Maryland Coal and Coke Company v. McGinnes

• Decision Date: 21 January 1964
• Docket Number: Civ. A. No. 26286.
• Citation: 225 F. Supp. 854
• Parties: MARYLAND COAL AND COKE COMPANY v. Edgar A. McGINNES, District Director of Internal Revenue.
• Court: U.S. District Court — Eastern District of Pennsylvania

225 F. Supp. 854

MARYLAND COAL AND COKE COMPANY v. Edgar A. McGINNES, District Director of Internal Revenue.

Civ. A. No. 26286.

United States District Court E. D. Pennsylvania.

January 21, 1964.

S. Gordon Elkins, David P. Brown, Jr., Stradley, Ronon, Stevens & Young, Philadelphia, Pa., for plaintiff.

Drew J. T. O'Keefe, U. S. Atty., Philadelphia, Pa, Louis F. Oberdorfer, Asst. Atty. Gen., C. Moxley Featherston, Rufus

E. Stetson, Jr., John M. Hammerman, Dept. of Justice, Washington, D. C., for defendant.

LUONGO, District Judge.

Maryland Coal and Coke Company (Maryland) instituted suit for the recovery of sums paid the defendant in 1954 for federal income and excess profits tax deficiencies assessed for the 1950 calendar year. The deficiencies resulted from defendant's determination that a $200,000 payment received by Maryland in 1950 for cancellation of an exclusive sales agency contract was taxable as ordinary income rather than as a capital gain. Defendant has moved for summary judgment. The facts are not in dispute, many having been stipulated and others, submitted by Maryland by affidavit, have been conceded by defendant for the purpose of the determination of his motion.

THE FACTUAL SITUATION

The relevant stipulated facts are as follows:

Maryland Century Coal Company (Century) acquired an assignment of lease to certain coal lands in January, 1945. On January 27, 1945, Century entered into an agreement under which it appointed Maryland exclusive sales agent for the sale and distribution of all coal produced from the Century mine. Maryland agreed to use its best efforts to promote the sale of the coal at the best prices obtainable. Maryland's compensation was a commission based upon profits, but not to exceed 15 cents a ton and was to remain unchanged until a guarantee by a Maryland subsidiary (Maryland New River Coal Company) of the expenditure of certain funds for capital improvements of the Century mine had expired.

Maryland guaranteed payment of all accounts, reserving, however, the right to reject any order where the credit risk, in its opinion, was unsatisfactory. Maryland undertook to render billings in its own name and to remit the proceeds, after deducting its commissions, to Century. The agreement was to remain in effect for at least two years, with provision for cancellation, upon notice, upon termination of the guarantee.

On November 15, 1946, the terms of the guarantee having been complied with, the agreement between Century and Maryland was revised as to compensation (commission to be at the fixed rate of 15 cents a ton) and duration (to be "for the life of the Century mine"), otherwise the terms remained the same as those in the 1945 agreement.

In the course of Maryland's exclusive sales agency, a corporation trading as "Subsidiary Companies of Bethlehem Steel Corporation" (Bethlehem) became the purchaser of substantial quantities of coal produced by Century and in 1950, Bethlehem sought to obtain the sole and unrestricted use of the coal in the mine and, to that end, offered to purchase the Century stock. Its offers, in successively higher amounts, were all conditioned upon termination of the Maryland agreement. On December 29, 1950, Bethlehem purchased the Century stock, paying $1,300,000 to Century's stockholders and, by check dated December 30, 1950, $200,000 to Maryland in settlement of the sales agency agreement. On the day of the purchase of the Century stock, in a writing which recited no money consideration, the sales agency agreement between Maryland and Century was terminated.

Maryland's affidavit sets forth these additional facts and circumstances:

In 1945 the lease of the Century coal lands was offered to Maryland provided it would make available $100,000 for capital expenditures to modernize the coal operation. Century was organized for the purpose of acquiring the lease and Maryland committed its subsidiary, Maryland New River Coal Company, to lend to Century and to guarantee the expenditure by Century of $100,000 to improve the Century mine. The subsidiary did lend Century $98,000 and was reimbursed that amount by Maryland. The funds were used to improve the operation of the mine to bring the price of coal down to competitive levels to create sales at a volume profitable to Maryland as exclusive sales agent. That loan was repaid prior to the time the revised agreement between Maryland and Century was entered into in November, 1946. Maryland made further loans to Century for operating capital from 1946 to 1950, which loans were also repaid. In 1950 when Bethlehem sought to purchase the Century stock its first offer was $1,000,000. Successively higher offers were made thereafter and when the bid reached $1,300,000 it was satisfactory to all of Century's stockholders except Medford J. Brown, Maryland's president and one of Century's principal stockholders. Brown's refusal to go along with that offer resulted in Bethlehem's increasing it to $1,500,000. Brown agreed to accept that offer provided something was paid to Maryland for its rights under the contract. An additional amount was sought from Bethlehem for the termination of Maryland's contract rights but Bethlehem refused, insisting that its offer was conditioned upon termination of the Maryland contract. Brown then sought and obtained agreement from the other Century stockholders (Brown and two others were substantial stockholders in Century as well as stockholders and employees of Maryland) that the $200,000 increase in the offer which had been brought about by his refusal to go along with the lesser one, be paid to Maryland to compensate it for the loss of its rights under the exclusive sales agency agreement. No other standard or measure for determining the amount to be paid for Maryland's contract was ever discussed.

THE ISSUE

The issue here is a narrow one, whether the lump sum paid for the termination of the exclusive sales agency contract was ordinary income, as defendant treated it, or a long-term capital gain, as plaintiff reported it in its 1950 return.

DISCUSSION OF APPLICABLE LEGAL PRINCIPLES

Long-term capital gain is limited to gain "from the sale or exchange of a capital asset * * *." Internal Revenue Code of 1939, Section 117(a) (4). Although the Code defines "capital asset" in broad terms — "property held by the taxpayer" Section 117(a) (1) — it

"* * * is to be construed narrowly in accordance with the purpose of Congress to afford capital-gains treatment only in situations typically involving the realization of appreciation in value accrued over a substantial period of time, and thus to ameliorate the hardship of taxation of the entire gain in one year. * * *" Comm'r v. Gillette Motor Transport, Inc., 364 U.S. 130, 134, 80 S.Ct. 1497, 4 L.Ed.2d 1617 (1960). See also: Corn Products Co. v. Comm'r, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955), rehearing denied, 350 U.S. 943, 76 S.Ct. 297, 100 L.Ed. 823 (1956); Heebner v. Comm'r, 280 F.2d 228 (3rd Cir. 1960), cert. denied, 364 U.S. 921, 81 S.Ct. 285, 5 L.Ed.2d 260 (1960).

Basically, Maryland's contract with Century gave it the right to perform services and receive compensation. The overwhelming weight of authority is that contracts for the performance of services are not capital assets and the proceeds from their transfer or termination will not be accorded capital gains treatment. United States v. Eidson, 310 F.2d 111 (5th Cir. 1962), rehearing, 312 F.2d 744 (1963); Holt v. Comm'r, 303 F.2d 687 (9th Cir. 1962); Gordon v. Comm'r, 262 F.2d 413 (5th Cir. 1958); Comm'r v. Pittston Co., 252 F.2d 344 (2nd Cir. 1958), cert. denied, 357 U.S. 919, 78 S.Ct. 1360, 2 L.Ed.2d 1364 (1958); Roscoe v. Comm'r, 215 F.2d 478 (5th Cir. 1954); General Artists Corp. v. Comm'r, 205 F.2d 360 (2nd Cir. 1953), cert. denied, 346 U.S. 866, 74 S.Ct. 105, 98 L.Ed. 376 (1953); Comm'r v. Starr Bros., Inc., 204 F.2d 673 (2nd Cir. 1953); Paul Small Artists, Ltd., 37 T.C. 223 (1961).¹

The authority to the contrary, Jones v. Corbyn, 186 F.2d 450 (10th Cir. 1950), Sammons v. Dunlap, CCH 52-2 U.S.T.C. ¶ 9481 (N.D.Tex.1952), Rev.Rul. 55-374, 1955-1 Cum.Bull. 370, is not convincing. The Corbyn decision was discredited in Wiseman v. Halliburton Oil Well Cementing Co., 301 F.2d 654 (10th Cir. 1962); Sammons v. Dunlap, decided within the jurisdiction of the Court of Appeals for the Fifth Circuit, is subject to that Court's subsequent decision in Roscoe v. Comm'r, supra; and the Revenue Ruling referred to above was handed down prior to the Supreme Court's decisions in Comm'r v. Gillette Motor Transport, Inc., supra, and Corn Products Co. v. Comm'r, supra.

Maryland seeks to align itself with those cases according taxpayers capital gains treatment. In addition to the Corbyn and Sammons cases mentioned above, these are: United States v. Dresser, Ind., Inc., 324 F.2d 56 (5th Cir. 1963); Bisbee-Baldwin Corp. v. Tomlinson, 320 F.2d 929 (5th Cir. 1963); Comm'r v. Killian, 314 F.2d 852 (5th Cir. 1963); Nelson Weaver Realty Co. v. Comm'r, 307 F.2d 897 (5th Cir. 1962); Comm'r v. Ferrer, 304 F.2d 125 (2nd Cir. 1962); Metropolitan Bldg. Co. v. Comm'r, 282 F.2d 592 (9th Cir. 1960); Comm'r v. Goff, 212 F. 2d 875 (3rd Cir. 1954), cert. denied, 348 U.S. 829, 75 S.Ct. 52, 99 L.Ed. 654 (1954); Comm'r v. McCue Bros. & Drummond, Inc., 210 F.2d 752 (2nd Cir. 1954), cert. denied, 348 U.S. 829, 75 S.Ct. 53, 99 L.Ed. 654 (1954); Comm'r v. Ray, 210 F.2d 390 (5th Cir. 1954), cert. denied, 348 U.S. 829, 75 S.Ct. 53, 99 L.Ed. 654 (1954); Comm'r v. Golonsky, 200 F.2d 72 (3rd Cir. 1952), cert. denied, 345 U.S. 939, 73 S.Ct. 830, 97 L.Ed. 1366 (1953); Elliott B. Smoak, 43 B.T.A. 907 (1941). An analysis of these cases reveals that in each instance taxpayer had more than merely a contractual opportunity "to obtain periodic receipts of income, by dealing with another * * *, or by rendering services * * *." Comm'r v. Ferrer, supra, 304 F.2d at 130-131. In United States v. Dresser Ind., Inc., supra, taxpayer had...