Hornberger v. CIR

• Decision Date: 15 May 1961
• Docket Number: No. 18692.,18692.
• Citation: 289 F.2d 602
• Parties: Joseph HORNBERGER, Jr., and wife Rose Hornberger, Estate of Robert E. Hornberger, Deceased, Dorothy A. Hornberger, Independent Executrix, and Dorothy A. Hornberger, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

289 F.2d 602 (1961)

Joseph HORNBERGER, Jr., and wife Rose Hornberger, Estate of Robert E. Hornberger, Deceased, Dorothy A. Hornberger, Independent Executrix, and Dorothy A. Hornberger, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 18692.

United States Court of Appeals Fifth Circuit.

May 15, 1961.

Clarence E. Kendall, William O. Taylor, Cecil N. Cook, Austin C. Wilson, Houston, Tex., Royal J. Voegeli, Washington, D. C., Fulbright, Crooker, Freeman, Bates & Jaworski, Houston, Tex., Butler, Binion, Rice & Cook, Houston, Tex., of counsel, for petitioners.

Harold M. Seidel, Meyer Rothwacks, Lee A. Jackson, Dept. of Justice, Washington, D. C., Abbott M. Sellers, Act. Asst. Atty. Gen., Louis F. Oberdorfer, Asst. Atty. Gen., Dept. of Justice, Hart H. Spiegel, Chief Counsel, I.R.S., John M. Morawski, Sp. Atty., I.R.S., Washington, D. C., for respondent.

Before TUTTLE, Chief Judge, and HUTCHESON and BROWN, Circuit Judges.

TUTTLE, Chief Judge.

This is a petition to review a decision of the Tax Court of the United States denying the petitioners the benefits of the installment sales provisions of Section 44 of the Internal Revenue Code of 1939.¹ The facts were all stipulated and found by the Tax Court. As so found they are:

Joseph and Robert Hornberger, hereafter called petitioners, are brothers.

By gifts from their father and uncle each of them acquired an undivided one-half interest in land hereinafter called the "Flanders Property." At all times material to this proceeding each of the petitioners owned his respective one-half interest in the Flanders property for more than six months and each of the petitioners' basis in his interest in said property was $40 per acre, or a total of $21,992 for his undivided one-half interest.

On November 18, 1953, petitioners sold their interest in the Flanders property to Hornberger Brothers Properties, Inc., a corporation organized under the laws of the State of Texas of which each of the petitioners owned 37½% of the capital stock, or a total of 75% thereof. The total purchase price to the corporation of the Flanders property was $1,099,600, being $1,000 an acre for 1,099.6 acres. Of the purchase price $7,500 was paid in cash and each of the petitioners received $3,750 as his one-half thereof. The remaining portion of the purchase price was evidenced by the two identical 3% interest bearing promissory notes, each in the principal amount of $546,050. One of such notes was payable to Joseph Hornberger, Jr., and the other was payable to Robert E. Hornberger. Each note was payable in installments on or before 13 years from date. The fair market value of each note was approximately its face value. No payments were made on either note during the year 1953 and both of said notes are now only partially repaid.

Prior to the sale of the Flanders property to the corporation, petitioners consulted with counsel as to whether income tax could be deferred, with respect to that part of the sales price represented by the corporation's notes, until such time as payments were made on such notes. Counsel advised petitioners that the gain from the sale could be reported on the installment basis as provided in Section 44(b) of the Internal Revenue Code of 1939. Based upon such advice, petitioners made the sale of Flanders property to the corporation. Petitioner Joseph Hornberger and wife employed a firm of certified public accountants to prepare their tax return for the year 1953 and such firm was directed to treat the gain on sale of Joseph Hornberger, Jr.'s interest in the Flanders property on the installment basis. Due to an error by the accounting firm, their return did not comply with rules set forth in the Respondent's Regulations for electing the installment method of reporting gain from the sale of realty. Petitioner Robert E. Hornberger discussed with his brother, Joseph, the manner in which the sale had been treated by the accountants in the preparation of latter's return and, based on such treatment by the accountants, petitioner Robert E. Hornberger and wife also filed their return in the same manner.

Although the memorandum opinion of the Tax Court did not mention it, the critical fact touching on the failure to "comply with the rules set forth in Respondent's Regulations" is that the income tax returns of neither brother for 1953 reported the sale at all; but Joseph, whose returns were handled by the accounting firm referred to, did file an amended return prior to the filing date for the 1954 return, reporting the sales as an installment sale. The government does not press the claim that the two brothers should be treated differently.

The issue presented on this record is whether in order to avail himself of the installment sales provisions of the 1939 Code the taxpayer must, without fail, and regardless of good faith and in complete absence of negligence on his part, take the affirmative step of claiming the benefit of the section in his original return filed for the year of the sale. We conclude that the statute has no such requirement and none can be validly imposed by the Commissioner.

It may be helpful to point out two situations that are not involved in this court. We are not dealing with a statute which in express terms requires an election by the taxpayer at a certain time or in a certain manner, or that in fact even mentions an "election" at all. Thus, such cases as Louis Pizitz Dry Goods Co. v. Deal, 5 Cir., 208 F.2d 724, and R. H. Macy & Co. v. United States, 2 Cir., 255 F.2d 884,² cited by the respondent here, are not persuasive. We are not dealing with a case where a taxpayer has made an election by reporting the sale on a deferred payment basis and subsequently seeks to change his position, as was the situation in Pacific National Company v. Welch, 304 U.S. 191, 58 S.Ct. 857, 82 L. Ed. 1282, and in Jacobs v. Commissioner, 9 Cir., 224 F.2d 412, strongly relied on by the respondent here.

It is, of course, necessary for the taxpayer to report his income for tax purposes. Normally, this obligation is met by taxpayers who report all transactions that result in taxable income. To the extent that one fails to do this he is immediately faced with the obligation of accounting for such failure. If due to negligence or fraud moderate to heavy sanctions are imposed. If resulting from honest error, as here, all that is required is that the omission be rectified, if not voluntarily by the taxpayer, then upon deficiency notice from the Commissioner. Here the government seeks to invoke a heavy sanction in the case of a non-negligent good faith omission that the statute does not expressly authorize. Nor does the regulation promulgated by the Commissioner under authority of the statute authorize it. The regulations, so far as here pertinent, provided only as follows:

"(a) * * * the vendor may return as income from such transactions in any taxable

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