United States v. Sampsell

• Decision Date: 12 May 1959
• Docket Number: No. 15472,15473.,15472
• Citation: 266 F.2d 631
• Parties: UNITED STATES of America, Appellant, v. Paul W. SAMPSELL, Trustee in Bankruptcy of F. P. Newport Corporation, Ltd., Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

266 F.2d 631 (1959)

UNITED STATES of America, Appellant, v. Paul W. SAMPSELL, Trustee in Bankruptcy of F. P. Newport Corporation, Ltd., Bankrupt, Appellee.

Nos. 15472, 15473.

United States Court of Appeals Ninth Circuit.

May 12, 1959.

Charles K. Rice, Asst. Atty. Gen., Harry Marselli, Lee A. Jackson, Robert N. Anderson, Helen A. Buckley, Attys., Dept. of Justice, Washington, D. C., Laughlin E. Waters, U. S. Atty., Edward R. McHale, Asst. U. S. Atty., Los Angeles, Cal., for appellant.

George Bouchard; Norman A. Bailie, Los Angeles, Cal., for appellee.

Before STEPHENS, HEALY and CHAMBERS, Circuit Judges.

PER CURIAM.

The opinion in the above entitled case is withdrawn, and the following opinion is hereby filed. The pending petition for a rehearing is dismissed. A petition for rehearing of the case on the substituted opinion may be filed or submitted upon the briefs heretofore submitted as to the original petition.

STEPHENS, Circuit Judge.

This case is back after a remand, United States v. Sampsell, 224 F.2d 721, and it involves the same question as on the prior appeal, i. e., the liability for income taxes of the trustee in bankruptcy after an order of liquidation has been made. The original appeal involved taxes for the year 1952. This appeal also involves the 1953, 1954 and 1955 tax years.

The bankrupt was a corporation in the realty business and was adjudged a bankrupt in 1937. A trustee in bankruptcy, Metcalf, was appointed, and he assumed control over the assets of the corporation consisting mostly of real estate. In 1950 Sampsell, the appellee (hereinafter called Trustee), was appointed as successor trustee in bankruptcy.

Prior to 1951, sale of the real estate held by the Trustee was difficult because of the rights of certain of the creditors, and very little of the property was sold up to that time. By 1952 these difficulties had been eliminated, and on May 26, 1952, the Referee made an order of liquidation directing Trustee to sell the assets and close the estate. The present appeals involve the Government's claim that Trustee is liable for federal income tax for amounts the bankrupt estate received after the order of liquidation was made.

During the period May 26, 1952, to December 31, 1952, Trustee received amounts for interest on trust deeds on the sales of property made prior to 1952, for royalties from oil leases made in 1938 and 1939, for sales of three parcels of real estate and for payments on trust deeds made in 1950. In 1953 he received oil royalties from these leases, interest on the trust deeds, and the proceeds from his sale of five parcels of land. In 1954, the Trustee received sums for oil royalties, interest on the trust deeds and payment for one parcel of land condemned by the City of Long Beach. He also arranged for the sale of the remainder of the property during the year. The bankrupt contested this last sale, however, and as a result, payment to the Trustee was not made until 1955.

After the 1952 tax year, the Government filed a claim for a deficiency which was contested by the Trustee. The Trustee claimed that the order of liquidation, by itself, rendered non-taxable all the income received thereafter. Both the Referee and the District Court held for the Trustee. In United States v. Sampsell, 224 F.2d 721, 723, this Court reversed and remanded, holding that it is the source and character of the income received and the nature of the operation of the bankrupt's property which will determine the taxability of the income. The case came up on a stipulation of facts, and the facts presented were insufficient to overcome the prima facie case arising from the sworn proof of the tax claims. Therefore, the case was sent back "for such further proceedings as may appear necessary and proper."

On remand a hearing before the Referee in Bankruptcy was had and evidence taken with respect to the year 1952 (May 26 to December 31). Evidence was also taken with respect to tax years 1953, 1954 and 1955, in regard to the tax claims of the Government for those years. The tax claims for 1954 and 1955 are in the alternative and are based on the profit on the final sale of the assets of the bankrupt estate. If this income on the final sale is held to accrue in one of the two years, the Government will have no claim for the other year.

The Referee held, and the District Court affirmed, that there was no taxable income to the Trustee during the periods in question, because the Trustee, after May 26, 1952, performed only liquidating activities and did not carry on or operate any trade, property or business.

The claims for 1952 and 1953 are controlled by Section 52 of the 1939 Internal Revenue Code:

"* * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control." Emphasis added. 26 U.S.C.A. § 52.

Under that section a trustee in bankruptcy need not file a return unless he is "operating the property or business" of the corporation.

In 1952, during the May 26 to December 31 period, the Trustee received $440.00 as interest on trust deeds from sales of property made before 1952; $18,745.00 royalties on oil leases made in 1938-39; $4,510.00 as payments on trust deed of sale made in 1950; and $77,600 from three separate sales of real estate. In 1953 the Trustee received $35,394.00 as oil royalties; $117.00 as interest on the trust deeds and $19,150 for the sale of five separate parcels of real estate. A tax deficiency of $11,391.21 and $221.19 for 1952 and 1953 respectively is claimed by the Government.

The District Court held that "When a trustee, by order of court, liquidates the business, he ceases to conduct it", In re F. P. Newport Corporation, 144 F.Supp. 507, 509, and in the present case, the trustee was liquidating the estate during the years in question.

This would seem to imply that the order of liquidation along with the gradual selling of property held by the trustee will automatically convert an operating trustee to non-operating status. In United States v. Metcalf, 131 F.2d 677, this Court held that Sampsell's predecessor was liable for income taxes as a trustee operating the property or business of the corporation. It was contended that since the ultimate object of the trustee was to liquidate the bankrupt estate, and that, in fact some parcels of land were being sold, this would render the income non-taxable. The trustee received large amounts from oil and other leases entered into during those years. We held that the trustee was clearly operating the property of the corporation despite the gradual liquidation. The Metcalf case shows that the gradual sale of the assets of the estate is not sufficient to end the trustee's liability for income taxes. Furthermore, we held in United States v. Sampsell, supra, that the order of liquidation did not automatically result in a non-operating status for the same bankrupt estate. An order of liquidation and the gradual sale of the assets are not, necessarily, sufficient to end the taxation of the trustee in bankruptcy.

The bankrupt was a real estate corporation, and the sale of property by it could be considered as part of its normal operations as well as a liquidation. It is not the same as the selling of the tools or equipment of production by a manufacturing company, or as the sale of trucks used in distributing produced merchandise.

The Trustee paid tax on his income until May 26, 1952. He has not shown any change of conduct or operation occurring after the order of liquidation during the years 1952 and 1953. He continued the previous practice of employing an agent to visit the leased oil fields to check production and operation. He had the right under the oil lease to choose between a royalty in kind or in cash, though he continued to accept the cash as both he and his predecessor had done.¹

In Louisville Property Co. v. C. I. R., 6 Cir., 140 F.2d 547, the court held that the assignee was operating the property or business of the bankrupt, a real estate corporation, under Section 52, although there was an orderly liquidation of the property over the years by sale of the parcels of land, and royalties for the removal of coal and timber were received. In Pinkerton v. United States, D.C., 73 F.Supp. 590, a...