Galena Oaks Corporation v. Scofield

• Decision Date: 29 December 1954
• Docket Number: No. 14788.,14788.
• Parties: GALENA OAKS CORPORATION v. Frank SCOFIELD, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Fifth Circuit

218 F.2d 217 (1954)

GALENA OAKS CORPORATION v. Frank SCOFIELD, Collector of Internal Revenue.

No. 14788.

United States Court of Appeals, Fifth Circuit.

December 29, 1954.

Wright Matthews, Leachman, Matthews & Gardere, Dallas, Tex., for appellant.

Grant W. Wiprud, Atty. Dept. of Justice, Washington, D. C., H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst. to the Atty. Gen., Brian S. Odem, U. S. Atty., Houston, Tex., Malcolm R. Wilkey, U. S. Atty., Houston, Tex., Charles L. Short, Asst. U. S. Atty., Seguin, Tex., Walter Akerman, Jr., Sp. Assts. to the Atty. Gen., for appellee.

Before HUTCHESON, Chief Judge, and BORAH and RIVES, Circuit Judges.

RIVES, Circuit Judge.

The question in this case is whether the gain derived from the sale of 102 houses over the period from June, 1946, through August, 1947, should be accorded capital gains treatment under the provision of Section 117(j) of the Internal Revenue Code, reading in pertinent part:

"(1) Definition of property used in the trade or business. For the purposes of this subsection, 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 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. * * *" 26 U.S.C.A. § 117(j) (1).

More narrowly the question may be stated as whether said houses constituted "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" within the meaning of said subsection.

The district court in an able opinion, reported in 116 F.Supp. 333, answered the last stated question in the affirmative, and held that the gain was taxable as ordinary income. Most of the evidentiary facts are set forth in the district court's opinion and need not be repeated here. After that opinion was rendered, the district court, upon the appellant's request, made certain additional findings of fact quoted in the margin.¹ None of the findings of evidentiary or primary facts are challenged by the appellant, but only the ultimate finding by the district court.

Appellee relies strongly on what we said when deciding a similar case in Lobello v. Dunlap, 5 Cir., 210 F.2d 465, 468: "Since the question is one of ultimate fact, the judgment of the district court should be affirmed unless found to be clearly erroneous." Several of our earlier cases were cited in support of the assertion that the question is one of ultimate fact.

It is also true, however, that the burden of showing a finding of fact "clearly erroneous" is not a measure of exact and uniform weight. Under the circumstances of each case, it depends on whether "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 Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746. The burden is especially strong when the trial court has had the opportunity, not possessed by the appellate court, to see and hear the witnesses, to observe their demeanor on the stand, and thereby the better to judge of their credibility. Grace Bros. v. C. I. R., 9 Cir., 173 F.2d 170, 173, 174. The burden is lighter, much lighter, when we consider logical inferences drawn from undisputed facts or from documents, though the "clearly erroneous" rule is still applicable. United States v. United States Gypsum, supra; Benton v. Commissioner of Internal Revenue, 5 Cir., 197 F.2d 745, 753. Insofar, however, as the so-called "ultimate fact" is simply the result reached by processes of legal reasoning from, or the interpretation of the legal significance of, the evidentiary facts, it is "subject to review free of the restraining impact of the so-called `clearly erroneous' rule." Lehmann v. Acheson, 3 Cir., 206 F.2d 592, 594. As succinctly stated by Professor Moore, "Findings of fact that are induced by an erroneous view of the law are not binding. Nor are findings that combine both fact and law, when there is error as to the law." 5 Moore's Federal Practice, 2d ed., Sec. 52.03(3), p. 2631. The language of Mr. Justice Frankfurter, speaking for the Court, in Baumgartner v. United States, 322 U.S. 665, 670, 671, 64 S.Ct. 1240, 1243, 88 L. Ed. 1525, is helpful:

"The conclusiveness of a `finding of fact\' depends on the nature of the materials on which the finding is based. The finding even of a so-called `subsidiary fact\' may be a more or less difficult process varying according to the simplicity of subtlety of the type of `fact\' in controversy. Finding so-called ultimate `facts\' more clearly implies the application of standards of law. And so the `finding of fact\' even if made by two courts may go beyond the determination that should not be set aside here. Though labeled `finding of fact\', it may involve the very basis on which judgment of fallible evidence is to be made. Thus, the conclusion that may appropriately be drawn from the whole mass of evidence is not always the ascertainment of the kind of `fact\' that precludes consideration by this Court."

The district court observed with reference to the ultimate question, that "the determination of this fact issue is not free of doubt." 116 F.Supp. at page 334. Some of the many...