Greenspon v. Commissioner of Internal Revenue

• Decision Date: 02 February 1956
• Docket Number: No. 15391-15394.,15391-15394.
• Parties: Louis GREENSPON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent (three cases). Anna GREENSPON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

229 F.2d 947 (1956)

Louis GREENSPON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent (three cases).

Anna GREENSPON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 15391-15394.

United States Court of Appeals Eighth Circuit.

February 2, 1956.

Max Bloomstein, Jr., Chicago, Ill. (Edmond S. Sager and Johnston, Thompson, Raymond & Mayer, Chicago, Ill., were with him on the brief), for petitioners.

Melva M. Graney, Atty., Dept. of Justice (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack, Atty., Dept. of Justice, were with her on the brief), for respondent.

Before SANBORN, JOHNSEN, and VAN OOSTERHOUT, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

The four cases involved, consolidated for trial in the Tax Court and here, are before us on petitions for review of the decisions of the Tax Court (opinion reported at 23 T.C. 138¹). This court has jurisdiction to consider said petitions under section 7482 of the Internal Revenue Code of 1954, 26 U.S.C. § 7482.

These appeals arise from the decisions of the Tax Court denying the taxpayers' capital gains treatment on the profits realized upon the liquidation of industrial pipe, and rejecting claims of taxpayers for deduction of certain promotional expenses. These issues are labeled by the parties as "Capital Gains Issue" and "Promotional Expense Issue." The parties in their briefs consolidate their arguments upon all of these appeals, rather than argue the cases separately, stating that this method of presentation will facilitate the disposition of the questions before the court. We shall follow this pattern in our discussion.

The decisions of the Tax Court are to be reviewed in the same manner as the decisions of the district courts in civil actions tried without a jury. § 7482, Internal Revenue Code of 1954; Rule 52 (a), Federal Rules of Civil Procedure, 28 U.S.C. Findings of fact by the Tax Court are not binding upon this court if there is no substantial evidence to sustain them, if they are against the clear weight of the evidence, or if they are induced by an erroneous view of the law. United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L. Ed. 746; Baumgartner v. United States, 322 U.S. 665, 64 S.Ct. 1240, 88 L.Ed. 1525; Marcella v. Commissioner, 8 Cir., 222 F.2d 878; Pendergrass v. New York Life Ins. Co., 8 Cir., 181 F.2d 136; Smith v. Dunn, 5 Cir., 224 F.2d 353; Galena Oaks Corp. v. Scofield, 5 Cir., 218 F.2d 217.

We now look to see whether there is sufficient evidence to sustain the Tax Court's findings, and whether the law was properly applied to the established facts.

Capital Gains Issue

The petitioners, Louis and Anna Greenspon, who will also be referred to jointly herein as taxpayers, contend that the Tax Court erred in its determination that the profit derived from the sale of pipe, which had been distributed in kind to taxpayers on complete liquidation of a corporation, was taxable as ordinary income rather than as capital gain. The pertinent facts on this issue will be reviewed.

Louis Greenspon and his sister-in-law, Anna Greenspon, each owned 50 per cent of the stock of the Joseph Greenspon's Son Pipe Corporation, hereinafter called the old corporation, a Missouri corporation organized in 1932, which carried on the business of buying industrial pipe, reconditioning and fabricating same, and selling the pipe. Louis Greenspon was president and manager and principal salesman of the old corporation. Serious discord developed between Louis and Anna, which resulted in their decision to liquidate the old corporation at the end of the year 1946. There is substantial evidence that the old corporation was dissolved because of the intense animosity which had arisen between the taxpayers. Since the good faith of the dissolution is not questioned by either the Commissioner or the Tax Court, no purpose will be served in going further into the nature of the taxpayers' difficulties between themselves. The old corporation was dissolved on December 31, 1946, and the remaining assets were then distributed to the taxpayers in kind. Included in the assets turned over to the taxpayers was a stock of pipe. The issue of ordinary income or capital gain arises with reference to the profit realized in the sale of this pipe. No dispute as to the valuation placed upon this pipe at the time of liquidation is involved. The pipe was largely used pipe. It was in odd sizes and had thin walls. Not more than three per cent of it conformed to standard specifications. Included also were odds and ends that had accumulated over many years. The pipe acquired in liquidation was sold under the name of Louis and Anna Greenspon, Liquidating Agents. The sales were made by Louis, the purchasers being the end-users, many of whom had done previous business with the old corporation. All the pipe involved was either on hand or had been ordered before the liquidation, except for one purchase of $75 to fill out an order. The Tax Court attaches no significance to this small purchase. The Tax Court in its findings of fact states:

"To obtain the best price for the pipe received from the dissolved corporation, it was necessary to sell it to the company which would actually use it, the so-called `end-user.\' If the pipe had been dumped in one lot on the market, it would have been classified generally as junk and would have brought very low prices. Consequently, disposition of the pipe was made in a series of sales extending from the beginning of 1947 through the end of 1948. One hundred and six sales were made during the first six months of 1947, 21 sales during the last six months of 1947, and 11 sales during 1948."

The liquidators maintained neither plant nor office after June 1947. The number of employees was gradually reduced from 26 in December 1946 to none in July 1947, the necessary labor of loading orders being performed by contract. No contention is made that the taxpayers did not liquidate the pipe as expeditiously as possible under the circumstances. The sales made during the first six months of 1947 totaled $399,990.98, on which short term capital gains were reported which carried the same tax liability as ordinary income. The sales for the last half of 1947 amounting to $179,710.72 and for 1948 amounting to $135,620.71 were accounted for by the taxpayers on the basis of long term capital gains. The liquidation of the pipe was completed in 1948.

Early in 1947 Louis Greenspon formed Louis Greenspon, Inc., of which he owned 99.6 per cent of the stock. About the same time Anna Greenspon's husband organized a new corporation. Each of such new corporations was engaged in the same line of business as the old corporation, but neither corporation owned any of the pipe involved in these cases.

Section 117(a) (1) (A) of the Internal Revenue Code of 1939, 26 U.S.C. § 117(a) (1) (A) provides:

"§ 117. Capital gains and losses

"(a) Definitions. As used in this chapter —

"(1) Capital assets. The term `capital assets\' means property held by the taxpayer (whether or not connected with his trade or business) but does not include —

"(A) 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".

The decisive question upon the capital gains issue is whether the liquidation was handled in such a way as to exclude it from the benefit of the capital gains treatment under the exclusionary provisions of section 117(a) (1) (A), hereinabove. The Tax Court thus states the controlling issue:

"Therefore, while it may be admitted that the purpose of the partnership `Louis and Anna\' was to liquidate the pipe which had been distributed to the partners when their corporation was dissolved, we are nevertheless required to examine the manner in which they disposed of the pipe to determine whether the operation constituted a trade or business, and whether the pipe was held for sale to customers in the ordinary course of a trade or business."

The conclusion of the Tax Court upon this issue is:

"In summary, when all the facts are considered, we think they show that the partnership `Louis and Anna Greenspon\' was essentially a business enterprise and that the pipe sold by the partnership was held for sale in the ordinary course of the partnership business. The details stressed by the petitioners such as the lack of purchases and the gradual tapering off of the number of employees and the sales, while important considerations to be taken into account, are not sufficient to change our opinion. When the whole record is viewed, we think it is inescapable that the partnership was as much a business as was the corporation it succeeded and the proceeds from the sale of pipe by the partnership were as much the proceeds from the sale of stock in trade as were the sales of pipe by the corporation."

The Tax Court found that the liquidating agents formed a partnership to dispose of the pipe. It relies principally upon the fact that returns for 1947 and 1948 were made out on Form 1065 labeled "Partnership Return." However, on the return, under the name of organization, appears "Louis and Anna Greenspon as Liquidating Agents." Under 26 U.S.C. § 3797, the term "partnership" is given a broad definition, and includes syndicate, group, pool, joint venture, and some other unincorporated organizations. The fact that the liquidating agents filed the returns on the partnership form is of little significance. Many organizations that do not constitute a partnership make use of the so-called partnership return. A partnership is a relationship arising out of a partnership contract. A necessary element of such a contract is the intent of the parties to create the partnership relationship. In 68 C.J.S., Partnership, § 10, it is stated:

"The court, in determining

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