Yunker v. Commissioner of Internal Revenue

• Decision Date: 01 May 1958
• Docket Number: No. 13032.,13032.
• Citation: 256 F.2d 130
• Parties: Milton S. YUNKER and Leonna S. Yunker (Husband and Wife), Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Sixth Circuit

256 F.2d 130 (1958)

Milton S. YUNKER and Leonna S. Yunker (Husband and Wife), Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 13032.

United States Court of Appeals Sixth Circuit.

May 1, 1958.

Louis E. Ackerson, Louisville, Ky., for petitioners.

Harry Marselli, Washington, D. C., for respondent. Charles K. Rice, Lee A. Jackson, Harry Baum and Walter Akerman, Jr., Washington, D. C., on the brief.

Before ALLEN, McALLISTER, and MILLER, Circuit Judges.

McALLISTER, Circuit Judge.

Leonna S. Yunker, the wife of Milton S. Yunker, inherited 75 acres of undeveloped farm land, in various parcels, from her grandfather, in 1928, and from her uncle, in 1935. Part of the land adjoined the Dixie Highway, known as US 31. Mrs. Yunker wanted to sell the acreage as a whole, and the real estate broker whom she employed, Mr. Carpenter, attempted such a sale. Considerable effort resulted only in offers that were entirely inadequate. Mrs. Yunker and Mr. Carpenter then concluded that it was not feasible to sell the property as a whole and that it would be salable only by subdividing it into sections of approximately five acres each. One of the sections was divided into three considerably smaller portions. Thereafter, a road was laid out and constructed, giving each parcel access thereto; and a power line was extended along the road to make electricity available to each parcel. Mr. Carpenter paid for the survey, engineering, and construction of the road under an agreement with Mrs. Yunker that he would be repaid out of the proceeds of each sale; and he was subsequently repaid the sums he had advanced. Mr. Carpenter was further employed by Mrs. Yunker as her agent to handle the sales of the various parcels, on a commission basis. Twelve sales were completed in 1950, and five sales, in 1951.

Mr. and Mrs. Yunker filed joint income tax returns and reported the gain from the sale of the above mentioned lots, as capital gain under Section 117 (a) (1) (A) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 117(a) (1) (A). The Commissioner, however, determined deficiencies. Thereafter, the Tax Court held that the disposition of the parcels of real estate constituted the carrying on of a trade or business, and that Mrs. Yunker held the parcels primarily for sales to customers in the ordinary course of her trade or business, with the result that the property could not be treated as a capital asset. The Tax Court further decided that the transaction came within the exception set forth in Section 117(a) (1) (A),¹ and within the meaning of Section 117(j), and thereupon determined that the gains from the sales of the real estate were taxable as ordinary income.

The sole issue presented is whether the net gain realized by the taxpayer, Leonna S. Yunker, from the above mentioned sales of the lots constituted ordinary, income, or whether it constituted gain from the sale of capital assets, taxable at long term capital gain rates.

Capital assets do not include property primarily for sale to customers in the ordinary course of carrying on a trade or business; but if the sale of the lots by the taxpayer in this case did not constitute sales to customers in the ordinary course of carrying on her trade or business, she is entitled to be taxed on the gain as upon sales of capital assets.

The taxpayer was interested only in one purpose — selling the batch of real estate which she had inherited — getting rid of it, and getting some profit out of it. She had never been in the real estate business and had never been interested in it. When she proceeded to sell the real estate, she was not interested in building a road or even in disposing of it in smaller parcels. The unquestioned evidence is that she was most anxious to sell the whole tract. In fact, she was reluctant to subdivide it. But she found that the old farm was unsalable, in one tract. Mr. Carpenter, who eventually assisted in the sale of the tract in smaller parcels, testified that it was "pretty unsalable" as a whole. He testified further that he had advertised the tract for sale as a whole, but that they were unable to sell it on that basis. It was Mr. Carpenter who told Mrs. Yunker that it could only be sold in smaller parcels, and it was he who put up the money for surveying, subdividing, engineering of the road to give access to the various parcels, and carried on the negotiations to secure and provide electricity and water service to the different lots, on the agreement with the taxpayer that he would receive back his financial advances from the first monies received on the sales. What Mr. Carpenter put up in the way of money was said to be "in the nature of a loan." But the taxpayer never borrowed anything. What Mr. Carpenter had for his advances was rather in the nature of a lien on the proceeds of the sales that he hoped would result from his efforts. But that matter is not important.

In the argument of this case, a forceful argument was made as to the sanctity of findings of fact and the wrongful usurpation by an appellate court of the role of the fact finder, which, it was suggested, at least implicitly, by appellee, would be the only way by which the taxpayer could here prevail. However, as Mr. Justice Frankfurter has said, "The conclusiveness of a `finding of fact' depends on the nature of the materials on which the finding is based. The finding even of a so-called `subsidiary fact' may be a more or less difficult process varying according to the simplicity or subtlety of the type of `fact' in controversy. Finding so-called ultimate `facts' more clearly implies the application of standards of law. And so the `findings of fact' even if made by two courts may go beyond the determination that should not be set aside here. Though labeled `finding of fact', it may involve the very basis on which judgment of fallible evidence is to be made. Thus, the conclusion that may appropriately be drawn from the whole mass of evidence is not always the ascertainment of the kind of `fact' that precludes consideration by this Court." Baumgartner v. United States, 322 U.S. 665, 670, 671, 64 S.Ct. 1240, 1243, 88 L.Ed. 1525.

In a case where the evidence is, in all essentials, undisputed, an appellate court may exercise its independent judgment with respect to the ultimate fact question, when it could not do so in a case wherein contradictory evidence appears. Smith v. Dunn, 5 Cir., 224 F.2d 356. "In so far, however, as the so-called `ultimate fact' is simply the result reached by processes of legal reasoning from, or the interpretation of the legal significance of, the evidentiary fact, it is `subject to review free of the restraining impact of the so-called "clearly erroneous" rules.' Lehmann v. Acheson, 3 Cir., 206 F.2d 592, 594." Galena Oaks Corporation v. Scofield, 5 Cir., 218 F.2d 217, 219. A similar problem was dealt with in E. H. Sheldon & Co. v. Commissioner, 6 Cir., 214 F.2d 655, 658, where the taxpayer had appealed from an order of the Tax Court sustaining the disallowance by the Commissioner of certain deductions from gross income, and it was said:

"As a preliminary matter, we dispose of the Commissioner\'s contention that the finding of the Tax Court that such expenditures were not ordinary and necessary expenses of carrying on the business during the years in question but were capital expenditures is not clearly erroneous and is conclusive under Sec. 1141(a), Internal Revenue Code, 26 U.S.C.A., § 1141(a) and Rule 52(a) Rules of Civil Procedure, 28 U.S. C.A. The subsidiary facts in this case are uncontradicted, and such facts, so found by the Tax Court, are accepted by us under Rule 52(a). However, the findings of the Tax Court, which are now relied upon by the commissioner, are conclusions drawn by the Tax Court from uncontradicted subsidiary facts, the drawing of which did not involve any element of seeing or hearing the witnesses or of judging their credibility. As we have heretofore pointed out, under such circumstances, this Court will make its own evaluation of the conclusions to be drawn from the facts established by the evidence."

In this case, since the evidentiary facts are not in dispute, the reviewing court is not bound by the findings of ultimate fact below. With respect to the interpretation of the statute, the words and phrases, "trade or business," "ordinary" and "customers" are to be construed in their ordinary and not in an artificially created meaning. Higgins v. Commissioner, 312 U.S. 212, 61 S.Ct. 475, 85 L.Ed. 783. To be engaged in the real estate business means to be engaged in that business "in the sense that term usually implies." Dillon v. Commissioner, 8 Cir., 213 F.2d 218, 220. In Goldberg v. Commissioner, 5 Cir., 223 F.2d 709, 712, 713, the court reversed the holding of the Tax Court that certain gain was "ordinary income" rather than capital gain. In that case, the court said that "The test as to whether the capital gains provisions apply in such event is, at bottom, whether the purpose of the sales is primarily making money by carrying on a substantial part of the activities of the person engaged in the business of selling houses, or to dispose of or liquidate the rental business. If the latter is the case, the owner obtains capital gains benefits."

The Tax Court, in its opinion in the instant case, stated that it recognized that no one test is controlling in ascertaining whether the sales are of property held primarily by the taxpayer for sale to customers in the ordinary course of his trade or business, and that the question must be decided upon consideration of all material facts and...