Vukasovich, Inc. v. C.I.R.

• Decision Date: 02 June 1986
• Docket Number: 85-7326,Nos. 85-7256,s. 85-7256
• Citation: 790 F.2d 1409
• Parties: -5107, 86-1 USTC P 9446 VUKASOVICH, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. VUKASOVICH, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1409

790 F.2d 1409

58 A.F.T.R.2d 86-5107, 86-1 USTC P 9446

VUKASOVICH, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

VUKASOVICH, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Nos. 85-7256, 85-7326.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 14, 1986.

Decided June 2, 1986.

John F. Hopkins, Hopkins, Mitchell & Carley, San Jose, Cal., for petitioner-appellee.

Teresa E. McLaughlin, Dept. of Justice, Washington, D.C., for respondent-appellant.

Appeal from the United States Tax Court.

Before GOODWIN, HUG, and REINHARDT, Circuit Judges.

GOODWIN, Circuit Judge:

As part of a settlement of disputes arising out of a cattle-feeding agreement, Vukasovich, Inc. paid approximately $212,000 to Sunset Cattle Co., which in turn agreed to pay $200,000 to Coit Ranch, to which Vukasovich owed $237,000. The Commissioner appeals from the Tax Court's holding that Vukasovich did not realize $37,000 in income from the cancellation of indebtedness. Vukasovich cross-appeals from the Tax Court's finding that the payment was a nondeductible repayment of a loan rather than a deductible settlement. We reverse the Tax Court's decision that Vukasovich did not realize income from the cancellation of its indebtedness and affirm its finding that the three-party arrangement was in substance the repayment of a loan.

Background

The taxpayer, Vukasovich, Inc., bought cattle from Coit, which agreed to fatten the cattle for market. The taxpayer paid approximately $400,000 directly to Coit. The remaining money for the investment was advanced by Crocker National Bank under a $2.1 million dollar line of credit to the taxpayer, guaranteed by Coit. The taxpayer prepaid interest and feed costs, partly with Crocker loans and partly with its advance. Sunset acted as the taxpayer's agent for the transaction.

The transaction was entered into on August 24, 1973, and the taxpayer's tax year ended August 31. The taxpayer deducted immediately $100,000 prepaid interest, and $700,000 for the feed. The taxpayer did not immediately deduct from 1973 income the $1.6 million purchase price of the cattle, but did report it in connection with the sale of cattle.

The next year, the cattle were sold for about $1.8 million. The taxpayer reported the gain over the purchase price. The taxpayer forwarded the proceeds of the sale to Crocker, which were nonetheless insufficient to repay the full amount advanced under the line of credit. Coit, pursuant to its guarantee, paid Crocker the $237,000 difference.

In a subsequent year, the taxpayer sued Coit for rescission of the contract. Coit counterclaimed on the taxpayer's note to Crocker, having been assigned the note when it paid Crocker pursuant to its guarantee. The parties settled the suit. The taxpayer agreed to pay Sunset $212,000 in installments with interest. Sunset promised Coit that it would remit installments of identical amounts, except for the last, to Coit. The taxpayer guaranteed Sunset's payments to Coit. Coit collected $200,000, plus interest. The other $12,000 went to Sunset. That amount approximated the sum Sunset would have earned under its agency contract. The parties released one another from all claims.

On its return, the taxpayer deducted its $212,000 payment as a business expense, describing it as the settlement of a disputed claim. It did not report the cancellation of its loan debt as income. The Commissioner challenged both these claims.

The Tax Court characterized the settlement as the repayment of a loan and disallowed the business expense deduction. It also held that the doctrine of Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 46 S.Ct. 449, 70 L.Ed. 886 (1926), required that the cancellation of the loan debt not be held income. The court also rejected the Commissioner's claim that the tax-benefit rule required the inclusion of the $37,000 as income.

Scope of Review

We review facts, including inferences made from a stipulated record, only for clear error. See Church by Mail, Inc. v. Commissioner, 765 F.2d 1387, 1390 (9th Cir.1985). The taxpayer's assertion that review is de novo relies on such cases as Sennett v. Commissioner, 752 F.2d 428, 430 (9th Cir.1985). However, these cases involved no factual disputes, leaving the Tax Court only the task of applying the law. Church by Mail, 765 F.2d at 1390.

The Commissioner and the taxpayer agree that the Tax Court's decision that there was no income from the cancellation of indebtedness is reviewable as a question of law. However, ambiguity in this circuit's case law has obscured the scope of review of Tax Court decisions on questions of law. One set of decisions apparently reviews Tax Court decisions only for "unmistakable error" of law. See First Charter Financial Corp. v. United States, 669 F.2d 1342, 1345 (9th Cir.1982) (de novo review, but this court will disagree with Tax Court only if "unmistakable question of law so mandates"); Merlino v. Commissioner, 660 F.2d 415, 416 (9th Cir.1981); Carnation Co. v. Commissioner, 640 F.2d 1010, 1012 (9th Cir.), cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 381 (1981); Estate of Simmie v. Commissioner, 632 F.2d 93, 94 (9th Cir.1980); Max Sobel Wholesale Liquors v. Commissioner, 630 F.2d 670, 674 (9th Cir.1980); Sibla v. Commissioner, 611 F.2d 1260, 1262 (9th Cir.1980).

Another set of decisions reviews Tax Court decisions without reciting any special deference to the Tax Court's expertise in tax law. See Bolaris v. Commissioner, 776 F.2d 1428, 1431 (9th Cir.1985); Bolker v. Commissioner, 760 F.2d 1039, 1041-42 (9th Cir.1985); Schneier v. Commissioner, 735 F.2d 375, 376 (9th Cir.1984), cert. denied, --- U.S. ----, 105 S.Ct. 962, 83 L.Ed.2d 967 (1985); Wein Consolidated Airlines, Inc. v. Commissioner, 528 F.2d 735, 737 n. 1 (9th Cir.1976). Bolaris relies on Dumdeang v. Commissioner, 739 F.2d 452, 453 (9th Cir.1984), in which the only issue was the Tax Court's decision that the revenue code's definition of dependent was constitutional. Bolker cites California Federal Life Insurance Co. v. Commissioner, 680 F.2d 85, 87 (9th Cir.1982), which cites two cases, Cruttenden v. Commissioner, 644 F.2d 1368, 1374 (9th Cir.1981), which itself states the unmistakable question rule of Sibla and progeny, and Allstate Savings and Loan Association v. Commissioner, 600 F.2d 760, 762 (9th Cir.1979), cert. denied, 445 U.S. 962, 100 S.Ct. 1649, 64 L.Ed.2d 237 (1980), which states that the Tax Court should receive substantial deference in the resolution of technical issues affecting a single industry. While Allstate was decided without citation of authority, the reasoning follows Dobson v. Commissioner, 320 U.S. 489, 501-02, 64 S.Ct. 239, 246-47, 88 L.Ed. 248 (1943). Schneier cites only Confederated Tribes v. Kurtz, 691 F.2d 878, 880 (9th Cir.1982), cert. denied, 460 U.S. 1040, 103 S.Ct. 1433, 75 L.Ed.2d 792 (1983), which held only that the district court's decision would be reviewed de novo. Wien cites only 26 U.S.C. Sec. 7482(a) (1982).

One recent Ninth Circuit decision holds that we review de novo but accord decisions of the Tax Court special respect. See Magneson v. Commissioner, 753 F.2d 1490, 1493 (9th Cir.1985). It relies on California Federal Life Insurance.

The conflict apparently results from seemingly contradictory statutes. 26 U.S.C. Sec. 7482(a) (1982) provides that we review Tax Court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury," which implies de novo review. Section 7482(c)(1) instructs us to reverse decisions "not in accordance with law," a standard akin to those used in reviewing administrative agencies. See 5 U.S.C. Sec. 706(2)(A) (1982). Dobson, which reviews Tax Court decisions deferentially, was decided before Sec. 7482(a) became law and interprets the predecessor statute to Sec. 7482(c)(1). See 320 U.S. at 497 & n. 21, 64 S.Ct. at 244 & n. 21 (citing Revenue Act of 1926, Pub.L. No. 69-020, Sec. 1003(b), 44 Stat. 9, 110). Dobson reasoned that Congress' changing the Board of Tax Appeals to the Tax Court was a sign of congressional approval of the court's work, so that greater deference should be paid to its conclusions. 320 U.S. at 496-99, 64 S.Ct. at 244-45. The Tax Court's expertise and the uniformity of its decisions provided further reason for deferring to the Tax Court. 320 U.S. at 498-500, 64 S.Ct. at 245-46.

Actually, congressional intent in conferring more independence on the Tax Court seems to have been directed at making it function as a court, deciding cases based on judicial reasoning rather than administrative discretion. The Commissioner has the power to promulgate regulations and is to be relied upon for any discretionary decisions based on administrative expertise or political judgments. See 26 U.S.C. Sec. 7805(a) (1982); National Muffler Dealers Association v. United States, 440 U.S. 472, 476-77, 99 S.Ct. 1304, 1306-07, 59 L.Ed.2d 519 (1979). Uniformity is provided by deference to the Commissioner. See National Muffler Dealers Association, 440 U.S. at 476-77, 99 S.Ct. at 1306-07. In any case, Congress's provision for review of the Commissioner's decisions in the district courts, 28 U.S.C. Sec. 1346(a)(1) (1982), suggests that uniformity in tax law is less important than in those areas where Congress gives a centralized administrative agency exclusive jurisdiction. After Dobson, the House draft codifying Title 28 placed the Tax Court in the judicial code. See H.R. 3214, 80th Cong., 2d Sess. (1948). The Senate rejected this in the interest of avoiding controversy. S.Rep. No. 1559, 80th Cong., 2d Sess. 2 (1948). However, the Senate agreed that criticism of Dobson was unanimous. Id. For these reasons, Congress decided to overrule Dobson. See id. at 2, 13; Act of June 25, 1948, ch. 646, Sec. 36, 62 Stat. 869, 991-92, amending 26 U.S.C. Sec. 1141(a), recodified as 26 U.S.C. Sec. 7482...