United States v. Bondurant

• Decision Date: 24 May 1957
• Docket Number: No. 13013.,13013.
• Citation: 245 F.2d 265
• Parties: UNITED STATES of America, Appellant, v. C. R. BONDURANT, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

245 F.2d 265 (1957)

UNITED STATES of America, Appellant, v. C. R. BONDURANT, Appellee.

No. 13013.

United States Court of Appeals Sixth Circuit.

May 24, 1957.

Melvin L. Lebow, Washington, D. C., Charles K. Rice, Lee A. Jackson, Hilbert P. Zarky, Washington, D. C., Millsaps Fitzhugh, Memphis, Tenn., on brief, for appellant.

Bailey Brown, Memphis, Tenn., Lucius E. Burch, Jr., Burch, Porter, Johnson & Brown, Memphis, Tenn., on brief, for appellee.

Before McALLISTER, MILLER and STEWART, Circuit Judges.

SHACKELFORD MILLER, Jr., Circuit Judge.

The appellee brought this action in the district court to recover the sum of $21,409.78, plus interest, claimed by him to be an overpayment of income taxes for the fiscal year ending August 31, 1951. The jury returned a verdict for the appellee, upon which judgment was entered, followed by this appeal.

The only evidence was on the part of the appellee, the Government offering no witness. It showed the following undisputed facts. Appellee has been in the business of cotton shipping since 1933. A cotton shipper is principally a buyer and seller of cotton, the purchaser paying a fixed amount per bale above what it costs a shipper to purchase the cotton. This differential is the shipper's compensation. Appellee carried on his business under the firm name of Reid Bondurant & Company, of Memphis, Tenn., which was wholly owned by him. During the entire period in issue he did not cease carrying on this business.

In addition to dealing in cotton, appellee had bought and sold land and invested and speculated in different commodities, including corn, cottonseed oil, lard, oats and rye. He knew that doctors and lawyers invested in cotton and took capital gains upon its sale. In 1950 appellee decided to buy and sell some cotton in such a manner as to make any profit resulting therefrom a capital gain instead of ordinary income. He consulted his tax counsellor, who advised him that it could be done with any commodity, but since appellee was in the business of buying and selling cotton, the transactions would have to be handled in a certain way so as to earmark them as individual purchases separate from the taxpayer's business. This would require, among other things, payment by personal check, maintenance of separate records, individual financing with the bank separate from the firm's financing, keeping the "investment" cotton physically separate from the business cotton, and holding without sale for the required period of time.

Using this advised procedure, appellee made purchases of so-called "investment" cotton, held it for the required length of time before selling, and reported the profits as capital gains. He purchased the "investment" cotton, along with business cotton, from California, using the same broker for the purchase of all California cotton. The "investment" cotton was stored in a public warehouse at Memphis, while his business cotton was stored at Galveston. The "investment" cotton was not displayed for sale on appellee's sample tables and was not for sale during the holding period. It was held and sold by him in the same lots in which it was purchased and was not broken down and classed out by him for purposes of sale. Appellee testified that none of it was hedged, as was the usual practice with business cotton; that at the time he purchased the cotton in question, he purchased it for investment; that he expressed and carried out that intention by records and statements to and arrangements with his banker; that it was never held by him for sale to customers in the regular or ordinary course of his business; that it was not shown to his customers, and that his intention to hold it for investment persisted up to the moment it was sold.

It is the Government's contention, in accord with the Commissioner's ruling, that the sale of the so-called "investment" cotton was not the sale of a capital asset and that the profit resulting therefrom was ordinary income fully taxable rather than a capital gain. Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29, rehearing denied 350 U.S. 943, 76 S.Ct. 297, 100 L. Ed. 823; Watson v. Commissioner, 345 U.S. 544, 73 S.Ct. 848, 97 L.Ed. 1232. Appellee contends that the profit on this part of his business resulted from the sale of a capital asset and was taxable as a capital gain rather than ordinary income. Section 117, Internal Revenue Code of 1939, 26 U.S.C.A. § 117.

Section 117, Internal Revenue Code of 1939, provides that in the case of a taxpayer, other than a corporation, only 50 per centum of the gain or loss recognized upon the sale of a capital asset shall be taken into account in computing net income if the capital asset has been held for more than 6 months. Section 117(a) provides: "The term `capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include * * * stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade of business; * * *."

At the close of appellee's evidence, the Government moved for a directed verdict. It contended that it was shown by appellee's own evidence that the only purpose in setting up separate accounts was to reduce the amount of taxes he would have to pay in his business, and, under the circumstances, the form of the transaction must be disregarded. This motion was denied, as was also the Government's motion for judgment notwithstanding the verdict or for a new trial. These rulings are challenged by this appeal.

The district judge, in charging the jury, gave the definition of "capital assets" as set out in the Internal Revenue Code. He explained that it excluded all goods or stock in trade of the taxpayer or other property which would be included in the business inventory of the taxpayer, or property held by him primarily for sale to customers in the ordinary course of business. He explained that there was no fixed formula for determining whether the cotton sold by the taxpayer was held by him primarily for sale to customers in the ordinary course of his trade or business, or was held by him as a capital asset, but that each case must turn upon its own facts and circumstances. He pointed out certain recognized tests which the jury should consider as being helpful guides. He instructed the jury that a taxpayer cannot convert...