Steen, In re, 73--3099

• Decision Date: 13 January 1975
• Docket Number: No. 73--3099,73--3099
• Parties: 75-1 USTC P 9199 In the Matter of Charles A. STEEN, Debtor. Dick DIMOND, Trustee, Appellees, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1398

509 F.2d 1398

75-1 USTC P 9199

In the Matter of Charles A. STEEN, Debtor Dick DIMOND, Trustee, Appellees, v. UNITED STATES of America, Appellant.

No. 73--3099.

United States Court of Appeals Ninth Circuit.

Jan. 13, 1975.

Louis A. Bradbury (argued), Tax Div., Dept. of Justice, Washington, D.C., for appellant.

Aaron Holman (argued), New York City, for appellees.

Before KOELSCH, CARTER and CHOY, Circuit Judges.

OPINION

KOELSCH, Circuit Judge:

The United States appeals from the judgment of the district court adjudicating the government's claim for federal income tax deficiencies against taxpayer Steen, the debtor in a Chapter XII bankruptcy proceeding, and his trustee in bankruptcy. The case came before the district court on the parties' cross-petitions for review of a decision of the referee in bankruptcy. Our jurisdiction rests on 28 U.S.C. § 1291.

The principal question presented is whether the sum of $458,532.03 which Steen received in 1966 is properly treatable as recovery of basis and capital gain, or simply as ordinary income. However, as will become apparent, the answer serves to raise an additional question that will require further proceedings.

The relevant facts are these: In 1952, Steen made an extraordinarily rich uranium discovery in Utah. He subsequently transferred this claim, known as Mi Vida, and others to Utex Exploration Company (Utex), a Utah corporation, in exchange for shares of Utex stock. Utex and others then formed a corporation known as Uranium Reduction Company (URC) to process uranium ore.

In 1962, Atlas Corporation (Atlas), which like Utex owned a substantial portion of the outstanding URC stock, entered into negotiations with Utex and its shareholders to acquire the Utex holdings of URC stock and Mi Vida. Atlas had no interest in other Utex assets, but it did want the Utex management personnel to continue because of their proven ability to operate Mi Vida.

The parties ultimately entered into two written contracts. Both were executed and dated May 29, 1962. By the terms of one--the Stock Purchase Agreement--Steen and all the other Utex shareholders agreed to sell to Atlas 85 per cent of their respective Utex shares and to transfer the remaining 15 per cent to Utex in exchange for all assets of the latter except Mi Vida and Utex' stock in URC. The specified purchase price was $12,980,000, of which $3,890,000 (or 29.9 per cent) was payable upon closing, with the remainder in installments over the period from August, 1962, through December, 1966. The installment payments were to be secured by a first mortgage on Mi Vida.

By the terms of the second contract--the Mining Agreement--Steen and the other Utex shareholders ¹ (the Mining Contractors) agreed to mine Mi Vida for Atlas until December 31, 1966, by which date the parties anticipated the mine would be completely exhausted. The Mining Agreement contained a provision for certain state taxes, the effect of which was to require Atlas to pay the Mining Contractors any difference between $827,000, the anticipated sum of those state taxes, and the amount Atlas would actually pay out for that purpose.

At the time the two agreements were executed, some doubt existed in the Utah mining industry as to whether the Utah tax on mines was properly a personal obligation of a mine's owner, or simply a lien against his mine property. The issue was put to rest several years later by the Supreme Court of Utah, which held that the tax was not a personal obligation. See San Juan County v. Jen, Inc., 16 Utah 2d 394, 401, 952 (1965); Atlas Corporation v. State Tax Commission, 18 Utah 2d 57, 415 P.2d 208 (1966). By the time of the latter decision, Mi Vida was fully exploited and worthless. And because Atlas had no reason to keep Mi Vida and because its actual tax payouts were less by approximately $500,000 than the anticipated $827,000, it paid this difference in 1966 to the Mining Contractors, as provided in the tax provision in the Mining Agreement. Steen's share amounted to $458,532.03. It is that payment which forms the basis for this controversy.

Steen elected in his 1962 income tax return to report his share of the sales price provided in the Stock Purchase Agreement, i.e., $10,666,023.85 on the installment method pursuant to Int.Rev.Code of 1954, § 453, 26 U.S.C. § 453; he made no mention of any further sum which he might receive under the tax provision in the Mining Agreement. However, in his 1966 return, Steen reported the tax contingency payment ($445,941.85--the $458,532.03 payment less a basis of $12,590.18) as additional capital gain from the Utex stock sale.

The Commissioner, however, took the position that the sum was not capital gain. Pointing to the fact that there were two agreements--the Stock Purchase Agreement which dealt with assets and specified a fixed price for the same, and the Mining Agreement which dealt with services and contained the provision under which the payment under consideration was made--he argued that the payment was not for capital assets but reflected solely compensation for services, and that the Stock Purchase Agreement constituted a 'closed transaction' that is, one where the purchase price is either specified or can be ascertained with reasonable certainty.

Steen, on the other hand, contended that the two agreements were part of a single transaction and should be read together; that properly construed, the tax contingency provision related to capital assets and constituted part of the consideration for their purchase. He now adds that because the tax contingency possessed no ascertainable fair market value when the agreements were executed, he is entitled, despite his declaration of a fixed consideration in his 1962 return, to treat the sale as 'open' because the installment method of reporting it was substantively unavailable to him in 1962, see Gralapp v. United States, 319 F.Supp. 265 (D.Kan.1970), aff'd, 458 F.2d 1158 (10th Cir. 1972), ² and under our holding in Mamula v. Commissioner, 346 F.2d 1016 (9th Cir. 1965), he is not bound by his impermissible election.

The referee and district court agreed with Steen. They determined that the two agreements integrated a single transaction; that they should read together; that the tax contingency payment constituted part of the purchase price for capital assets as distinguished from compensation for services; and that the payment was not taxable until received in 1966.

With respect to the issue concerning integration of the two agreements and the allocation of the monies paid under the tax clause, the finding was:

'The $458,532.03 that was paid by Atlas to Debtor (Steen) in 1966 represented his share of an allowance that had been granted conditionally to Atlas in 1962 in fixing the sales price of his Utex shares, and on recovery thereof by Debtor this sum constituted an addition to the sales price of the said shares.' ³

We cannot say that this factual determination was 'clearly erroneous.' Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960); Chism's Estate v. Commissioner, 322 F.2d 956 (9th Cir. 1965); Cohn v. Commissioner, 226 F.2d 22 (9th Cir. 1955). ⁴

While it is true that neither document refers specifically to the other, neither proclaims itself to be a complete integration of the agreement between the parties. Given the size of the transaction, the related subject matter of the two documents, the fact that they were contemporaneously negotiated, drafted, executed and delivered, and the substantial certainty that neither would have been executed without the other, it is apparent that they integrate a single large transaction. Where two or more written agreements are contemporaneously executed as part of one complete transaction, we have labeled 'elemental' the proposition that they must be construed together. Parker v. Commissioner, 166 F.2d 364, 367 (9th Cir. 1948). See, e.g., Kurz v. United States, 156 F.Supp. 99, 104 (S.D.N.Y.1957), aff'd, 254 F.2d 811, 812 (2d Cir. 1958); Bullfrog Marina, Inc. v. Lentz, 28 Utah 2d 261, 501 P.2d 266, 270--271 (1972); 4 Williston on Contracts, § 628 at 904 (3d ed. 1961). ⁵ Further, the conclusion may be fairly drawn that the tax contingency provision reflects part of the purchase price for assets. Depending upon the taxes paid, the value of those assets and the amount to be paid to the vendors was correspondingly increased or diminished. ⁶

We are also clear that--as the Commissioner appears to concede in brief--the contingency payment had no ascertainable fair market value in 1962. This case appears to present one of those rare and extraordinary situations where such a conclusion is permissible, ⁷ for the right to the payment depends entirely upon a favorable judicial decision on a novel question of state law; in short, we regard payment vel non as 'wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty.' Burnet v. Logan, 283 U.S. 404, 413, 51 S.Ct. 550, 552, 75 L.Ed. 1143 (1931); Westover v. Smith, 173 F.2d 90, 91--92 (9th Cir. 1949). ⁸ Hence the sale of stock was as taxpayer contends, an 'open' transaction, and, under Gralapp and Mamula, taxpayer's election of the installment method of reporting that transaction was impermissible and will not be binding upon him. It necessarily follows that taxpayer's gain realized by reason of the contingency payment, being 'gain from the sale or exchange of a capital asset,' is taxable as capital gain in the year of its receipt. Westover, supra, 173 F.2d at 92; Commissioner v. Carter, 170 F.2d 911, 912--913 (2d Cir. 1948).

Taxpayer nevertheless misconceives the full import of his disqualification from installment reporting under § 453. By that section, Congress provided an exception to the general rule that the gain realized on the sale or other disposition of an asset is recognized in the year of sale. The statute 'was enacted, as shown by its history, to relieve...