*1 granted, and relief could dismissing complaint with error in court district prejudice, the order Judge, Chambers, dissented Circuit part. Affirmed. INC., TERMINALS, Petitioner TRUCK Review,
v. INTERNAL REV
COMMISSIONER OF ENUE, Respondent Review.
No. 17167. Appeals Court of
United States
Ninth Circuit. 20, 1963.
Feb. *2 Hodges prin- and 'Mullikin were cipal steps shareholders. Some were purpose, but,
taken effectuate that change plans, due ato Truck Termi- *3 engaged any actively nals was not in August, business and between March, capital, 1952. It then had no subscriptions, enforceable .no as- stock sets, and a debt of $100. During period, before, and engaged was
lines in business com- as a mon property carrier of motor vehicle in сommerce, interstate and non- as a public utility carrier within California. Schureman, and Theodore Russell & March, In seeking 1952 Fleetlines was to Angeles, Cal., peti Russell, for Los W. acquire public utility common carrier tioner. in purchase status California and to con- Atty. Gen., Oberdorfer, trol F. of Asst. another interstate motor Louis carrier. Prescott, Jackson, engaged F. Charles A. Fleetlines was Lee A. also then in liti- Rothwack, gation Meyer Freeman, alleged and for B. E. violations of Califor- Justice, Attorneys, relating registration Department Wash- of nia statutes to of respondent. C., ington, for motor D. vehicles. CHAMBERS, and HAMLEY Before April 1, Prior 1952, to officers, di- Judges. DUNIWAY, Circuit rectors and of shareholders Fleetlines determined to a undertake ac- course of HAMLEY, Judge. Circuit designed tion to company’s meet that problems current peti- This matter is and future needs. before us on the Specifically, Terminals, (Truck (1) it was tion Truck decided Inc. that: Terminals), Truck Terminals should to review a be activated as decision wholly-owned redetermining subsidiary Fleetlines; Tax Court petitioner’s in deficiencies (2) purchase Fleetlines 1952, should income taxes for findings opin- shares stock in Truck to be and 1954. The of fact and Terminals issued; reported Tax should transfer ion of the Court are jurisdiction equipment its motor vehicular to Truck We have T.C. 876. Terminals; 7482 of and Truck Terminals the Internal Revenue equipment, any should rent the and sub- Code of 1954. sequently acquired, any Fleetlines, to problem us before concerns the ba- lessees who could other attracted. seventy-eight piec- sis to be attributed equipment comput- es of motor vehicle April 1, 1952, On Truck Terminals long-term depreciation capital and and agree- Fleetlines executed sales gain during years question. ment under which acquired the former seventy-eight Terminals, corpora- a Nevada units of Truck motor vehicle organized April by equipment tion, price on for the was stated $221,- Hodge, Henry Hodge purchase price 150.1 The $5,150 May 1, payable F. N. and M. Wil- was company on liam Mullikin. The was E. the balance organized monthly originally purpose $6,000 installments of each. property payable acquiring delinquent real certain on Interest in- Fleetlines, Inc., (Fleetlines), percent at the rate a Nevada stallments seven organizеd annum, corporation, per payable compounded in which questioned figure rep- property this at the It is not on this time the trans- fer, however, $101,- fair of the approximately value at resents adjusted Fleetlines’ cost basis that time. semiannually. April, 1953, retained is- Terminals Truck Title stock, payment 1,950 the first sued additional Fleetlines until the shares price. purchase $195,000, In re- valued at to Fleetlines. installment turn it received in that check Fleetlines’ right to rescind Fleetlines reserved the payment Truck amount stock. taxes, pay upon insurance default thereuрon check issued its necessary protect or other costs and preserve pay- the same amount to Fleetlines agree- property. Under open account. ment advances Terminals, ment, seiz- Truck breach Subsequent others, or bank- ure ruptcy credit and its own Terminals established oper- Terminals, through purchases did not finance its unpaid all due accelerate and make ate to obligations *4 Fleetlines. option Fleetlines. at the provided up- 113(a) It is in lien agreement a section reserve not The did (Code) Internal Revenuе It was Code of 1939 property Fleetlines. on necessary, property Truck that the basis of that, shall be if understood cost, exceptions. equipment with certain pledge as One could Terminals exceptions, provided these source. for in section whatever for loans from collateral 113(a) (8), property is that if the was rented Truck Terminals acquired 1920, by after a December commencing April 1, 1952. Fleetlines by corporation its stock issuance of monthly into account the rate took in or securities connection with a trans- by charged and the factor of others rate 112(b) (5) action described in section renting For the rental the entire fleet. Code. provided fuel, up- price, Truck Terminals “ * * * then be the basis shall maintenance, paid keep and all other and as it same inbe the hands charges wages except the of drivers and transferor, of the increased types of and taxes. insurance A certain gain amount of or decreased in the agreement of a written lease was draft recognized amount of loss to the prepared but never executed because the upon transferor such transfer un- prepared as did not reflect the document applicable year der the law to the agreement parties as to rates true in which the transfer made.” was expenses. and The Tax Court equip- held 28, 1952, Terminals Truck On question in acquired ment by fifty stock Truck of its common shares issued Terminals in $5,000 connection with cash. transac- in to Fleetlines return tion described in 112(b) (5), section May 1, cash pay- Terminals’ and Truck On exception set forth $4,958.90. no in made section It balance 113(a) (8) is agree- applicable. therefore the sales It Flеetlines on ments that, held applying further May 29, 1952. No interest that ex- ment until ception, the basis to charged Truck paid or other de- Terminals on this or be the same should as it would have been payments. linquent in the hands of Fleetlines without in- monthly payments Subsequently, gain recognized crease the amount of days twenty-four made five to were computing fact Fleetlines in and Sep- In first each month. after paying its own taxes. Both of these rul- October, Termi- and tember ings question are drawn into on this re- $51,000 paid Fleetlines more than nals view. agreement. specified in the amount Turning first, to the December, 1952, revolve Fleetlines advanced issues In application, speci- around open the circum- account $160,000 case, of this 112(b) stances repayment dates, section rate or interest fied pertinent (5). part, paid $129,000 that section as and agree- remaining reads: under the balance gain recog- subsequently or “No loss shall Fleetlines sale. ment property if $35,000. nized is transferred to a advances further made persons actually corporation or a transfer of ex- one more change exchange proprietary solely se- for stock or interest corporation, im- and Truck Terminals. in such curities exchange mediately such after If the Tax Court’s persons person are in control clearly erroneous, otherwise then what * * corporation; parties’ ever going motives in The Tax Court based its decision through the sale, motions of the tax seventy-eight pieces transfer of the consequences 112(b) (5) sections equipment by of motor vehicular 113(a) (8) must follow. For in a case kind lines to Truck Terminals was aof this, such as in which the business rea 112(b) two described making sons for the trаnsfer are not findings fact, (1) the ultimate i. e.: by disputed, motives themselves are not fide transfer was not effected a bona controlling characterizing the transac purchase, the transfer sale tion utilized They to effect the transfer. solely ex- was made getting «serve a means of at change for stock or securities in Truck parties intent of the and hence as one questions Terminals. Truck Terminals indication of the true nature of the findings fact. both of these *5 transaction. Concerning finding the that the trans- Thus, evidence of a non-tax by not a bona sale fer wаs effected fide choosing business reason for a sale would argues purchase, Truck Terminals and tend to confirm that real the nature of the Tax Court failed to consider that transaction conformed to its form. consider, ap- required it was to criteria plied Miller’s Estate v. Commissioner of Inter criteria, improper failed to consid- Revenue, Cir., nal 9 F.2d 239 734. evidence, drew uncontradicted and er purpose a Lack such non-tax inferences. unreasonable note; worthy of not because it neces divergence was sarily The criteria which Tax Court indicated a of sub not, consider, required form, but which it did from failed stance but because it urges, parties negate inducing whether other evidence that purpose of with a tax evasion. acted inference. hand, On the other of a mo- evidence by The transaction as evidenced might prompt minimize tive to taxes well agreement is, form, and written a sale scrutiny given a closer of a transaction equipment. purchase ar- Petitioner its nature. But a to determine true gues from this the transac- that:. finding specific a that the use of certain tion cоuld not be held to be of some other by actuated a desire to mini- form was form was used to character unless the taxes is not essential a conclu- mize disguise purpose; (2) the some different a transaction sion that substance pos- only purpose concealed which could its form. from materiality differs sibly tax here have is one of evasion; made the Tax Court might proceed Parties oblivious ascertain, find- and made no effort to consequences attempting to tax to ac parties ing, were so as to whether by complish sale what сan be done motivated. through Or, some other transaction. year fully apprised little more Within than a the tax after even if conse purported sale, up quences action, ended alternative courses of owning legitimate given two objective, thousand shares Truck non-tax a tax Terminals The payers stock. at- are bound to choose the circumstances most tending sale, when least in the tax-burdensome viewed nor means light of accomplishing Company this fact and the it. Kraft Foods transactions place during intervening took Revenue, which of Internal v. Commissioner 2 year, led the Cir., Tax Court to F.2d The that 127-128. conclude 232 exist fide; sale was not bona of certain motives was need that it ence absence always question sole, most char The it
not be the nor is guide char- acter of the fact. reliable, was one of followed transaction to be consequences. Cir., Commissioner, Cohen F.2d acterizing v. tax actions problem was to determine findings and The Tax Court’s parties intent of the as ascertained guided opinion it reveal that circumstances, all relevant facts and in conclud principles above outlined States, Tarzian, United Sarkes Inc. v. ing transaction that the single Cir., cri 240 F.2d 470. No that hold fide sale. We was not a bona governs. Gooding Co. Amusement terion clearly finding erroneous. is not its Revenue, 6 Internal v. Commissioner of against argument In its second Cir., 236 F.2d finding transaction of fact that pur- bona fide sale a not effected did Court We hold the Tax argues that the chase, Terminals Truck giving ques application not err in to the applied improper criteria Tax Court along criteria with others tioned questioned respects. three These three reaсhing process of ultimate a valid* there was whether are: criteria transac true character of the as to the con- independent tax reason business tion. a sale as for the choice siderations against argument find- In its third transfer; this trans- whether method was not of fact the transaction parent and negotiated action, between purchase, fide sale effected a bona kind of a subsidiary, terms' involves argues num- independ- negotiated would be respects failed to Tax Court ber Termin- parties; and whether ent Sev- evidence. uncontradiсted consider capitalized. adequately als evidence,” “uncontradicted eral kinds of *6 principal petitioner’s The burden of Court, ignored by assertedly Tax the all argument point appears on this to be to, (1) evidence referred as follows: are could that the transaction be bona fide making for reasons to the business as if tax were sale even principal considerations the than in some sale rather transfer the objective, or the transaction sig- way; (2) the as to evidence other nego- a kind not of which would be selectiоn tax motives the nificance of by independent parties, or Truck tiated transfer; and method sale as the inadequately capitalized, subject “thin” as evidence the all if these circum- or even three capitalization. “adequate” compared to existed. stances particular Tax Court did not rest ulti- The its fact that items finding to the bona fides of the mate as were evidence not mentioned in the find upon any opinion purchase ings and one of these sale or of the Tax Court does upon criteria, they these three alone. As or nоt establish that were not con margin, in the the Tax Court Nor indicated that court. does cir sidered the finding into account.2 factors other that the ultimate also took is not cumstance opinion sequently $35,- the Tax Court stated: 2. its In made further advances of ic * * * 000; petitioner the Petitioner made initial and in 1953 issued days parent payment $195,- after to its the in stock the amount of additional agreement. specified in the Subse- time It received Fleetlines’ cheek this monthly payments it, quently, turn, were made and amount issued Fleet- days after the first of each 5 to in the same from linеs check amount September October, payment appearing against In and month. 1952, petitioner advances it paid parent $51,000 open the account on Fleetlines’ books. specified parent amounts than the claim more the Petitioner does not that the any agreement. upon equipment preserved In December lien $160,000 parent open transferred; rather, on an advanced ac- it introduced evi specified parent no interest and no count dence that intended that repayment; petitioner paid equipmеnt petitioner dates be used as col $129,000 remaining securing independent as the balance lateral loans from agreement parent of sale. The sub- lenders.” T.C. regards adequacy capitaliza- accord with what prove that as tion. uncontradicted evidence It
such
proves
was not considered.
evidence
findings
In our view the
of fact and
did
Tax
at
Court
most that
opinion of the Tax Court disclose that
regard
uncontradict-
as
not
evidence
given
each of these criteria was
consid-
appraised
or
when
ed
otherwise reliable
not,
not,
eration.
de-
We need
and do
light
record.
in the
of the entire
cide whether
of each of
consideration
required.
them was
argues
Finally, petitioner
Tax
that the
fides of
Court
as to
bona
challenging
Further
find-
this ultimate
purchase
based
is
sale and
transaction
fact, petitioner argues
reasonably
not
on inferences which are
Tax Court
failed to determine when
evidence. We
warranted
the entire
being
place,
transfer
it
as-
issue took
inferences
draw our own
are asked to
prejudicial
serted that
this constitutes
evidentiary
upon
undisputed
based
error.
and,
process, to determine
facts
stating
Petitioner
is
correct
purchase
fide.
was bona
sale
that the
explicit finding
there is no
toas
time
when the
exchange
transfer in
for stock
reviewing
the Tax Court de
completed.
and securities was
The court
“clearly
pro
terminations the
erroneous”
held that it need not determine whether
52(a),
vision of Rule
Federal
Rules
completed
transfer be viewed as
Procedure, applies
Civil
alone
May
April,
December,
1952, or in
evidentiary facts but also to factual in April,
true,
1953. This is
the Tax Court
undisputed
ferences from
facts. Com
stated, because even if the transfer
missioner of Internal Revenue v. Duber
regarded
completed
on the earliest of
stein,
U.S.
80 S.Ct.
dates, April 1, 1952,
these
(2) pai'ties; validity of the premise, the intent of that the Tax proprietary petitioner 3. The Tax Court said: a interest in the “ * * * regarded If the transfer is nature of stock rather than a bona fide ” * * * equip- April 1, completed as indebtedness. 33 T.C. exchanged promise pe- for a ment was $221,150. pay parent to its titioner promise proportion promissory was in direct to the It is established that *8 by Ap- reported ve the of motor is under consideration now the transfer lines 1, Region. plate In view of this on Division Terminals Truck to hicles agreement property has not morе that held fact the a sale Terminals, resulting capital the Truck in a been secured in months six than by Fleetlines, paid $120,119.44. claim filed on Inc. the Tax was case gain of rejected.” $31,231.05. There Inc. herein gain is sum of the 30, 1958, deficiency September Fleetlines’ Since no determination been has by year has been held the claim for refund for the of Fleetlines tax suspense pend- 1956, 31, in a file deficien District Director after the December On ing to be the decision ren- the basis of this notification cy which forms notice Terminals, case now under review. dered in the litigation on Truck served was protective for claim filed Fleetlines upon Gooding plus $31,231.05 Court relied interest. 6. The Tax refund requested Commissioner on the Amusement Co. v. of In that action Fleetlines Revenue, Cir., disposition pending T.C. aaff.6 ternal withheld be claim 159, 165, against on this branch F.2d of the Truck Terminals. assessment Analysis believe, leads us to the Fleetlines case. taken on was No action Gooding petitioner, clearly September is that 1958. On that until claim by given point. to Fleetlines was notice date Angeles that: Los at Director District cap- year Fleetlines, refund of the to obtаin a applicable to the law erroneously paid gains ital tax it has made.” transfer which the may transaction, ease. it atbe position, statutory basis As good stand- claim for refund is lines’ argues unless that Truck Terminals pending de- ing suspense and is language closing quoted section us. She of the case before termination recognized gains in fact (a) (8) means required note to District Director language transferor, serves that rejection claim because an interim of the argument true, purpose. is no This uncertainty this outcome of toas 113(a) (8) applies goes, because indication been case. But there has 112(b) exclusively (5) trans- to section asserting the is that the Commissioner gain proper- actions, never can on which right high deny cost basis Accordingly, recognized. lim- ly if be holding ato Terminals while proper gains recognized under a ited to gain capital occasion which would closing portion law, interpretation of high basis. same 113(a) (8) be never would of section is af- Tax Court decision of the ren- play would so called into firmed. superfluity superfluous. This dered by Con- intended been not have could Judge CHAMBERS, (сoncur- Chief gress; construed should be statute ring dissenting). meaning give operative all of its is, part, I concur in the last that parts. part opinion rejects peti- of the which not, decide wheth- do not need We 113(a) (8) tioner’s construction “recognized er, read- in law” under the Internal where- Revenue Code of concluding 113(a) (8), the of section it Fleetlines and asserts that operative ef- lack of that section words could the door on close Assuming true, nev- we to be this fect.7 mere act commissioner Fleetlines’ circumstance this believe ertheless gain paying capital tax: outweighed by circum- additional is thereby the issue determined. Lit- below. stances referred to erally there is a lot to be for the said construction, concluding but I do not believe One these is that language Congress gate 113(a) (8) repre- intended to leave the of section legislative ajar. express sents an far Counsel for is to be choice be- ingenuity. recognized complimented his tween the fact and rec- ognized being concepts, in law indi- this upholding But I have trouble the re cated the words “under the law.” The casting of the basiс transaction to one that, petitioner’s other is if construction simple exchange of a trucks Fleetlines’ adopted, 113(a) were to be all of section capital stock of Truck Terminals. practical would be without effect. Normally I would think Commissioner of always pow- It would then lie within the Duberstein, Internal Revenue v. 363 U.S. controlling er of the transferor to dic- 278, 80 S.Ct. 4 L.Ed.2d tate the cost basis of trans- But, indicate affirmance here. I am subsidiary to a ferred a section 112 case, troubled a circumstance in the by “recognizing” (b) (5) transaction perhaps tactiсs, understandable *9 gain 112(b) fact section parties neither of the on which has said recognized. states not be shall very much. misgivings case, court, If Truck Terminals In this tax has concerning ability parent, “sale” of its transaction the trucks may noted, however, 113(a) (8), 7. It that at least would en- words of section respect provision to the “boot” to take the transferee account of able 112(c) (1), resulting gain section a transferor in a sec- “boot” com- 112(b) may puting tion transaction have a the cost basis ac- recognized gain concluding quired in law. The in that transaсtion. 15(c) corporate In which lobe brain was attacked Section 1939, an ex- would find the Internal Revenue Code of we intent not to avoid ex- By profit profits in 1952. cess in effect in which taxes lobe cess prof- get gains terms, capital we avoid excess find the an intent to intent to keystone expressly ordinary Any- and avoid made the its was income ? taxes way, I found: now tax court better the section. The understand the mean- “dichotomy.” “Securing exemption the surtax may profits It the minimum excess tax petitioner be said that not has major properly purpose credit was point not a asserted the I which make. petitioner specifically the activation of He pointed has not it, but general may transfer the 78 ve- units motor his attack cover it. hicular to it Fleetlines. I If one, had two votes instead of I would send the case back “The to the transfer of tax units court query with a findings equipment by of: motor vehicular Are not the rather inconsistent ? lines to not effected by a purchase, bona fide sale and but solely was made change in ex- pe- for stock or securities in
titioner.” opinion, the tax court Elsewhere
says gains capital on the for the issue companies higher
two vis-a-vis a cost depreciate:
basis for Truck Terminals to “Petitioner has shown reasons numerous rel., UNITED STATES of America ex making transfer, valid but no REED, Jr., Commodore Petitioner- independent reasons con- Appellant, business of tax siderations for the choice of a as the sale v. method of transfer.” PATE, Warden, Frank J. Illinois State Penitentiary, Respondent-Appellee. against it, 15(c) I Section see As No. 13800. impliedly said the tax- tax court the payer has for the had valid business reasons Appeals United States Court of transfer, no business reasons other but Seventh Circuit. saving ordinary by an in- than taxes Feb. depreciation base. I trouble creased have Rehearing Denied March taxpayers notion in- with the ordinary tended avoid taxes but not profits taxes. vitiates One
.excess that the decision on the I take it other. final, profits has become but taxes excess the tax court has sort of “arbi-
I feel case.
trated” the many unmindful tax- not
I am flout the income tax law
payers intend observing honorably it and succeed their intent. other taxed
are in hor- intentions result innocent
cases But here the tax taxes. court rendous words, a few offhand recast seems, ordinary taxes on the transaction taxpayers’ “no valid business
basis of *10 independent tax considera- reasons
tions.” notes interest, parent’s proprietary which, face, not actual- instruments or other on their according ly terms, paid indebtedness, may to its subse- evidences of are be promise pay quently a converted to to “securities” within the held to be ing mean upon provision (5). 112(b) for interest de- without of section See R. M. specified repayment dates, Gunn, aff., Cir., fault or and ul- 244 25 T.C. F.2d timately peti- 408; Gooding converted into stock in Amusement Co. v. Commis hold, therefore, Revenue, Cir., conclude and tioner. We of Internal sioner promise that constituted in substance F.2d 164-165. correctly that, Court for tax determined be the same as it would be in the hands exchange purposes, or secu- of ($101,030.56 stock this transferor April 1, 1952, gain case), rities effectuated on in the increased amount recognized notwithstanding cer- ($120,119.- that fact stock to the transferor case). until some- tificates were not delivered 44 in this being case, it be- time This later. following argument, this line of act in the last immaterial when the came complicated petitioner 113(a) contends section Events transaction occurred. (8) permits a transferee to increase signifi- subsequent April 1952 had to gain basis the amount on which they throw tended to cance as actually tax, paid its transferor a has light parties intended at on what the obli- whether or not the transferor was earlier date. gated by pay law to tax.5 con- This arguments against final Petitioner’s 113(a) (8) which struction of section for equip- finding that the transfer petitioner is contends at odds with exchange solely for made ment was ruling Tax Court’s under section securities, Tax are that or stock 113(a) may (8) a increase its transferee uncontradicted consider failed to Court evidence, only by gain that its basis the amount factuаl inferences and drew recog- required transferor was law reasonably warranted are which nize.6 evidence. entire again reference we For convenient argu- merit these no more findWe quote pertinent part of section 113 find- ments, ultimate to this addressed as (a) (8), prescribing procedure ulti- other ing, than addressed 112(b) where a section followed was not transaction that the mate part of (including cases where transfer purchase. fide sale bona effected for the transfer the consideration of the branch On the second property property corporation was to the argues if it did case, that even money, in stock or securi- or addition to equipment in a .acquire the vehicular ties) has occurred: 112(b) in section described transaction “ * * * shall be then the basis (5), should for the its basis pay hands purported as it would be $221,150 it the same be the transferor, urged, increased in the so, because This is it it. gain (8) provides 113(a) decreased amount section recognized to the received loss amount basis transferee’s upon 112(b) shall such transfer transaction transferor Terminals, Inc. Fleet- of Truck tax return “The case income 5. In its