Byram v. United States

• Citation: 705 F.2d 1418
• Decision Date: 31 May 1983
• Docket Number: No. 81-1582.,81-1582.
• Parties: John D. and Sally A. BYRAM, Plaintiffs-Appellees Cross-Appellants, v. UNITED STATES of America, Defendant-Appellant Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

705 F.2d 1418

John D. and Sally A. BYRAM, Plaintiffs-Appellees Cross-Appellants, v. UNITED STATES of America, Defendant-Appellant Cross-Appellee.

No. 81-1582.

United States Court of Appeals, Fifth Circuit.

May 31, 1983.

Robert D. Martinez, Atty., Tax Div., Dept. of Justice, Dallas, Tex., Edward C. Prado, U.S. Atty., Hugh P. Shovlin, Asst. U.S. Atty., San Antonio, Tex., Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Chief, Appellate Section, Richard Farber, Frank P. Cihlar, Gary R. Allen, Attys., Tax Div., Dept. of Justice, Washington, D.C., for the U.S.

Clark, Thomas, Winters & Shapiro, Michael L. Cook, Donald L. Reese, Austin, Tex., for John D. and Sally Byram.

Before WISDOM, GEE and REAVLEY, Circuit Judges.

GEE, Circuit Judge:

"If a client asks you in any but an extreme case whether, in your opinion, his sale will result in capital gain, your answer should probably be, `I don't know, and no one else in town can tell you.'"¹

Sadly, the above wry comment on federal taxation of real estate transfers has, in the twenty-five years or so since it was penned, passed from the status of half-serious aside to that of hackneyed truism. Hackneyed or not, it is the primary attribute of truisms to be true, and this one is: in that field of the law—real property tenure—where the stability of rule and precedent has been exalted above all others, it seems ironic that one of its attributes, the tax incident upon disposition of such property, should be one of the most uncertain in the entire field of litigation. But so it is, and we are called on again today to decide a close case in which almost a million dollars in claimed refunds are at stake. Doing so requires us to survey the development of this law in our circuit and to consider what application here, if any, the recent decision in Pullman-Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982), is to find.

FACTS

The trial court, sitting without a jury in this taxpayer's suit for refund, found the following facts:

During 1973, John D. Byram, the taxpayer, sold seven pieces of real property.² Mr. Byram was not a licensed real estate broker, was not associated with a real estate company which advertised itself, and did not maintain a separate real estate office. He advertised none of the seven properties for sale, nor did he list any of them with real estate brokers. To the contrary, all of the transactions were initiated either by the purchaser or by someone acting in the purchaser's behalf.

None of the properties sold was platted or subdivided. Byram devoted minimal time and effort to the sales in question, occupying himself chiefly with his rental properties. Byram's income for 1972 and 1973 included substantial amounts of rental income and interest income.

The district court's findings do not reflect the following additional facts, which apparently are not disputed by the parties. From 1971 through 1973, Byram sold 22 parcels of real property for a total gross return of over $9 million and a net profit of approximately $3.4 million. The seven properties at issue in this case sold for approximately $6.6 million gross, resulting in a profit of approximately $2.5 million. Six of the seven properties were held by Byram for periods ranging from six to nine months, intervals just exceeding the then-applicable holding periods for long-term capital gains. The seventh property had been held for two years and six months.

Although, as noted above, Mr. Byram received substantial rent and interest income in 1973, nevertheless his rental activities for that year resulted in a net tax loss of approximately $186,000. He received rental income from only one of the seven properties sold in 1973. The record does not reflect the exact relative amounts of income attributable to the sales in question and Byram's other activities.

Certain facts are disputed by the parties. The government asserts in its brief that Byram had entered into contracts to sell at least three of the seven properties in issue before he actually acquired them. Byram first responds that the record reflects only two such instances, not three; and at oral argument the government appeared to concede the point. As to those two transactions, Byram asserts that he acquired the right to purchase the properties by executing a contract before he entered into a contract to sell them; it was only closing on the purchases that postdated his contracts to sell. Finally, the government asserts, and Byram denies, that by virtue of Byram's civic activities in Austin, Texas, Byram's business of selling real estate was well-known in the community.

Based on its subsidiary findings indicated, the district court made ultimate findings that Byram held each of the seven properties for investment purposes and not primarily for sale to customers in the ordinary course of his trade or business. Judgment was therefore entered granting Byram the capital gains treatment that he sought. The government brought this appeal.

In a 1972 transaction unrelated to his real estate sales, Byram sought construction financing for an apartment and office building. Because there was a possibility that the interest rate required by the lenders would violate Texas usury laws if Byram borrowed the money individually, he formed a wholly-owned corporation, Byram Properties, Inc. (the "corporation"), to obtain financing by executing certain notes. This was the corporation's only function. The corporation was the principal obligor; Byram personally guaranteed payment of the notes and in fact made the payments. Byram deducted the interest component of these payments on his 1972 and 1973 tax returns. The Internal Revenue Service disallowed the deductions, the district court upheld its action, and Byram cross-appealed.

I.

Profits derived from the sale of "capital assets," known as "capital gains," are entitled to favorable tax treatment under the Internal Revenue Code (the "Code"). See 26 U.S.C. §§ 1201, 1202. The term "capital asset" is defined in relevant part as "property held by the taxpayer," not including property held "primarily for sale to customers in the ordinary course of the taxpayer's trade or business." Id., § 1221. The district court found that Byram "was not engaged in the real estate business" during the relevant years and that each of the seven properties in issue was held "for investment purposes and not primarily for sale to customers in the ordinary course of Byram's trade or business." Accordingly, the district court held that Byram was entitled to treat the profits from his 1973 sales as capital gains and ordered an appropriate refund. Our first task is to decide the correct standard by which to review the district court's principal finding³ that Byram's holding purpose was for investment rather than for sale. The choice of a standard will determine the outcome of many cases; if the issue is treated as factual, the district court's decision is final unless clearly erroneous, F.R.C.P. 52(a), but if a question of law is presented, we may decide it de novo.

The question whether the characterization of property as "primarily held for sale to customers in the ordinary course of a taxpayer's trade or business" is an issue of fact or one of law has engendered tremendous controversy and conflict both in this⁴ and in other⁵ circuits. Recognizing the conflict in our own cases, a panel recently attempted to resolve it by breaking the statutory test down into its component parts, see note 3, supra, some of which we held "are predominantly legal conclusions or are `mixed questions of fact and law,' whereas others are essentially questions of fact." Suburban Realty, 615 F.2d at 180 (footnote omitted). As we shall see, it must now be admitted that, because we were forced to struggle with this circuit's long-standing distinction between "subsidiary facts" and "ultimate facts," this attempt to clarify the law was not entirely successful.

The ultimate fact doctrine, first embraced by our court in Galena Oaks Corp. v. Scofield, 218 F.2d 217 (5th Cir.1954), posits that review of ultimate facts is not constrained by the clearly erroneous rule since though factual in nature, these issues are also the ultimate ones for resolution in a case and must be determined by a process of legal reasoning from subsidiary facts. Id. at 219-20. Accordingly, in Suburban Realty we observed that a taxpayer's holding purpose is "primarily factual," but that it is not a "pure" question of fact. 615 F.2d at 180-81 and n. 27. Though we stated that a lower court's finding of holding purpose must be followed unless clearly erroneous, id. at 185 n. 41, we also maintained that our review of the "ultimate conclusion" in such cases is plenary. Id. at 181 n. 28. Thus, although Suburban Realty purported to clarify our role in capital gains cases, the actual dynamics of appellate review remained unclear.

Fortunately, it is unnecessary once again to traverse the conceptual thicket of ultimate and subsidiary facts so carefully husbanded by this court through the years. The Supreme Court has levelled it. Pullman-Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982).

In Swint, the Court reviewed a decision of this court holding that by setting up and perpetuating a particular seniority system, an employer and two unions had discriminated against black employees in violation of Title VII of the Civil Rights Act. 42 U.S.C. § 2000e-2(h). In order to establish discrimination in the operation of a seniority system, it is necessary to prove discriminatory intent. Id.; Swint, 456 U.S. at 275-277, 102 S.Ct. at 1783-1784, 72 L.Ed.2d at 72-73. Analyzing the issue in the manner suggested by this court,⁶ the district court found that the seniority system did not result from an intention to discriminate. Treating the issue of discriminatory purpose as one of ultimate fact, this court independently reviewed the record and made its own finding of...