Moore v. United States
| Decision Date | 23 June 1969 |
| Docket Number | No. 25898.,25898. |
| Citation | 412 F.2d 974 |
| Parties | Harry MOORE, Trustee, Appellant, v. UNITED STATES of America, Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
COPYRIGHT MATERIAL OMITTED
Allan L. Poage, El Paso, Tex., Jack Bryant, Abilene, Tex., Raymond A. Lynch, Midland, Tex., for appellant.
Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Chombie J. D. Garrett, John J. McCarthy, Richard M. Roberts, Jerome H. Fridkin, Attys., Dept. of Justice, Washington, D. C., Ernest Morgan, U. S. Atty., Harry Lee Hudspeth, Asst. U. S. Atty., of counsel, for appellee.
Before THORNBERRY and SIMPSON, Circuit Judges, and CASSIBRY, District Judge.
This case involves federal tax claims asserted by the Commissioner against the estate in bankruptcy of Billy Sol Estes. Harry Moore, Trustee for the bankrupt, appeals from the district court's decision in favor of the Government. In so doing, he doubtless has the unqualified support of the numerous creditors who will be adversely affected by a huge award of federal taxes. The Commissioner's original proof of claim asserted tax liabilities for the years 1959-61 in the total amount of $12,289,316.76. The breakdown of the amounts against which the tax claims are asserted is as follows:
Calendar year 1959
(a) Disallowed fertilizer expense deduction $1,594,832.42
(b) Unreported income from discount of commercial
paper to finance companies 164,545.94
(c) Other income and disallowed deductions 2,193,059.64
Calendar year 1960
(a) Disallowed fertilizer expense deduction $1,212,929.03
(b) Unreported income from discount of commercial
paper to finance companies 3,653,335.22
(c) Other income and disallowed deductions 4,684,098.19
Calendar year 1961
(a) Disallowed fertilizer expense deduction $1,808,279.13
(b) Unreported income from discount of commercial
paper to finance companies 7,902,677.02
(c) Other income and disallowed deductions 6,052,722.88
Item (c) for each of these years ("other income and disallowed deductions") is not involved in this case and is apparently being held in abeyance pending final adjudication as to items (a) and (b). After a hearing on items (a) and (b), the referee sustained the Trustee's objections and rejected the Government's claims in full. The district court reversed the referee. Thus, the question to be decided is whether the referee or the district court correctly evaluated the Government's contention that deductions taken by Estes for fertilizer expense item (a) should be disallowed and that money he received from the discounting of commercial paper item (b) should have been reported as income. We consider these matters in reverse order.
In passing on the issue of unreported income as well as the deductions for fertilizer expense, we must take care not to lose sight of the appropriate standard of review: "We do not determine whether the district judge's findings were clearly erroneous but whether the findings of the referee were; if the referee's findings were not clearly erroneous the district judge was bound to accept them." Bazemore v. Stehling, 5th Cir. 1968, 396 F.2d 701, 703. While we recognize we must focus primarily on the referee's findings, we hasten to admit that the ensuing description of the factual context out of which this tax dispute arose is based largely on the thorough fact findings entered by the district court. To the extent that his findings developed the factual background, i. e., the scheme employed by Estes to obtain large sums of money needed for expanding his operations, the district judge was not in disagreement with the referee but simply more thorough. The district judge and refere did not have conflicting views about the method employed by Estes to obtain money though they drew different inferences from the undisputed facts.
Billy Sol Estes had a pyramid of businesses numbering somewhere between forty and fifty. What he needed to keep everything in motion was a steady influx of large sums of cash. To this end, he devised a highly ingenious, albeit highly unlawful scheme. Other participants in the scheme were the Superior Manufacturing Company (hereinafter referred to as Superior) and the Lubbock Machine and Supply Company (hereinafter referred to as Lubbock), manufacturers of anhydrous ammonia tank equipment. The first step was for Estes to persuade various farmers in the West Texas area to sign promissory notes and chattel mortgages for the purchase of anhydrous ammonia tanks from Superior and Lubbock. He led the farmers to believe that they would be loaning him their credit, that he would be using the tanks in his business, and that he would lease the tanks from them at a rental equivalent to their note payments. He not only guaranteed their note payments but promised a bonus equal to 10% of the cost of each tank purchased. Thus, so far as the farmers were concerned, they were getting a 10% fee for signing their names to notes and chattel mortgages. They never expected to use the tanks but thought that Estes was using them in his business. They expected their note payments to the manufacturers to be covered by Estes' rental payments to them.
The next step was for Superior and Lubbock to sell the notes and mortgages to various finance companies at a discount. They in turn received checks from the finance companies for the discount price and deposited them in their accounts. Thereafter, they remitted 90% of the proceeds to Estes, retaining 10% as a fee for their part in the transaction. In purchasing the notes and mortgages, the finance companies were under the impression that Superior and Lubbock were selling actual tanks to numerous farmers and that the sales were being made on the farmers' credit. They had no idea that Billy Sol Estes was involved until they investigated a local newspaper story that farmers were buying nonexistent tanks. The truth of the matter was that Superior and Lubbock were not manufacturing any of the tanks and that Estes was receiving 90% of the proceeds from the discount sales of commercial paper. Moreover, the farmers were not intending to commit any of their own resources to the purchase of tanks but thought they were helping Estes buy them and that they would be fully reimbursed by Estes.
Between 1959 and 1961, Superior and Lubbock sold approximately 300 promissory notes and mortgages to thirteen different finance companies. The instruments of indebtedness were obtained from 70 different farmers. Billy Sol Estes received from Superior and Lubbock the sums of $215,137.56 in 1959, $4,197,919.88 in 1960, and $10,959,991.28 in 1961. He used these large sums of cash to expand his operations though part of the money necessarily had to be remitted to the farmers under his agreements with them. He made so-called rental payments of $50,591.62 in 1959, $544,584.66 in 1960, and $3,057,314.26 in 1961, which sums the Government has treated as necessary expenses of a swindle. Accordingly, after subtracting these necessary expenses, Estes received the net sums of $164,545.94 in 1959, $3,653,335.22 in 1960, and $7,902,677.02 in 1961, which sums the Government says he should have reported as income for the calendar years in question. He did not report them and the Trustee argues that he was not required to do so because they represented the proceeds from loans.
Estes made regular payments to the farmers up to the time of bankruptcy, but no matter how sincere he may have been in his intention to keep up the payments, it cannot be denied that he was swindling the finance companies out of large sums of money. The finance companies were unaware that Estes was involved in the tank sales and that the tanks were nonexistent. More importantly, the companies had no intention of extending unlimited credit to him and did not realize that this was the effect of their business with Superior and Lubbock. They had no agreement with Estes concerning the terms of repayment and no collateral from him. Knowing that he did not have this kind of credit, Estes used the farmers and manufacturers as front men and paid them each a fee. What he could not obtain through honest, arms' length loans from the finance companies, he obtained through his elaborate scheme, the total for a three-year period being in exceess of $15,000,000. In the same period, the finance companies got back less than $4,000,000 by way of Estes' payments to the farmers. The question is whether the net sum received in these years, which exceeded $11,000,000, should have been reported as income.
For purposes of this case we need describe only the broad outlines of the relevant tax principles. An economic gain is includable in gross income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it; and it is well settled that unlawful, as well as lawful, gains are comprehended within the term "gross income." Rutkin v. United States, 1952, 343 U.S. 130, 72 S.Ct. 571, 96 L.Ed. 833. Thus, income derived from extortion, embezzlement, or swindling is includable in gross income and must be reported by the recipient. James v. United States, 1961, 366 U.S. 213, 81 S.Ct. 1052, 6 L.Ed.2d 246; Rutkin v. United States, supra; United States v. Rochelle, 5th Cir. 1967, 384 F.2d 748; Cohen v. United States, 9th Cir. 1962, 297 F.2d 760; Briggs v. United States, 4th Cir. 1954, 214 F.2d 699; In re Parr, S.D.Tex.1962, 205 F.Supp. 492. In this case, the unlawful activity is most accurately described as swindling; that is, the obtaining of money through some false pretense or device. Rollinger v. United States, 8th Cir. 1953, 208 F.2d 109, 112. As opposed to unlawful economic gains which must be reported as...
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