W. W. Windle Co. v. C.I.R.

• Decision Date: 21 January 1977
• Docket Number: No. 76-1249,76-1249
• Parties: 77-1 USTC P 9203 W. W. WINDLE COMPANY, Petitioner, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
• Court: U.S. Court of Appeals — First Circuit

Page 43

550 F.2d 43

77-1 USTC P 9203

W. W. WINDLE COMPANY, Petitioner, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.

No. 76-1249.

United States Court of Appeals First Circuit.

Argued Sept. 14, 1976.

Decided Jan. 21, 1977.

Raymond T. Mahon, Worcester, Mass., with whom Bowditch & Lane, Worcester, Mass., was on brief, for appellant.

Ernest J. Brown, Atty., Tax Div., Dept. of Justice, Washington, D.C., with whom Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews and Stephen M. Gelber, Attys., Tax Div., Dept. of Justice, Washington, D.C., were on brief, for appellee.

Before COFFIN, Chief Judge, CLARK, Associate Justice, ^* and CAMPBELL, Circuit Judge.

LEVIN H. CAMPBELL, Circuit Judge.

W. W. Windle Co. (Windle) appeals from a March 6, 1976 decision of the Tax Court that there was "no deficiency in income tax due from, or overpayment due to, the petitioner (Windle) for the taxable year ended June 30, 1970." Windle's quarrel is not with the decision, which was favorable to it. Rather Windle seeks review of one finding made by the Tax Court in reaching its decision to the effect that some worthless stock represented a capital loss a finding which, though unfavorable, was more than balanced out for the tax year in question by favorable findings as to other items resulting in a net determination of no deficiency. We are asked, in essence, to make an exception to the rule that "(a) party may not appeal from a judgment or decree in his favor, for the purpose of obtaining a review of findings he deems erroneous which are not necessary to support the decree", Electrical Fittings Corp. v. Thomas & Betts Co., 307 U.S. 241, 242, 59 S.Ct. 860, 860, 83 L.Ed. 1263 (1939). We decline to do so and dismiss the appeal.

The facts are fully set out in the Tax Court's findings and opinion, 65 T.C. 694 (1976), and we recount them only briefly here. Windle, a Massachusetts corporation since 1912, processes and sells woolen stock and other woolen materials. In an effort to overcome severe economic problems common during the 1950's throughout the woolen textile industry, Windle, in 1961 organized an Oregon corporation, Nor-West Fabrics, Inc. (Nor-West) to operate a woolen textile mill which was to provide a captive customer for Windle's products. Windle acquired more than fifty percent of the stock in the company at par value. The Nor-West venture did not succeed, and the corporation was dissolved on December 28, 1970.

During the years Nor-West was in operation, Windle loaned the company money, and at the time of liquidation, $320,000 in loans had not been repaid. $127,514 received in the sale of Nor-West's assets was applied to the loan leaving an unpaid balance of $192,486. In addition, $124,514.60 in accounts receivable for raw material was owed Windle by Nor-West. Neither Windle nor the other stockholders of Nor-West received anything for their stock upon liquidation of the company.

Windle, on its tax return of the taxable year ended June 30, 1970, claimed ordinary loss deductions for both the unpaid debts and the worthless shares of stock and these losses were offset against its taxable income for that year. On audit, the Commissioner determined that the loans made to Nor-West, as well as the accounts receivable owed by Nor-West, were an equity investment by Windle and subject to the capital loss limitations of 26 U.S.C. § 1211. The Commissioner also determined that the loss on the worthless stock was a capital rather than an ordinary loss.

Petitioner appealed to the Tax Court pursuant to 26 U.S.C. § 6213. The Tax Court reversed the Commissioner's determination on the bad debt issue but upheld him as to the worthless stock. Since the $317,000.60 bad debt was greater than the $284,264.76 taxable income the Commissioner had determined, the Tax Court entered its decision that there was no deficiency in the taxpayer's income tax for its taxable year ended June 30, 1970. The Tax Court's finding that the worthless stock represented a capital loss thus became irrelevant to the taxpayer's 1970 liability. The Commissioner took no appeal from the Tax Court's decision.

Windle's argument on appeal is directed to the Tax Court's finding that the worthless stock represented a capital loss. The taxpayer contends that because the Tax Court found that the company's predominant motive in acquiring the stock was related to business and not to investment, the worthless stock should have been considered an ordinary business loss. A substantial body of case law outside this circuit, said to have been evolved by lower courts from Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29 (1955), is cited in support of this contention, e. g., Schlumberger Technology Corp. v. United States, 443 F.2d 1115, 1119-21 (5th Cir. 1971); Steadman v. Commissioner, 424 F.2d 1, 5-6 (6th Cir.), cert. denied, 400 U.S. 869, 91 S.Ct. 103, 27 L.Ed.2d 109 (1970); Union Pacific R.R. v. United States, 524 F.2d 1343, 1358-59 (Ct.Cl.1975), cert. denied, 429 U.S. 829, 97 S.Ct. 83, 50 L.Ed.2d 89 (1976); Waterman, Largen & Co. v. United States, 189 Ct.Cl. 364, 419 F.2d 845, 847 (1969), cert. denied, 400 U.S. 869, 91 S.Ct. 103, 27 L.Ed.2d 109 (1970); Booth Newspapers, Inc. v. United States, 303 F.2d 916, 920-21, 157 Ct.Cl. 886 (1962).

The Commissioner does not dispute the existence of a sizable body of precedent in other circuits for a "predominant motive test", and seems to concede that were that yardstick to be applied here, the Tax Court's resolution of the worthless stock issue would indeed be open to question. But the Commissioner urges this circuit to reject any motive test at all. He argues that Congress defined the term "capital asset" as "property held by the taxpayer (whether or not connected with his trade or business)," 26 U.S.C. § 1221, and enumerated in the statute only five specific exclusions. The Nor-West stock, the Commissioner points out, falls under the statutory definition of a "capital asset" and does not come within any express exemption. As the statute is plain on its face, the Commissioner argues that a taxpayer's motive in acquiring stock is immaterial under the Code, and that the line of cases holding otherwise is simply wrong.

While the substantive question thus raised is interesting, we do not reach it on this record because we feel compelled to rule against Windle on the threshold question of whether a taxpayer may appeal from a favorable redetermination of its tax liability in order to gain review of the Tax Court's treatment of an issue that proved unnecessary to the final decision.

Our appellate jurisdiction in this instance is conferred by 26 U.S.C. § 7482(a) which grants exclusive jurisdiction to courts of appeals to review "the decisions of the Tax Court" (emphasis supplied), a decision of the Tax Court being the formal determination of the existence or nonexistence of a deficiency. ¹ Commissioner v. Smith Paper, Inc., 222 F.2d 126, 129 (1st Cir. 1955) (Magruder, C. J.). There is no grant of jurisdiction to review the findings and rulings of the Tax Court apart from their effect upon the decision. A decision is rendered "upon the date that an order specifying the amount of the deficiency is entered in the records of the Tax Court", 26 U.S.C. § 7459(c), and is reviewable only if there is a controversy between the taxpayer and the Government about the amount of taxes due. 9 J. Mertens, Law of Federal Income Taxation § 51.13 (1974) (hereinafter Mertens). See De Amodio v. Commissioner, 299 F.2d 623, 625 (3d Cir. 1962). The tax liability in controversy before the Tax Court below was for the tax year ended June 30, 1970 and was properly before that court on a petition for redetermination of the Commissioner's determination of a deficiency for that year only. See 26 U.S.C. §§ 6214(b), 6213; 9 Mertens, supra at § 50.15. No other year's taxes were in issue. Therefore, when the decision was entered and it was favorable to the taxpayer the controversy about the amount of taxes due ended. ² Any conclusion we might now reach on the merits of Windle's claim would be at most a kind of declaratory judgment affording guidance for other years, a type of remedy nowhere sanctioned with respect to Federal taxes, see 28 U.S.C. § 2201.

Windle argues that it will be bound in litigation for other tax years by the adverse finding of the Tax Court in this case or, alternatively, that relitigating the Corn Products issue in the Tax Court would be an undue burden. The short answer is that neither of these concerns can provide appellate jurisdiction where we have none. Happily, however, while it is true that the doctrine of collateral estoppel applies in tax cases, Walter Wilson Flora, 47 T.C. 410, 413 (1967) citing Commissioner v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948), the doctrine may be invoked only as to questions of law and fact essential to a judgment. Walter Wilson Flora, supra at 413-14. The contested finding in the present case was...