Redwing Carriers, Inc. v. Tomlinson

• Decision Date: 22 August 1968
• Docket Number: No. 24785.,24785.
• Citation: 399 F.2d 652
• Parties: REDWING CARRIERS, INC., and Rockana Carriers, Inc., by Redwing Carriers, Inc., Appellants, v. Laurie W. TOMLINSON, former Director of Internal Revenue for the District of Florida, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

399 F.2d 652 (1968)

REDWING CARRIERS, INC., and Rockana Carriers, Inc., by Redwing Carriers, Inc., Appellants, v. Laurie W. TOMLINSON, former Director of Internal Revenue for the District of Florida, Appellee.

No. 24785.

United States Court of Appeals Fifth Circuit.

August 22, 1968.

COPYRIGHT MATERIAL OMITTED

Michael G. Emmanuel, Norman H. Lipoff, Thomas D. Aitken, Carlton, Fields, Ward, Emmanuel, Smith & Cutler, Tampa, Fla., for appellants.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Harry Marselli, Robert N. Anderson, Robert H. Solomon, Issie L. Jenkins, Bennet N. Hollander, Attys., Dept. of Justice, Washington, D. C., Edward F. Boardman, U. S. Atty., E. J. Salcines, Asst. U. S. Atty., Tampa, Fla., for appellee.

Before BELL, GOLDBERG and DYER, Circuit Judges.

GOLDBERG, Circuit Judge:

This case involves another attempt by a taxpayer to insulate himself from the incidence of taxation by means of paper armor. The question presented is whether a taxpayer may shape what is essentially an integrated purchase and trade-in transaction of new and used trucks into two separate transactions in order to recognize an immediate gain at capital gains rates and concomitantly to take a larger depreciation deduction from ordinary income. We agree with the district court that this transaction is an exchange rather than two sales, and thus comes within the coverage of Section 1031 of the Internal Revenue Code.¹

This appeal involves income tax liabilities for the calendar years 1958 through 1961 in the total amount of $66,630.33. The plaintiff below and appellant here, Redwing Carriers, Inc.,² paid the assessments in question and sued in the district court for a refund with interest.

The following facts were substantially stipulated, and the district court's findings on the few disputed fact questions were not clearly erroneous.³ Redwing is a Florida corporation engaged in the business of hauling bulk commodities as a common carrier, subject to regulation by the Interstate Commerce Commission. Trucksales, Inc., a Florida corporation engaged in the business of selling trucks, parts and equipment, is a wholly-owned subsidiary of Redwing. During the years in question Trucksales was a franchised dealer for G. M. C. trucks. Charles E. Mendez, as president and chairman of the board of both Redwing and Trucksales, was the moving force behind the transactions in question.

During 1958 Trucksales purchased twenty-eight new G. M. C. diesel tractor trucks from G. M. C. for cash. At or about the same time Redwing transferred title to twenty-seven used trucks to G. M. C. for cash. In 1959 and 1961 essentially identical transactions involving thirty-six and fourteen trucks, respectively, were executed. Also during 1959 transactions in like form were executed with White Motor Company.

Because it is an extremely profitable trucking concern, Redwing is considered a prestige account by both G. M. C. and White Motor Company. Thus Mendez, who handled all negotiations in these transactions, was in a strong bargaining position and was able to insist upon casting these purchases of new equipment and trade-ins in the form of separate purchases of the new and sales of the old.

Mendez did not specify which corporation he was representing at any time to either White or G. M. C., and it made no difference to the manufacturers whether they were dealing with Redwing or with Trucksales. Both Redwing and Trucksales used the same Tampa address on the checks used in these transactions, even though Trucksales is located in Fort Lauderdale and even though it used a Fort Lauderdale bank account for all of its other business activities. Most of the trucks involved were delivered by White and G. M. C. directly to Redwing in Tampa, despite the fact that they were ostensibly being sold to Trucksales in Fort Lauderdale for resale to Redwing.

In addition to the above indicia of transactional unity, the district court found a definite contractual interdependency between the sale of new trucks and the trade-in of old trucks. In its findings of fact the court noted: "There would have been no purchase by plaintiffs of new trucks or tractors without concurrent and binding agreements to purchase plaintiff's used equipment."⁴

The district court further found that G. M. C. viewed these transactions as trade-ins which were occasioned by the purchase of new equipment and that the form of selling the old and purchasing the new was arranged solely on Mendez' insistence. A G. M. C. executive testified that the price which G. M. C. paid for the used trucks was in excess of their fair market value and that G. M. C. would be able to calculate a profit only by viewing the purchases of used trucks and sales of new trucks as one transaction.⁵

It is apparent that Mendez sculptured these transactions so as to achieve the best possible tax results for Redwing. Instead of obtaining customary discounts from the retail price of the new trucks, Mendez would insist that the manufacturers add the discount amount to the price of the used trucks being repurchased. The gain of the trade-in price over the depreciated basis of the used trucks would be recognized at capital gains rates, and the basis of the new trucks for depreciation purposes would be inflated. As a result, Redwing's depreciation deductions from ordinary income would also be inflated, resulting in considerable tax savings.⁶

As is obvious from the above facts, these Mendez-dominated transactions were severable in form only. In substance, the sale was in bondage to the purchase and the purchase indissolubly dependent upon the sale. If Redwing had not carried out the agreement to buy the new trucks, the auto makers would have had no juristic obligation to purchase the used trucks. The buying and selling were synchronous parts meshed into the same transaction and not independent transactions.

Section 1031 requires the non-recognition of gain or loss in transactions when in theory the taxpayer may have realized gain or loss, but in substance his economic interest in the property has remained virtually unchanged by the transaction. Century Electric Co. v. Commissioner of Internal Revenue, 8 Cir. 1951, 192 F.2d 155, 159, cert. den., 342 U.S. 954, 72 S.Ct. 625, 96 L.Ed. 708. Compare Trenton Cotton Oil Co. v. Commissioner of Internal Revenue, 6 Cir. 1945, 147 F.2d 33, 36.⁷ With its paper armor crumpled, Redwing's transactions are brought directly within the ambit of Section 1031, and, more specifically, within that of Treas. Reg. § 1.1031(a)-1(c):

"(c) No gain or loss is recognized if (1) a taxpayer exchanges property held for productive use in his trade or business, together with cash for other property of like kind for the same use such as a truck for a new truck or a passenger automobile for a new passenger automobile to be used for a like purpose; * * *"

Because of the expertise of Internal Revenue Service in interpreting the Internal Revenue Code which it is charged with administering, Treasury regulations come to us with great persuasive force. South Texas Land Co. v. C. I. R., 1947, 333 U.S. 496, 501, 68 S.Ct. 695, 92 L.Ed. 831, 836; United States v. D. I. Operating Co., 9 Cir. 1966, 362 F.2d 305, 308, cert. den., 385 U.S. 1024, 87 S.Ct. 742, 17 L.Ed.2d 673; cf. Estate of Willett v. C. I. R., 5 Cir. 1966, 365 F.2d 760; Whirlwind Mfg. Co. v. United States, 5 Cir. 1965, 344 F.2d 153. When, as here, the regulation has long continued without substantial change, applying to unamended or substantially reenacted statutes, the regulation is deemed to have the effect of law. United States v. Correll, 1967, 389 U.S. 299, 88 S.Ct. 445, 19 L.Ed.2d 537, 543; Fribourg Nav. Co. v. Commissioner, 1966, 383 U.S. 272, 283, 86 S.Ct. 862, 868, 15 L.Ed.2d 751, 758. In Vitter v. United States, 5 Cir. 1960, 279 F.2d 445, cert. den., 364 U.S. 928, 81 S.Ct. 353, 5 L.Ed.2d 266, Judge Brown, speaking for our Court, articulated this rule of construction as follows:

"When a Treasury Regulation interprets a section of the Code and the Regulation remains in effect and unchanged for a long period of time, re-enactment of the statute without change is presumed to show congressional approval of the Regulation which thereby acquires the force and effect of law * * * numerous cases cited." 279 F.2d at 450 at fn. 9.

The relevant part of Treas.Reg. § 1.1031(a)-1(c), as well as Section 1031 (a) of the Internal Revenue Code, is identical to its predecessor under the 1939 Code.⁸ Despite extensive changes in the Internal Revenue Code in 1954, no change was made in what is now § 1031(a). Further amendments were made to other parts of § 1031 in 1958 and 1959, but § 1031(a) was left untouched. It is reasonable to assume, therefore, that Congress knew and approved of the application of § 1031(a) to trade-ins of trucks.

The Treasury's interpretation of § 1031(a) was also manifested in Revenue Ruling 61-119, 1961-1 Cum.Bull. 395. This Ruling bears directly on the exact question at bar:

"Where a taxpayer sells old equipment used in his trade or business to a dealer and purchases new equipment of like kind from the dealer under circumstances which indicate that the sale and the purchase are reciprocal and mutually dependent transactions, the sale and purchase is an exchange of property within the meaning of section 1031 of the Internal Revenue Code of 1954, even though the sale and purchase are accomplished by separately executed contracts and are treated as unrelated transactions by the taxpayer and the dealer for record keeping purposes."

The district court in its conclusions of law relied heavily on that Ruling, and we agree. Although the Ruling does not have the force and effect of law, we find it to be a persuasive interpretation of the Code and Regulations. See 3 Mertens, Federal Income Taxation §§ 20.31 and 20.165 (at p. 724).

Despite Redwing's arguments to the contrary, Revenue Ruling 61-119 is founded upon well established principles of tax...