Republic Petroleum Corp. v. U.S.

• Decision Date: 12 March 1980
• Docket Number: No. 77-2060,77-2060
• Citation: 613 F.2d 518
• Parties: 80-1 USTC P 9279 REPUBLIC PETROLEUM CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant. Lucy Cocchiara, Wife of/and Louis J. ROUSSEL, Plaintiff-Appellant, Cross- Appellee, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 518

613 F.2d 518

80-1 USTC P 9279

REPUBLIC PETROLEUM CORPORATION, Plaintiff, v. UNITED STATES of America, Defendant.

Lucy Cocchiara, Wife of/and Louis J. ROUSSEL, Plaintiff-Appellant, Cross- Appellee, v. UNITED STATES of America, Defendant-Appellee, Cross-Appellant.

No. 77-2060.

United States Court of Appeals, Fifth Circuit.

March 12, 1980.

Peter J. Butler, Gayle A. Reynolds, New Orleans, La., for Republic Petroleum & Lucy Cocchiara.

M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Acting Chief, App. Section, Crombie J. D. Garrett, David English Carmack, Attys., Tax Div., Dept. of Just., Washington, D. C., for defendant.

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

Before THORNBERRY, GEE, and HATCHETT, Circuit Judges.

GEE, Circuit Judge:

This appeal concerns the tax consequences of the sale of two mineral leases by Louis Roussel and his wife, Lucy Cocchiara (collectively referred to as "taxpayer"), to Republic Petroleum Corporation ("Republic"). The stakes are high the district court determined, and the government does not dispute, that the taxpayer overpaid its taxes for the tax years 1959 to 1966 in the amount of $511,878.03; yet the court concluded that taxpayer was entitled to a refund of only $242,753.15. At issue on appeal are: (1) whether Republic assumed a mortgage burdening the mineral leases for the purposes of the installment sale provision of the Internal Revenue Code; (2) whether taxpayer was properly permitted to recover a refund of taxes attributable to the disallowance of deductions and losses for 1960 and 1962; and (3) whether taxpayer was entitled to a refund of taxes paid with the filing of his tax returns for 1959-65. A brief recitation of the facts prefaces our analysis of these issues.

On July 24, 1959, taxpayer sold two mineral leases to Republic, of which Mr. Roussel was the majority shareholder and the ultimate decision maker, for a consideration of $2 million. The "Act of Sale and Assumption of Mortgage" ¹ executed on that date provided that Republic would pay taxpayer $50,000 in cash and assume taxpayer's indebtedness of $1,950,000 under a mortgage note in the amount of $2,500,000 due on demand at the Whitney National Bank ("Whitney Bank"). Four days later taxpayer and Republic signed a letter agreement ² stating that in lieu of the formal assumption of the mortgage Republic would give taxpayer a $1,950,000 promissory note, payable in monthly installments of not less than $25,000, plus interest. Republic's promissory note was secured by Roussel's own promissory note to the Whitney Bank, which was in turn secured by the mortgage on the leases.

Taxpayer's basis in the leases was $29,425.50. He realized a capital gain on the sale of $1,970,574.50. On taxpayer's tax return for 1959 he elected to report his gain on the installment basis pursuant to IRC § 453, 26 U.S.C. § 453, ³ and continued to do so in each succeeding tax year through 1965. Taxpayer timely filed each of his returns and paid the amount of tax indicated thereon. ⁴

Taxpayer and the IRS filed agreements (Forms 872) to extend the statute of limitations on assessment with respect to tax years 1959 to 1966 until June 30, 1972. On February 28, 1972, the IRS assessed deficiencies for 1959, 1961 and 1963-66 ⁵ and issued "Quick Assessment" notices for those years. The deficiency for 1959 was occasioned by the IRS' determination that taxpayer was not entitled to use the installment method and should have reported his entire gain from the sale of the mineral leases in 1959. Other adjustments in income, not relevant here, accounted for the deficiencies in each of the other years. On March 6, 1972, the IRS determined that the taxpayer had overpaid his taxes for 1960 and 1962. ⁶ These overpayments were credited against taxpayer's deficiencies. Taxpayer paid the net deficiency assessments in full on March 13, 1972.

On August 15, 1973, taxpayer filed a claim for a refund for each of the years in issue. Those claims were denied, and taxpayer brought suit. ⁷ The district court granted the government's motion for partial summary judgment to the extent that it barred taxpayer from claiming a refund for taxes paid with the filing of his returns but permitted taxpayer to claim a refund of taxes attributable to the disallowance of certain deductions and losses for 1960 and 1962. Republic Petroleum Corp. v. United States, 397 F.Supp. 900, 906-07 (E.D.La.1975). The court further determined that taxpayer was not entitled to use the installment method to report his gain on the sale of the leases. Id. at 907-11. The court then proceeded to examine other adjustments that the IRS had made for the tax years 1959-66. In a separate judgment the court concluded that although the government had collected $511,878.03 more from the taxpayer than it was entitled to, taxpayer was entitled to judgment for only $242,753.15. ⁸ Taxpayer appeals, and the government cross appeals, from these determinations. We affirm the district court's judgment, except to the extent that it permits taxpayer to recover a refund for tax years 1960 and 1962.

I. Assumption of Taxpayer's Mortgage.

Section 453 of the IRC ⁹ permits a taxpayer to report his gain from the sale of real property on the installment method so long as the payments received by the taxpayer in the year of sale do not exceed 30 percent of the selling price. Where a mortgage is "assumed by" a purchaser, however, the amount of the mortgage, to the extent that it exceeds the vendor's basis, is included as a payment received during the year of sale in determining whether payments in that year exceeded 30 percent of the price. Treas. Reg. 1.453-4(c) (1979). Thus, if Republic assumed the mortgage to which the mineral leases were subject, taxpayer would not be entitled to use the installment method. ¹⁰ Conversely, if Republic did not assume the mortgage, as taxpayer contends, taxpayer would be entitled to report his gain on an installment plan.

The district court found that Republic had in fact assumed the mortgage. ¹¹ Aware that the installment sale provisions are "relief provisions" to be "strictly construed," 2 Mertens, Law of Federal Income Taxation § 15.01 at 3, we conclude that the district court's finding was correct.

The most persuasive evidence supporting the district court's finding is the explicit language of the "Act of Sale and Assumption of Mortgage" in which Republic expressly assumed the mortgage and bound itself to the discharge of the mortgage note. See n.1 Supra. That document clearly and unequivocally states that "the present purchaser assumes, binds and obligates itself for the payment of the indebtedness of vendor" under vendor's mortgage note payable to Whitney Bank. Moreover, the minutes of a special meeting of Republic's board of directors held on July 24, 1959, the same day on which the "Act of Sale" was executed, indicate that assumption of the mortgage was a prerequisite of the sale. ¹²

Although Republic did subsequently execute a promissory note, there is ample evidence that Republic undertook to satisfy taxpayer's obligations to the bank. For example, one of Republic's checks, payable to taxpayer, was described on Republic's books as a payment "to reimburse interest charges paid by (taxpayer) to Whitney National Bank." As the district court observed, "Why would Republic reimburse Roussel for interest payments he had made on the mortgage unless it had assumed the obligation to make such payments?" 397 F.Supp. at 908-09. Another check was described on Republic's books as a "payment on mortgage loan." In still another instance a check was made directly payable to the Whitney Bank. Furthermore, although the promissory note indicated that Republic would pay taxpayer no less than $25,000 plus interest per month, its payments in 1959 were considerably less than the minimum amount and were "directly related to the payments due to the Whitney Bank under the mortgage," as found by the trial court. Id. at 908.

On the other hand, taxpayer's position is supported by the existence of the promissory note, as well as by certain testimony offered at trial. A CPA associated with Republic and taxpayer testified that Republic issued the promissory note after she reviewed the "Act of Sale" and ascertained that the collateral mortgage sought to be assumed under the act of sale could not, in her opinion, be assumed. An officer of the Whitney Bank testified that the bank's records reflect that Republic was never indebted to it. He further testified that taxpayer paid off his loans from the bank on February 20, 1961, and that the mortgage note was surrendered to taxpayer on that date, whereas Republic did not satisfy its obligation to taxpayer until December 30, 1965. ¹³

We are convinced that the district court properly held for the government on this issue. Any doubt that we might harbor is dispelled by taxpayer's treatment of the mortgage in the course of this suit. In his initial claim for a refund for 1959, taxpayer Admitted that Republic had assumed the mortgage as part payment for the leases. Only one month before trial did taxpayer amend his claim to assert that no mortgage obligation had been assumed. As the district court concluded:

Considering the fact that Roussel had full control over all aspects of the transaction, his own uncertainty as to what transpired served to emphasize the confusing nature of the sale. Suffice it to say, however, that from the date of the act of sale until one month before trial, Roussel believed Republic had assumed his mortgage liability.

Id. at 909.

It is axiomatic that we may look through the form in which a taxpayer has cloaked a transaction to the substance of that transaction. Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1944); Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652, 657 (5th Cir. 1958). Taxpayer's belated attempt to transform the assumption...