Stockton Harbor Indus. Co. v. Commissioner of Int. Rev., 13615.

• Citation: 216 F.2d 638
• Decision Date: 01 December 1954
• Docket Number: No. 13615.,13615.
• Parties: STOCKTON HARBOR INDUSTRIAL COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

216 F.2d 638 (1954)

STOCKTON HARBOR INDUSTRIAL COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13615.

United States Court of Appeals Ninth Circuit.

November 1, 1954.

Rehearing Denied December 1, 1954.

Valentine Brookes, Arthur H. Kent, San Francisco, Cal., for appellant.

H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Lee A. Jackson, Melva M. Graney, Sp. Assts. to Atty. Gen., Charles W. Davis, Chief Counsel, Bureau of Internal Revenue, Washington, D. C., for appellee.

Before ORR and CHAMBERS, Circuit Judges, and YANKWICH, District Judge.

YANKWICH, District Judge.

We are called upon to review a decision of the Tax Court of the United States. The main question before us is whether the petitioner, to whom we shall refer as the taxpayer, acquired its property in a reorganization and whether the money derived from a condemnation of land by the United States Government resulted in a capital gain.

I The Scope of Review

The taxpayer filed its tax return on the assumption that the basis of the land for computing its tax liability in 1944 and 1945 was its cost to it, amounting to $380,000.00 and that the gain from the sale of the condemnation of the land was capital gain. The Commissioner disallowed both contentions in his deficiency letters and his action was sustained by the Tax Court, which found:

"That there are deficiencies in income tax for the years 1944 and 1945 in the respective amounts of $2,484.57 and $840.13; that for such years there are deficiencies in declared value excess profits tax in the respective amounts of $317.01 and $39,639.50; and that for such years there are deficiencies in excess profits tax in the respective amounts of $1,884.50 and $220,935.95."

This is a petition to review the decision. Under the provisions of the Internal Revenue Code the scope of our review, except as provided in 28 U.S.C. § 1254, with which we are not concerned here, is stated to be:

"* * * in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury". 26 U.S.C., § 1141.

In applying this provision, this court and other courts have held that it is not our function to retry questions of fact determined by the trial court upon conflicting evidence or even upon uncontradicted evidence where different inferences may reasonably be drawn from them. Grace Bros. v. Commissioner of Internal Revenue, 9 Cir., 1949, 173 F.2d 170, 173-174; Rider v. Commissioner of Internal Revenue, 8 Cir., 200 F.2d 524; Wisdom v. United States, 9 Cir., 1953, 205 F.2d 30, 33; R. P. Farnsworth & Co. v. Commissioner of Internal Revenue, 5 Cir., 1953, 203 F.2d 490.

The Court of Appeals for the Eighth Circuit has summed up the limitations of the scope of this review in these words:

"It is not the province of this court to retry the issues that were presented to the Tax Court. It was the province of that court to determine the facts." Rider v. Commissioner of Internal Revenue, supra, 200 F.2d at page 525.

These cases are in line with the statement of the Supreme Court that the Tax Court

"is the agency designated by law to find and examine the facts and to draw conclusions as to whether a particular assignment left the assignor with substantial control over the assigned property or the income which accrues to the assignee. And it is well established that its decision is to be respected on appeal if firmly grounded in the evidence and if consistent with the law." Commissioner of Internal Revenue v. Sunnen, 1948, 333 U.S. 591, 607, 68 S.Ct. 715, 724, 92 L.Ed. 898.¹

II The Basic Facts

The basic facts as found by the Tax Court are these. The taxpayer, a California corporation, was incorporated on October 16, 1936. Ten days later it acquired certain assets of Lindley Patrick Farms, Inc., (to be referred to as Lindley Patrick) a California corporation of which Albert Lindley was president, director and sole stockholder. His wife was the other director.

Between the years 1912 and 1926 Albert Lindley purchased various parcels of land totaling approximately 1,150 acres on an adjoining Rough and Ready Island, which is situated in the delta of the San Joaquin River near Stockton. The Stockton Deep Water Channel runs along the island's northern boundary to the Port of Stockton. Lindley purchased the lands for the purpose of holding them for appreciation in value which he expected would result from public improvements for navigation, with the thought that, while awaiting such developments, he could farm the land and thereby receive income or rentals.

Upon the organization of Lindley Patrick, Lindley transferred 1,110 acres of land to the corporation in exchange for all of its stock. The corporation was organized for the purpose of farming, working, developing and otherwise dealing with the properties acquired.

In 1930, further improvements for navigation were planned by public authority and were later made. The Belt Line Railroad was proposed and constructed at approximately the same time. It was about that time that a demand arose for parcels of the property for waterfront and industrial uses. Lindley Patrick undertook to sell its lands in parcels for such purposes.

By October 1, 1936, approximately 200 acres had been sold, but Lindley Patrick was in financial difficulties because of inability to pay $25,655.77 back taxes and mortgage interest. It was indebted to the San Francisco Bank in the amount of $79,000.00, secured by a deed of trust, and to the Stockton Savings and Loan Bank in the amount of $45,595.65 and to L. F. Grimsley, Inc., in the amount of $3,557.97, both secured by a single second deed of trust. Interest on these debts had not been paid for several years, and by October 1, 1936, totaled about $20,500.00. In addition, the property was subject to liens for delinquent county taxes in the amount of $3,767.36.

On October 6, 1936, Lindley Patrick gave Stuart L. Rawlings a written option "to purchase" its assets, the terms of which (as amended by an addendum dated October 8, 1936) were as follows:

(a) A new corporation was to be formed for the purpose of "holding, operating and selling" the real property, with a board of directors of three members, one of whom was to be Albert Lindley.

(b) "The purchase price" of the property was "to be paid" by the delivery to Lindley Patrick of 49 per cent of the new corporation's stock, subject to the payment of the principal sum of the above-mentioned promissory notes and accrued interest thereon.

(c) Rawlings was to pay to the new corporation the sum of $30,000.00 and receive 51 per cent of its stock.

(d) The $30,000.00 was to be used by the new corporation to pay the delinquent taxes and the overdue interest, and any balance was to remain in the treasury of the new corporation.

(e) Rawlings was to lend $20,000.00 to Lindley Patrick, to be secured by the pledge of its 49 per cent of the stock in the new corporation.

On October 15, 1936, the Stockton Savings and Loan Bank (which held promissory notes of Lindley Patrick on which there was a balance due of $45,495.65 secured by a second trust) bought from the San Francisco Bank its entire interest in the first deed of trust for the face amount of the principal ($79,000) and overdue interest, plus one dollar for a release. E. L. Wilhoit was at that time president of the Stockton Savings and Loan Bank and is now chairman of its board of directors.

On October 16, 1936, the taxpayer was incorporated by E. L. Wilhoit, R. L. Eberhardt and Stuart L. Rawlings, each receiving one $50 share of stock. Taxpayer had a capital stock of $60,000 divided into 1,200 shares of a par value of $50 each, all of which was common stock. Its stated powers and purposes were, among other things, "to acquire, own, subdivide, develop, improve, buy, sell, lease * * * all kinds of land and personal property; * * * to transact any other kind of business that may be beneficial and desirable for the stockholders."

On October 22, 1936, the directors of Lindley Patrick resolved to deed the real property to the taxpayer, subject to the principal amount of the encumbrances, and to transfer to taxpayer a related obligation of the City of Stockton and five promissory notes made by Grant B. Shipley to Lindley Patrick, hereinafter referred to as the Shipley notes. The resolution stated "the consideration therefor to this corporation to be the sum of approximately $25,655.77 in cash, and five hundred ninety-nine (599) shares of the capital stock of" taxpayer.

Two days later, on October 24, 1936, the taxpayer's board of directors adopted a resolution to acquire from Lindley Patrick all the real property, the related obligation of the City of Stockton and the Shipley notes. The real property was to be acquired subject to the deeds of trust securing the principal of the notes, and to the second installment of the current realty taxes. The resolution also provided that "The consideration to be paid therefor by this corporation to the said Lindley Patrick Farms, Inc., is the sum of $25,655.77 and the issuance by this corporation to Lindley Patrick Farms, Inc., of 599 shares of the capital stock of this corporation."

On the same day, October 24, 1936, the taxpayer's board of directors, also by resolution, instructed its officers to apply to the State Corporation Commission for a permit to issue additional shares of stock, for the following named considerations

E. L. Wilhoit — 259 shares for $12,950

Stuart L. Rawlings — 239 shares for $11,950

William Wallace Mein — 100 shares for $5,000

Lindley Patrick Farms, Inc. — 599 shares, for the transfer of the property subject to the encumbrances described above.

The resolution also recited that "in addition to the said 599 shares of the capital stock of this corporation, there is to be paid to the Lindley Patrick Farms, Inc., the sum of $25,655.77."

On October 22, 1936, two days prior to the date of the above resolution, taxpayer filed with the...