Grace Bros. v. Commissioner of Internal Revenue

• Citation: 173 F.2d 170
• Decision Date: 18 February 1949
• Docket Number: No. 11976.,11976.
• Parties: GRACE BROS., Inc. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

173 F.2d 170 (1949)

GRACE BROS., Inc. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11976.

United States Court of Appeals Ninth Circuit.

February 18, 1949.

COPYRIGHT MATERIAL OMITTED

George H. Koster and Bayley Kohlmeier, both of San Francisco, Cal., for a petitioner.

Theron Lamar Caudle, Asst. Atty. Gen. and Ellis N. Slack and S. Walter Shine, Sp. Assts. to Atty. Gen., for respondent.

Before MATHEWS and HEALY, Circuit Judges, and YANKWICH, District Judge.

YANKWICH, District Judge.

I The Nature of the Controversy

Petitioner is a California corporation which for many years was engaged in various enterprises, including farming, grape growing and the manufacture and sale of wines and beers. All its stock is owned by its president and manager, Joseph T. Grace. Between 1921 and 1943, it operated at Santa Rosa, Sonoma County, California, a winery known as the "DeTurk Winery". It sold, under the "DeTurk" label, wines and brandies from grapes grown by it or bought from others. Its wines were considered by the trade as of high quality. In 1942, it sold 114,046 gallons of dry wine in bulk and 7,028 gallons in bottles, at 22.2 cents per gallon, and 46,009 gallons of sweet wine in bulk and 10,268 gallons in bottles, at 36.8 cents a gallon. During the years 1936-1942, the investment in this portion of its business was $150,000, of which $60,000 represented the plant and $90,000 the inventory. The substantial inventory in stock is accounted for by the fact that wines must be held for aging. Late in 1942, Petitioner decided to discontinue its wine business. It, therefore, limited its production for that year to 4,959 gallons from its own grapes, as against a normal production of 200,000 gallons. Notwithstanding this, its entire inventory for that year was 522,761 gallons. In November, 1943, talks began with L. A. Weller, Vice-President of Garrett and Company, Inc., of New York. At no time did Weller show an interest in acquiring the physical properties of the DeTurk Winery by purchase. From the very beginning of the exchange of written communications, in a telegram dated December 28, 1942, the request of Garrett and Company was to submit details if "interested in selling your inventory and leasing winery." The Petitioner, on December 29, offered specified quantities of several types of wine at various prices per gallon and a lease "of winery, distillery, and bonded warehouse" for five years at an annual rental of $12,000. Agreement was finally confirmed by telegram of Garrett and Company, dated December 31, 1942. The price agreed on for all the wine was fifty cents per gallon, twenty per cent of the purchase price to be paid immediately. The lease for the winery was to be for five years, at an annual rental of ten thousand dollars. On the same day, 104,000 gallons were delivered, for which Garrett and Company paid $52,000, the profit from which the Petitioner reported in its 1942 income tax return. The balance of the wine, 418,761 gallons in all, was delivered in 1943. Petitioner received $124,317.50 for the dry wine and $94,862.41 for the sweet wine. A higher price than fifty cents per gallon was paid for the sweet wine, because 73,628 gallons had a higher sugar content than the California standard. Garrett and Company also agreed to purchase 600 wine barrels at $4.00 each. In view of the discussion to follow, it is interesting to note that although performance of the contract was begun on December 31, 1942, when $52,000 was paid, a formal memorandum of agreement, embodying the terms of the sale was not executed until January 20, 1943, and the lease not until January 30, 1943. This fact has singular significance, in view of the claim of unitary transfer made in this case. Following the execution of the formal lease, the Petitioner surrendered its permit to manufacture and sell wine, in order that Garrett and Company might procure a permit to operate a winery on the premises. The wine stocks, cooperage, labels, list of customers, and the small staff of eight or ten employees were taken over by the purchaser-lessee. Rent was paid under the lease until the end of April, 1944, when the lease was terminated by mutual agreement. On April 15, 1944, Petitioner sold the winery to Taylor & Co. for $150,000.

The profit realized by the petitioner on the transaction was $140,138.58. The petitioner treated the transaction as a sale of the business, and the profits taxable as capital gain. The Commissioner treated the profits as ordinary income and assessed a deficiency of income and excess profit taxes for 1943. The petitioner sought a redetermination of the deficiency by the Tax Court. That Court, on April 5, 1948, found that the proceeds of the transaction constituted income and that no part of it was chargeable to transfer of good will. It assessed a deficiency in excess profits taxes of $124,073.01 for the year 1943.

This is a petition to review the order. In the main, the issue is:

Did the sale of the inventory on hand, the lease of the premises, and the transfer of the enumerated accessories constitute, in whole or in part, a capital transaction?

II Scope of Review

Consideration of the questions involved turns upon the scope of our review of the decision of the Tax Court.

By recent statutory enactment, Internal Revenue Code, Section 1141(a), as amended by Section 36, Public Law 773, 80th Congress, Second Session, 26 U.S. C.A. § 1141(a), it is decreed that this Court's jurisdiction to review shall be "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury". This reads into the Internal Revenue Code the provision of the Federal Rules of Civil Procedure that:

"Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge of the credibility of the witnesses." Rule 52(a), Federal Rules of Civil Procedure, 28 U.S.C.A.

In the application of this rule and of the equity rule, which prior to the adoption of the Federal Rules of Civil Procedure governed review of equity cases only and which the rules made of universal application in all civil cases, United States v. United States Gypsum Company, 1948, 333 U.S. 364, 394, 68 S.Ct. 525, reviewing courts have emphasized the importance of the conclusions of the trial judge which derive from his opportunity to pass upon the credibility of the witnesses. And they have declined to resolve a conflict in the testimony of witnesses their own way. Davis v. Schwartz, 1895, 155 U.S. 631, 636, 15 S.Ct. 237, 39 L.Ed. 289; Adamson v. Gilliland, 1917, 242 U.S. 350, 353, 37 S.Ct. 169, 61 L.Ed. 356; Wittmayer v. United States, 9 Cir., 1941, 118 F.2d 808, 810; Gates v. General Casualty Company of America, 9 Cir., 1941, 120 F.2d 925, 927; Augustine v. Bowles, 9 Cir., 1945, 149 F. 2d 93, 96; and see "Findings in the Light of the Recent Amendments to the Federal Rules of Civil Procedure", 8 F.R.D. 271, 288-291, and cases cited in footnotes 6-9. The Supreme Court, in a very recent case, United States v. United States Gypsum Company, 1948, 333 U.S. 364, 68 S.Ct. 525, has stated the scope of this provision in this manner:

"It was intended, in all actions tried upon the facts without a jury, to make applicable the then prevailing equity practice. Since judicial review of findings of trial courts does not have the statutory or constitutional limitations on judicial review of findings by administrative agencies or by a jury, this Court may reverse findings of fact by a trial court where `clearly erroneous.' The practice in equity prior to the present Rules of Civil Procedure was that the findings of the trial court, when dependent upon oral testimony where the candor and credibility of the witnesses would best be judged, had great weight with the appellate court. The findings were never conclusive, however. A finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Company, 1948, 333 U.S. 364, 394, 68 S.Ct. 525, 541.

This interpretation is not a new departure. It merely stresses, as courts of appeal (including this court), have done before, that findings are to be given the effect which they formerly had in equity. Equity Rule 70½. See, Equitable Life Assurance Society v. Irelan, 9 Cir., 1941, 123 F.2d 462, 464, and cases cited in footnotes 1 and 2; and see, Guilford Construction Co. v. Biggs, 4 Cir., 1939, 102 F.2d 46; United States v. Still, 4 Cir., 1941, 120 F.2d 876, 878; Katz Underwear Co. v. United States, 3 Cir., 1942, 127 F.2d 965, 966.

It is axiomatic that uncontradicted testimony must be followed. Chesapeake and Ohio Railway Company v. Martin, 1931, 283 U.S. 209, 216, 217, 51 S.Ct. 453, 75 L.Ed. 983; San Francisco Association for Blind v. Industrial Aid for the Blind, 8 Cir., 1946, 152 F.2d 532, 536; Foran v. Commissioner, 5 Cir., 1948, 165 F.2d 705. The only exception to the rule occurs when we are dealing with testimony by witnesses who stand impeached and whose testimony is contradicted by the testimony of others or by physical or other facts actually proved or with testimony which is inherently improbable. The classic statement of this rule, is that by Mr. Justice Field in Quock Ting v. United States, 1891, 140 U.S. 417, 420-422, 11 S.Ct. 733, 851, 35 L.Ed. 501. And see Greenfeld v. Commissioner, 4 Cir., 1947, 165 F.2d 318, 319, 320. This Court has applied the same principles repeatedly, in reviewing administrative findings. Illustrative are the immigration cases, in which conclusions of a board on exclusion based upon contradictions in the testimony of a single witness were upheld. Wong Ying Wing v. Proctor, 9 Cir., 1935, 77 F.2d 135; Ng Heu Yim v. Bonham, 9 Cir., 1935, 79 F.2d 655; Lum Sha You v. United States, 9 Cir., 1936, 82 F.2d 83. In giving effect to these...