Irwin v. U.S., 75-3197

• Decision Date: 26 August 1977
• Docket Number: No. 75-3197,75-3197
• Parties: 77-2 USTC P 9609 Ellis C. IRWIN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 249

558 F.2d 249

77-2 USTC P 9609

Ellis C. IRWIN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 75-3197.

United States Court of Appeals, Fifth Circuit.

Aug. 26, 1977.

Gerald J. Gallinghouse, U.S. Atty., New Orleans, La., Scott P. Crampton, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Washington, D.C., Gilbert E. Andrews, Jr., Acting Chief, Appellate Sec., Wm. A. Friedlander, George G. Wolf, William S. Estabrook, III, Atty., Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Harry Nowalsky, John D. Lambert, New Orleans, La., for plaintiff-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before MORGAN and RONEY, Circuit Judges, and KING, District Judge. ^*

MORGAN, Circuit Judge:

The question for decision in this case is whether the district court erred in granting taxpayer's motion for summary judgment in taxpayer's suit for refund of taxes paid under protest. The specific issue on appeal is whether material facts are in genuine dispute thereby rendering summary judgment improper. Because the case involves a question of the state of mind of the taxpayer, material facts do remain in dispute in light of the evidence, and therefore we reverse and remand for trial.

Taxpayer is an attorney and notary public of long standing. In 1963, taxpayer and others formed the law partnership Irwin, Seely and Nelkin. In 1964, taxpayer purchased approximately 14% of the capital stock of Hygrade Investment Inc., a recently "activated" personal finance corporation. Concurrently, taxpayer's partners Nelkin and Seely each purchased approximately 11% of Hygrade. From its inception, Hygrade's legal and notatorial requirements were fulfilled by Irwin, Seely and Nelkin, until the law firm's dissolution in 1965. On May 25, 1965, taxpayer purchased Seely's interest and, as the largest shareholder, successfully had himself installed as president of Hygrade. In 1966, however, Hygrade was liquidated pursuant to judicial decree.

The stock of the liquidated company being totally worthless, taxpayer reported a loss in toto on the stock in his 1966 income tax return. Instead of deducting the loss as a long term capital one, taxpayer treated the loss as an ordinary business loss pursuant to § 165(a), Internal Revenue Code of 1954, contending that the stock was purchased in order to secure the legal work of Hygrade. Additionally, taxpayer applied for loss-carryback refunds generated by the stock loss. Although the claimed refunds were paid, on audit the Commissioner determined that the loss was capital in nature and assessed deficiencies. After timely payment of deficiencies and disallowance of refund claims, taxpayer commenced the suit in the district court.

After obtaining depositions of his former law partners, taxpayer filed for summary judgment. The government obtained a stay on the motion for the purpose of completing discovery. The district court then heard argument on the issue of summary judgment and, on the basis of documents submitted to it, granted taxpayer's motion. Refunds were accordingly awarded in the amount of $10,706.14 and the government appealed that judgment to this court.

Summary judgment, as provided by Rule 56(c), is appropriate only if it appears from the pleadings and supporting documentation that (1) no genuine dispute as to material facts exists and (2) such facts would entitle the moving party to judgment as a matter of law. In order to determine whether summary judgment is proper, it is first necessary to analyze the legal result sought to be compelled. Only by analyzing the legal result can we determine what facts must be established and whether those facts are in genuine dispute.

Taxpayer seeks to deduct the loss on the Hygrade stock as a business loss pursuant to § 165(a), Internal Revenue Code of 1954. Capital stock, however, is normally a capital asset, and any loss thereon is normally a capital loss. Taxpayer correctly contends that what normally is a capital asset, may, under certain circumstances be treated as an ordinary asset and generate ordinary loss. In the seminal case in this area, Corn Products v. Commissioner of Interval Revenue, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955), the Supreme Court held that corn futures, held for the purpose of securing a steady supply of grain for production, were not capital in nature, being held for a valid business purpose. In Schlumberger Technology Corporation v. United States, 443 F.2d 1115 (5th Cir. 1971), this court applied the Corn Products rationale to allow an ordinary loss generated by corporate stock acquired for the purpose of obtaining technological information necessary to the taxpayer's business. In Schlumberger, we adopted the following test that rests heavily on the intent of the taxpayer and the factual background of the transaction, (quoting from Booth Newspapers v. United States, 303 F.2d 916, 921, 157 Ct.Cl. 886 (1962) ):

'(I)f securities are purchased by a taxpayer as an integral and necessary act in the conduct of his business, and continue to be so held until the time of their sale, any loss incurred as a result thereof may be fully deducted from gross income as a business expense or ordinary loss. If, on the other hand, an investment purpose be found to have motivated the purchase or holding of the securities, any loss realized upon their ultimate disposition must be treated in accord with the capital asset provisions of the Code. . . . ' In determining whether the transaction involved falls within the 'ordinary' or 'investment' categories, the Court must consider . . . 'the circumstances of the transaction (its factual background, the necessities of the particular time involved, and the intentions of the taxpayer, both at the time the securities were originally purchased and at the time they...