively from 1975 was done exemption. I do so bility year the three private developers having relationship no because I reluctant to reverse a would be with utility corporation either the ques- judgment of the District Court on the its stockholders. Surely, illustrates intent, appellant tion of when the even that section 341 could not have been intend- going the to offer evidence party ed to has applied majority be as the done. that issue. case illustrates what we all must This be SMITH, & INC.—THE MINUTE KING of, independent statements aware MAID OPTION law, while in and possibly correct disagree with The final on which I themselves, issue together cannot be forced out is its majority opinion conclusion without totally losing context mean- Smith, King gives the sale of Inc. stock ing have. they intended to I was a rise to income because it fear that that is what the precisely majority with agree While I corporation. has agree done in this case. IWhile with type that this is the majority’s instincts statements,5 first majority’s two was in- of situation to which section 341 could in which the imagine situation third majori- tended to I am forced apply, might applicable, result the obvious sec- ty’s analysis own to conclude that jointly presented them applying to the facts not applicable. tion is here rule, logical to establish conclu- sion of which is untenable. stock utility As was the case issue, the tax- question here is whether A more reasonable in this case result requisite had the “view” to sell the payer would be to treat assets of the Fortunately, time. stock at the relevant independent entities. That here, only there is no construction involved is, utility plant treated should be as a option, there is no purchase of an so asset, non-eollapsible if construction on it must to sell dispute that the view more completed than three be- option have been at the time the present sold, fore the stock was sewer purchased. lines, water assuming there sufficient relationship utility corporation between the was in whether the discussing option attributing the builder to justify within the mean- “purchased” property fact former, says, ing 341(b)(3) majority construction latter See, supra. g., (1970). 5. See text e. accompanying 70-93 note 3 Rev.Rul. financial condition of the record that

“It is clear from sale, the condi- at the time of the option first tion ration must purchase. the This it.... Al- tion at time develop order because, majority’s implicit in the King be true his though sold stock issue, pur- was option the the treatment of Smith, after Inc. in order raise altering the weak for purpose chased the Development, sale to Gate only one South time at the existing financial condition properly the lower found court true, I must purchase. said Since option primarily for corporation held majority’s conclusion that disagree with the course of sale to customers Smith, was a King & Inc. at What Opinion business.” 268. ration. language unequivocal to me says in clear option purchased, was that at the time the CONCLUSION inquiry, our the tax- time for the relevant Ser- the Internal Revenue The mission of develop payer property, intended to way survival of our goes very vice corporation that to sell the operation are essential for the life. Taxes major According- as its asset. imposes the government. Congress of our requisite present “view” was not ly, the most our imposition rules for the collapsible. be To cannot sys- main, “honor ours is an taxes. is inconsistent reach other conclusion pay his fail to tem”. Should language. own None- majority’s with rules, existing the Internal fair share under theless, majority opinion concludes that vigor- obligation has an Revenue Service was at requisite present “view” and ev- pursue the collection of each ously The central option purchased. time the owing. When such mat- ery cent due and majority leading facts to its conclusion courts, however, parties ters reach the corporation’s were that financial cir- equal should accorded equal are time of the sale were cases, cumstances at treatment, in civil Equal treatment. at the time similar to those that existed ago Years we with full disclosure. equates majority rea- option purchased. The Dead and “trial ambush”. abolished Regulation I’m Treasury buried, underground. sons that this satisfied it remain should and, here 1.341-2(a)(3) resurrected which states concerned it has been therefore, respectfully most dissent. corporation is formed or availed I requisite if the sale of stock is at- “view” present

tributable to circumstances

time of the I believe this reason- purchase.

ing is There is a substantial differ- flawed. facts saying ence between similar ex- WILLIAMS, E. Samuel sale, purchase isted at the time Petitioner-Appellant, saying that the sale was attributable pur- facts that existed at time of the majority’s chase. I that the earlier al., believe Dolph BRISCOE et option was originally Respondents-Appellees. conclusion that purchased development and sale No. 80-1104 ordinary course of business is inconsistent Summary Calendar. analysis. may very with its attribution It Appeals, United Court of States well have the case that at both the been Fifth Circuit. times of and sale the AUnit Nonetheless, if undercapitalized. March 1981. option purpose for the purchased logical development, it is Banc Rehearing En Rehearing and improve undercapital- tion intended to May Denied position. fact ized it was unsuc- cessful in its efforts be determina- cannot

tive. The of the stock reason sale

Case Details

Case Name: Rolland L. King and Arlene P. King v. United States

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Mar 30, 1981

Citation: 641 F.2d 253

Docket Number: 79-3679

Court Abbreviation: 5th Cir.