Municipal Bond Corporation v. CIR

• Decision Date: 18 February 1965
• Docket Number: No. 17721.,17721.
• Citation: 341 F.2d 683
• Parties: The MUNICIPAL BOND CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

341 F.2d 683 (1965)

The MUNICIPAL BOND CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17721.

United States Court of Appeals Eighth Circuit.

February 18, 1965.

COPYRIGHT MATERIAL OMITTED

Joseph A. Hoskins of Hoskins, King, Springer, & McGannon, Kansas City, Mo., made argument for petitioner and was on the brief with Charles P. Schleicher and Walter J. Kennedy of Hoskins, King, Springer & McGannon, Kansas City, Mo.

William A. Geohegan, Asst. Deputy Atty. Gen., Tax Division, Dept. of Justice, Washington, D. C., made argument for respondent and filed brief with Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., Lee A. Jackson and David O. Walter, Attys., Dept. of Justice, Washington, D. C.

Before VAN OOSTERHOUT, BLACKMUN and MEHAFFY, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

The taxpayer, The Municipal Bond Corporation, has filed a timely petition for review of the decision of the Tax Court (opinion reported at 41 T.C. 20) upholding the Commissioner's determination of deficiencies in income tax for the years 1954 to 1958 inclusive aggregating $38,060.08. The deficiency determination is based entirely upon a finding that taxpayer is not entitled to capital gain treatment with respect to gains from sale of real estate made during the 1954 to 1958 period or from installments collected during such years on real estate sale contracts made in prior years.

Since we are reversing the Tax Court's decision for errors of law hereinafter pointed out, no purpose will be served in making an extensive statement of the facts disclosed by the extensive record in this case. The facts are quite fully set out in the Tax Court's opinion.

Taxpayer is a corporation incorporated under the laws of Missouri on October 23, 1924. It files its income tax returns on a calendar year basis. Returns for the years here involved were timely filed with the Collector at Kansas City, Missouri. All real estate sales here involved were reported and tax was paid thereon on the basis that taxpayer was entitled to report the gain as capital gains.

Charles F. Curry has since incorporation been president, director and chief executive officer of the taxpayer. He obtained a controlling stock interest in 1939 and during the taxable years here involved he owned 2063 of the 2310 shares of corporate stock outstanding. The balance of the stock was at least largely owned by members of Mr. Curry's immediate family and nominees.

Taxpayer on December 31, 1945, held fifteen parcels of real estate with a cost of $39,350. On December 21, 1953, it owned twenty-five parcels with a cost of $222,620, and on December 31, 1958, it owned nineteen properties with a cost of $230,311. Taxpayer made nineteen sales of real estate in the involved years. During such period it purchased six additional properties. The Tax Court found, "Petitioner never at any time maintained a sales force or regularly engaged in sales activities. Many of its sales resulted from inquiries made by prospective purchasers." 41 T.C. 20, 22.

The rentals for the years 1954 to 1958 ran from $25,215 to $27,586. The Tax Court found on an overall basis taxpayer's gains from real estate and from rentals were about equal. The average holding period of the properties was four and one-half years.

Taxpayer individually or with members of his immediate family owned a controlling or substantial interest in eight other corporations. Some of these corporations held real estate for rental and investment and others held real estate for resale to customers. One of the corporations was a real estate sales and management agency. Each of the corporations served a legitimate business purpose. It is not here contended that any of such corporations is only a shell or a sham, nor is it contended that the corporate veil of such corporations should be pierced.

The Tax Court upheld the Commissioner's contention that all gains on sales of real estate during the 1954-58 period as well as installments collected in such years on prior sales were taxable as ordinary income. If capital gains treatment is not available, the correctness of the deficiency determination is not questioned. The principal question here presented as stated by the Commissioner is:

"1. Whether the Tax Court correctly held that the gains from the sale of certain real estate by the taxpayer during the tax years 1954 through 1958, inclusive, and the gains from the sale of certain real estate in prior years, installment payments from which were received during the tax years here involved, were gains from the sale of real estate held primarily for sale to customers in the ordinary course of taxpayer\'s trade or business within the meaning of Sections 1221 and 1231 of the Internal Revenue Code of 1954, with the result that such gains are taxable as ordinary income rather than as capital gain."

The pertinent provisions of the Internal Revenue Code of 1954 here involved are:

"§ 1221. Capital asset defined

"For purposes of this subtitle, the term `capital asset\' means property held by the taxpayer (whether or not connected with his trade or business), but does not include —

"(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

* * * * * *

"§ 1231(b) Definition of property used in the trade or business. — For purposes of this section —

"(1) General rule. The term `property used in the trade or business\' means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not —

* * * * * *

"(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * * *."

The corresponding 1939 code provisions are found in § 117(a) and (j), I.R.C.1939.

The Tax Court held that the sales here in controversy did not constitute sales of capital assets within the meaning of the statutes just quoted, upon the ground that such sales came within the exclusion of such statutes since the subject matter of the sales constituted "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."

It is conceded that all real estate sold was held more than six months and it is clear that the real estate was held by the taxpayer in its trade or business. Thus, the crucial question presented is whether the Tax Court's determination that the real estate sold was primarily held for sales to customers in the ordinary course of taxpayer's trade or business is clearly erroneous.

It is quite true that the clearly erroneous standard of Fed.R.Civ.P. 52 (a) applies to findings of fact made by the Tax Court. However, it is equally clear that findings of fact induced by an erroneous view of the law are not binding upon this court. Greenspon v. Commissioner, 8 Cir., 229 F.2d 947, 949; Marcella v. Commissioner, 8 Cir., 222 F.2d 878, 881.

Taxpayer contends that the Tax Court erroneously interpreted the meaning of the word "primarily" as used in §§ 1221 and 1231 and in support thereof points to the portion of the Tax Court's opinion reading:

"The term `primarily\' as used in the statute has been construed to mean `substantial.\' Rollingwood Corp. v. Commissioner 9 Cir. 190 F.2d 263; Joseph A. Harrah, 30 T.C. 1236; American Can Co., 37 T.C. 198. This construction permits recognition of the dual purpose concept inherent in some types of business operations. In petitioner\'s real estate operations, its dual purpose is obvious. Petitioner acquired and held real estate for the dual purpose of both investment and sale to the public. And while the sales purpose, in some instances, may not have been predominant over the investment purpose, it was, nevertheless, substantial throughout the entire period under review. Petitioner\'s gains from the sale of properties in some years exceeded its gains from all other sources. They were substantial in each of the years involved. On an overall basis the gains from real estate sales and from rentals, petitioner\'s two principal sources of income, were about equal." 41 T.C. 20, 29.

While the cases cited by the Tax Court in the foregoing quotation lend some support to interpreting the word "primarily" found in the statutes as the equivalent of "substantial", we reject such interpretation.

In United States v. Bennett, 5 Cir., 186 F.2d 407, 411, the court, in interpreting the statutes we are here considering determined that gains from sales of cattle culled from a breeding herd were entitled to capital gains treatment, stated:

"If the statute had been intended to mean what the collector contends for, the word `primarily\' would not have been in it. Since `primarily\' is in the statute, it seems clear to us that to hold, as the collector contends, that the main, the first, purpose of the keeping of these breeder cattle was for sale, does complete violence to the statute and to its purpose and intent."

In Albright v. United States, 8 Cir., 173 F.2d 339, 344, we found that a capital gain was derived from selling culls from a dairy herd on a consistent basis. We said, "A dairy farmer is not primarily engaged in the sale of beef cattle. His herd is not held primarily for sale in the ordinary course of his business. Such sales as he makes are incidental to his business and are required for its economical and successful management."

In W. R. Stephens Co. v. Commissioner, 8 Cir., 199 F.2d 665, 669, 46 A.L.R.2d 608, we held automobiles assigned to a dealer for his use were held primarily for sale to customers in the ordinary course of business. We discussed the Bennett and Albright cases, supra, stating:

"In those cases it

...