MacGuire v. CIR

• Decision Date: 07 December 1971
• Docket Number: No. 30258.,30258.
• Citation: 450 F.2d 1239
• Parties: John and Betty MacGUIRE, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

450 F.2d 1239 (1971)

John and Betty MacGUIRE, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 30258.

United States Court of Appeals, Fifth Circuit.

November 3, 1971.

Rehearing Denied December 7, 1971.

Towner Leeper, El Paso, Tex., for petitioners-appellants.

Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Atty., Tax Div., Dept. of Justice, K. Martin Worthy, Chief Counsel, I. R. S., William Massar, Kenneth L. Gross, Charles E. Anderson, Attys., U. S. Dept. of Justice, Washington, D. C., for respondent-appellee.

Before SKELTON, Judge,^* and MORGAN and CLARK, Circuit Judges.

MORGAN, Circuit Judge:

On their joint federal income tax returns for 1961, taxpayers John and Betty MacGuire reported a long-term capital gain of $700,000 on a claimed disposition of stock in a Mexican corporation, Cia. Ganadera Sahuarito, S.A. (hereinafter Sahuarito). By a notice of deficiency dated August 6, 1965, the Commissioner determined that the $700,000 should be taxed as ordinary income, and that there was a deficiency in the taxpayers' return of $436,521.74. Taxpayers sued in the United States Tax Court to set aside the ruling of the Commissioner. The Tax Court sustained the Commissioner's determination, and the taxpayers have appealed to this court. We affirm the decision of the Tax Court.

I. Background

This tax dispute grows out of a complicated series of transactions in Mexico and Texas which took place over a span of two decades, and we shall attempt here only to outline the principal events. In 1942, Betty MacGuire's father, Lee Moor, formed a cattle corporation in Mexico known as Sahuarito. Moor was the largest shareholder, owning 1,950 of the 3,000 shares issued. The remainder of the shares were owned by three of Mr. Moor's employees, Fernando Villalobis (450 shares), Ashley Mershon (300 shares), and Robert Cook (300 shares). Under its charter, Sahuarito was permitted to engage in the cattle business but was barred from owning land. Consequently, Mr. Moor supplied funds to "straw owners" who bought land and leased it to Mr. Moor. In addition Villalobis owned some 145,173 acres of land acquired previously in an unrelated transaction which he leased to Moor. Moor in turn subleased all this land to Sahuarito. On this land, a total acreage in excess of 300,000 acres, Sahuarito raised thousands of imported pure bred Hereford cattle. In 1950, the ranch foreman Mershon quit and his stock in Sahuarito was retained as treasury stock. Cook also quit in 1950, and, at the behest of Moor, transferred his shares to the taxpayer John MacGuire.

In 1951, Mr. Moor acquired, for the benefit of the taxpayers, another Mexican cattle company known as Terrenates,¹ located 120 miles south of Sahuarito. Moor acquired a 98 percent interest in the company and Villalobis, two percent. Shortly thereafter, Moor transferred a 90 percent interest in Terrenates to John MacGuire, and the remaining eight percent to his daughter, Betty MacGuire. Terrenates owned 98,963 acres of land.

In September 1951, armed Mexican soldiers expropriated the Sahuarito lands and informed Moor's employees that all cattle on the ranch must be removed or be auctioned off as strays. Shortly thereafter, Villalobis and the former ranch foreman Mershon protested the order to a Mexican judge, but were informed that the Sahuarito lands had been sold to Mexican citizens and that the cattle must be removed. As a result, between 5,400 and 5,500 head of cattle were removed from Sahuarito by the end of 1952. Approximately 2,950 were driven over land to Terrenates and the rest were sent to slaughter houses in Juarez. As of June 30, 1952, the only asset shown on Sahuarito's books was an account receivable from Terrenates in the amount of $47,350.87. By December 31, 1952, Sahuarito's books reflected no assets. Shortly after Sahuarito was confiscated, Mr. Moor converted his 1,950 shares into treasury stock and delivered them to Villalobis. Thereafter, the sole remaining stockholders in Sahuarito were Villalobis with 450 shares and the taxpayer John MacGuire with 300 shares. At the request of Moor, Vallalobis then filed with the Mexican government a formal notice of suspension of operations by Sahuarito.

The ranching operations at Terrenates were small at the time of the expropriation of Sahuarito, there being only about 1,000 head of cattle on the ranch. The cattle from the two ranches were not kept separate but were combined into one large herd on the Terrenates ranch. From 1952 until 1958, cattle from this combined herd was sold from time to time in Texas and the money was deposited to the account of Terrenates. No effort was made to segregate the proceeds from the sale of cattle which had originally been on the Sahuarito ranch since Sahuarito was considered to be out of business. Lee Moor bought many of these cattle and, at the time of his death, owed a note for them payable to Terrenates in the sum of $467,641.99, which was paid out of his estate after his death.

Lee Moor became ill in 1957 and died on December 15, 1958. Although John MacGuire owned 90 percent of Terrenates, he did not begin managing the company until Moor became ill in 1957. Between July 31, 1958, and December 31, 1960, MacGuire borrowed a total of $577,019.66 from Terrenates and issued personal notes therefor. The funds were obtained by MacGuire by depositing to his personal bank accounts checks payable to Terrenates. In addition MacGuire wrote checks on the Terrenates checking account and deposited them in his personal accounts. All of the monies so obtained by MacGuire were deposited in bank accounts in El Paso.

MacGuire testified that his purpose in concentrating these funds in Texas was to strengthen his bargaining position in a dispute which he anticipated with Moor's employee Villalobis. As noted, MacGuire and Villalobis were the sole remaining shareholders in Sahuarito. Villalobis had never been compensated for the loss of his lands on the Sahuarito ranch. In addition, he had never received any of the proceeds from the sale of cattle by Terrenates which originated from the Sahuarito ranch. MacGuire anticipated that, with Moor out of the way, Villalobis would now assert a claim against a portion of the assets of Terrenates. Because of the possibility of litigation in the Mexican courts, MacGuire deemed it prudent to remove the liquid assets of Terrenates from Mexico.

II. The Disputed Transaction

On January 31, 1961, taxpayer MacGuire borrowed $600,000 from the First National Bank of Dallas through the Chelmont State Bank (where Terrenates had an account) and deposited the proceeds in his personal account. He then repaid his total indebtedness to Terrenates, $577,019.66 plus interest of $21,380.97, by depositing his check for $598,390.63 in the Terrenates checking account in the Chelmont State Bank. MacGuire then drew two checks aggregating $700,000 on the Terrenates checking accounts (one in the amount of $655,000 drawn on the Chelmont State Bank; the other for $45,000 drawn on the account at the State National Bank of El Paso) and deposited them to his personal account at the Chelmont State Bank. The next day, MacGuire drew a check on his personal account to the Chelmont State Bank in El Paso in payment of the $600,000 loan of the previous day plus interest for one day in the amount of $83.00. On the same day, he closed out the Terrenates checking account at the State National Bank. It is the taxpayers' receipt of this $700,000 which is the subject of this tax dispute. During the course of this litigation, taxpayers have advanced no fewer than four different explanations of that transaction which would, in their view, qualify the transaction for capital gains treatment.

Taxpayers' initial story was that the $700,000 was received as consideration for the sale of 100 shares of Sahuarito stock to Terrenates. At the time of the transaction, MacGuire advised his book-keeper that such a sale had occurred, and the bookkeeper made the appropriate notations in the taxpayers' accounting records to reflect such a sale. Adhering to the same story, the taxpayers on their joint federal income tax return for the taxable year 1961 reported the $700,000 as a long-term capital gain from the sale of the 100 shares of Sahuarito to Terrenates. However, the Commissioner, on audit, denied the long-term capital gain treatment and determined that the $700,000 was taxable as ordinary income.

In September 1964, Internal Revenue Agent Felix Lopez interviewed taxpayer in the presence of his auditor and counsel as well as Lopez's supervisor. At this juncture, the taxpayers' story changed. He stated that the $700,000 was received from the sale of 300 (not 100, as reported on his 1961 tax return) shares of Sahuarito stock to an unknown purchaser (not to Terrenates as originally claimed). Taxpayers' auditor indicated that it was his error that the 1961 return reflected a sale of 100 shares instead of 300 shares. When MacGuire was asked how the sales price of $700,000 was arrived at, he stated that Villalobis had handled the sale, and that the taxpayer did not know who the purchaser was.

Agent Lopez then discussed the transactions with Villalobis, who stated that MacGuire's stock in Sahuarito had been purchased by one Jose Terasas, but was unable to explain how the $700,000 sales price was reached. When questioned as to the value of the Sahuarito stock, Villalobis acknowledged to the agent that Sahuarito's land had been expropriated and its cattle sold. Agent Lopez suggested that the stock must have been worthless, and Villalobis replied that Sahuarito might have had money received from the sale of cattle. This was the entire explanation of Villalobis for the $700,000 transaction. Villalobis did not make any contention at this meeting, as was later claimed, that an element in the transaction was the transfer to him from petitioner of an ownership interest in Terrenates.

In the Tax C...