Dessauer v. CIR, 20672.
| Decision Date | 12 October 1971 |
| Docket Number | No. 20672.,20672. |
| Citation | 449 F.2d 562 |
| Parties | Ralph DESSAUER and Rebecca Dessauer, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Thomas H. Krise, Indianapolis, Ind., for petitioners-appellants.
David English Carmack, Atty., Tax Div., Dept. of Justice, Washington, D. C., Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Harry Baum, Attys., Tax Division, Dept. of Justice, Washington, D. C., for respondent-appellee.
Before MATTHES, Chief Judge, GIBSON, Circuit Judge, and HENLEY, District Judge.*
This is a petition to review a determination of the Tax Court fixing the federal income tax liabilities of petitioner, Ralph Dessauer of Springfield, Missouri, for calendar years 1964 and 1965. Dessauer v. Commissioner of Internal Revenue, 54 T.C. 327 (1970). Petitioner's wife who was a party to the returns filed by petitioner is a nominal party to this action, but for practical purposes her presence in the case can be ignored. Most of the facts in the case have been stipulated.
During 1964 and 1965 taxpayer owned 70 percent of the stock in Huddleston Brothers Sales, Inc. and all of the stock in Washington Trailer Sales, Inc. Both corporations were engaged in the sale of mobile homes and many of their sales were made on installment credit. Most of the homes were sold for basic prices of between $3,500 and $4,000, and most of the credit sales were financed over a period of seven years with the buyers making monthly installment payments. Both of the corporations were small business corporations falling within the terms of Subchapter S of the provisions of the Internal Revenue Code relating to income taxes, 26 U.S.C.A. § 1371 et seq., and as a consequence the undistributed taxable income of the corporations was includible in the gross incomes of the individual shareholders, 26 U.S.C.A. § 1373.
Credit purchasers of homes from the corporations executed in favor of the corporations conditional sales contracts dischargeable by monthly payments extending usually over an 84-month period. The face amount of each contract reflected the cash price of the home less down payment, plus a finance charge, and a charge for insurance. The contracts revealed that they would be transferred to a finance company.
As mobile homes were sold, the selling corporations executed notes in favor of the finance company secured by pledges of the conditional sale contracts that had been executed by the home buyers. As conditional security the finance company had a dealer's reserve contract with the selling corporations, and all of the notes executed by the selling corporations were personally guaranteed by the taxpayer and his wife.
The face amounts of the notes executed by the corporations to the finance company were equal to the outstanding time balances on the respective conditional sales contracts. The finance company advanced cash to the selling corporations in amounts less than the face amounts of the notes. In each instance the difference was the amount of the finance charge made by the lending corporation to the selling corporation.
There was no relationship between the finance company and the selling corporations, and all of the dealings between them were at arm's length.
Upon audit of the returns of the selling corporations for fiscal 1964 and fiscal 1965 the Commissioner determined that the transactions between the selling corporations and the finance company were "dispositions" of installment paper with respect to which gains or losses had to be recognized as provided by section 453(d) of the Internal Revenue Code, 26 U.S.C.A. § 453(d). The result of that determination was to increase the undistributed income of the selling corporations for each of the years in question, and that increase, in turn, increased the taxable income of the taxpayer for both years. Deficiency assessments against him were made and were duly challenged by him in the Tax Court.
The Tax Court upheld the Commissioner, and to the extent that the determination of that Court involves findings of fact we are bound by those findings unless they are "clearly erroneous" as that term is now conventionally understood. 26 U.S.C.A. § 7482(a).
Insofar as here pertinent, section 453(d) (1) of the Code provides in substance that if an installment obligation is sold "or otherwise disposed of", gain or loss shall result to the extent of the difference between the "basis of the obligation" and:
Section 453(d) defines "Basis of obligation" as being "the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full."
The taxpayer conceded in the Tax Court and concedes here that the dealings of the selling corporations with the finance company were dispositions of the conditional sales contracts having tax consequences as measured by section 453(d) of the Code, and the taxpayer does not quarrel with the "bases" determined by the Commissioner under section 453(d) (2), which bases are the subtrahends that must be employed in determining whether and to what extent the dispositions of the contracts resulted in gains or losses.
In the Tax Court both sides seem to have proceeded on the theory that the minuends that had to be used in determining the gains or losses from the dispositions were the fair market values of the contracts. In other words, both sides apparently proceeded on the theory that these particular dispositions fell within section 453(d) (1) (B) rather than within section 453(d) (1) (A). The dispute between the parties was as to what the contracts were worth on the market, that is to say, what would a reasonable and willing seller have demanded for them and what would a reasonable and willing buyer have been willing to pay for them.
The Commissioner determined that the market values of the contracts were properly measured by the amounts of cash actually advanced to the selling corporations by the finance company, and in that determination he was upheld by the Tax Court. The taxpayer contended before the Tax Court and contends here that the market values of the contracts were actually substantially less than the amounts of cash advanced on them by the finance company.
In support of his position the taxpayer called two expert witnesses who testified before the Tax Court that the principal risk taken by a buyer of installment paper covering mobile homes is the expense of repossession; that the taxpayer sold many homes to individuals who were marginal credit risks, and that his repossession experience was above the average for the mobile home industry. Both experts were of the opinion that in order to determine the reasonable market values of the contracts the face amounts thereof or the amounts due thereon would have to be discounted heavily. One expert fixed the proper discount rate at 20 percent; the other thought that 25 percent would be correct.
In its opinion the Tax Court...
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