Court Opinion

ID: 9455328
Source: CourtListenerOpinion
Date Created: 2023-08-04 19:18:49.487953+00
Date Added: 2024-06-11T17:34:33.295277
License: Public Domain

SKELTON, Judge
(dissenting):
I respectfully dissent.
The only property involved is the can closing equipment which the plaintiff had been leasing to its customers for 16.6 years on the average and in some cases for thirty years.
The only problem involved is whether this equipment constituted “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.”
In my opinion, this property was not only not held “primarily” for sale to its customers, but was not held for sale at all. Furthermore, when taxpayer was forced to convey the equipment to its lessees by the court decree, this was not done in the ordinary course of business but in a most extraordinary way.
The courts have uniformly held where this problem has arisen that it must be solved by the facts in each particular case and that there is no formula or rule of thumb test that can be applied to all cases. For this reason, this case must be considered in the light of its peculiar facts that are not to be found in any other case.
We start with the Supreme Court’s definition of the word “primarily” in the case of Malat v. Commissioner of Internal Revenue, 383 U.S. 569, 86 S.Ct. 1030, 16 L.Ed.2d 102 (1966), where the court said:
* * * We hold that, as used in § 1221(1) [Sec. 117(j) of the Internal Revenue Code of 1939] “primarily” means “of first importance” or “principally.” (Id. at 572, 86 S.Ct. at 1032.]
This definition in effect overruled American Can Co. v. Commissioner, 317 F.2d 604 (2d Cir. 1963), cert. denied, 375 U.S. 993, 84 S.Ct. 632, 11 L.Ed.2d 479 (1964), which the Supreme Court referred to in footnote 3, page 571, 86 S.Ct. 1030, as being one of the cases where there was a conflict over the *421meaning of the word “primarily.” It will be noted that in American Can the court had said that “primarily” meant “substantial” instead of “principal.” The majority relies heavily on American Can in this case, but obviously its reliance thereon is misplaced because the decision of the Supreme Court in the Malat case has effectively negatived its standing as an authority in this field. Moreover, American Can is clearly distinguishable on the facts from the instant case. There, the taxpayer evidently repossessed or reclaimed its leased jnachines from its lessees and put them in its inventory or stock of merchandise held for sale, although this is not made clear by the opinion. However, we can assume this is what happened because it is clear that after the decree of 1950, it sold all machines, both those previously leased as well as new ones manufactured after the decree, to the general public indiscriminately during the years 1951, 1952, and 1953. It then claimed it was entitled to capital gains treatment for all machines (both old and new) sold by it in 1953 only. As is evident, 1953 is a taxable year more than three years after the decree was entered, and during these three years it sold all machines to all people and then claimed the exemption on all sales These facts are not present in our ease. Consequently, American Can does not control our case either on the facts or on the law.
In the Malat case, the Supreme Court also mentioned Recordak Corporation v. United States, 325 F.2d 460, 163 Ct.Cl. 294 (1963), which the majority relies on, with a cf. reference to it in the same footnote described above in which it listed American Can. In other words, it was listed among the cases where a conflict existed as to the meaning of the word “primarily.” The majority says that the Supreme Court did not intimate that Recordak Corporation was erroneous. I disagree at least as to the meaning of the word “primarily,” because otherwise there would have been no reason to list it with American Can and the other cases that had erroneously defined “primarily” in the Code. This is made doubly apparent by a reading of the opinion in Recordak Corporation in which this court said in defining “primarily” ;
* * * [Gjoods are held “primarily for sale to customers in the ordinary course of * * * trade or business” because they are regularly offered for sale to customers as part of the normal operation of the enterprise. * * * [Id. 325 F.2d at 463, 163 Ct.Cl. at 300.]
In my opinion, this statement does not meet the requirements of the Supreme Court’s definition. The word “regularly” has about the same meaning as “substantially” which was erroneously used in American Can to define “primarily.” Goods could be “regularly” offered for sale without being “principally” offered for sale and without sale being the object of “first importance” in the offering. They could be offered “principally” for lease and with rentals being of “first importance,” even though “regularly” offered for sale. In such case, under the Supreme Court’s definition, the goods would not be held “primarily” for sale, and any gain by the taxpayer on their sale would be long term capital gain under Section 117(j) of the Code.
In any event, the Recordak Corporation case does not require a decision against the taxpayer in our case as a matter of law, nor even as a compelling precedent. We do not have to overrule that decision in order to hold for the taxpayer here. That case, in addition to the foregoing, is clearly distinguishable from the instant case on the facts. There, the taxpayer had been freely and voluntarily disposing of its microfilm machines either by rental or by sales to anyone wishing to acquire them for over four years prior to the tax years in question. The machines were in its possession and inventory as the main part, if not the only part, of its stock of merchandise. When a new model came out, it decided to dispose of the old machines. This was accomplished by selling what it could and *422discarding the rest as junk. It claimed capital gains treatment for the equipment thus disposed of, which was correctly denied. It was never intended that capital gains treatment would be given to transactions of that kind. Otherwise, every time a new model automobile or appliance came out, the dealer could dispose of his old models and claim capital gains treatment for any profit made.
The facts in our ease are vastly different. Here, the taxpayer had been leasing the machines for over thirty years (their average age was more than 16.6 years). It had never sold nor offered to sell any of these machines during this entire period. At the time of the decree in the antitrust suit, the machines were not even in its possession but were in the hands of the lessees who had the right to such possession under the terms of the leases. Consequently, they were not a part of its inventory nor stock of merchandise on hand and they could not have been offered for sale to the general public prior to the decree because of the lease contracts. It should be remembered that we are only considering the leased machines (and not machines in general) because they are the only ones involved here. Under these circumstances, everyone will agree that up to the time of the decree, the taxpayer did not hold these machines “primarily for sale to customers in the ordinary course of his trade or business.” In fact, it made no sales and refused to make them. As far as these machines were concerned, it was in the leasing and rental business exclusively.
The defendant says in its brief (page 11) that “ * * * whether goods are being held primarily for sale in the ordinary course of business depends * * * upon conditions at the time of sale.” [Emphasis supplied.] I do not agree. This argument would require us to shut our eyes to the purpose for which the machines were acquired and the purpose for which they were held and used during the 30 years they were leased, and would require us to look only to the fact that they were sold as proof they were being held primarily for sale. The same argument could be made if the taxpayer was forced to make the sales at gun point, but no court would hold that sales under such circumstances would be proof that the goods were being held primarily for sale. The situation before us is not materially different, especially when the end result is considered. Here the taxpayer was forced to sell these machines at “legal gun point” (the decree), when it did not want to do so. It had no choice as to whom the machines would be sold, nor the price to be obtained for them nor the terms of sale. The decree took care of all of these matters and forced the taxpayer to comply with its dictates. Yet, the government would have us consider only the fact that sales were made “at the time of sale,” and asks us to hold that the sales made under these circumstances were made in the normal course of business as ordinary sales. They could not have been more extraordinary unless physical force had been used. There was nothing normal about them.
This “at the time of sale” argument was answered by the court in Philber Equipment Corp. v. Commissioner of Internal Revenue, 237 F.2d 129 (3d Cir. 1956). There the taxpayer was in the business of renting motor vehicles (trucks, tractors and trailers) to the public. Most of the leases were for one year. When the vehicles were returned at the end of the leases, they were not worn out but still had a lot of useful life left in them. The taxpayer sold them and claimed long term capital gain. The Commissioner rejected the claim and said that only ordinary gain applied because the vehicles were acquired for the dual purpose of leasing and selling, and, therefore, they were held primarily for sale. This was upheld by the Tax Court. However, the Circuit Court of Appeals reversed this decision and held for the taxpayer. It said that:
* * * [T]he determinative factor is the purpose for which the property was held at the time of its acquisition and during the period of its use. * * * [Id. at 131.]
*423The court also said that the sale, standing alone “cannot be considered inconsistent with the conduct of a rental business or make the sale factor a dominating business purpose of [the] taxpayer.” [Id. at 132.] The court held that notwithstanding the sales, the “primary business purpose was vehicle rental.” In that case, the same “at the time of sale” argument was made as in the instant case, which was upheld by the Tax Court but rejected by the Court of Appeals when it said:
The Tax Court, as an alternative ground, stated that even if the intention to sell had been absent at the time of the original acquisition, such intention did exist at the time of re-possession from the lessee, and the determining factor is then the purpose for which the property was being held at the time of sale rather than the purpose for which it was originally acquired and held.
We cannot subscribe to this “alternative ground”. To do so would make for judicial nullification of Section 117(j).
The essence of the Tax Court’s alternative ground is that property changes character merely by the fact of its being exposed for sale. We agree with the taxpayer that such a concept is neither logical nor reasonable. [Id. at 132-133.]
In my opinion, the conditions that existed at the time of the decree are more important than those which existed at the time of the sale. For all practical purposes, the sales were required and arranged for at the time the decree was entered. At that time, the taxpayer was required to sell the leased machines to the lessees who had possession of them for the prices and on the terms specified in the decree. All that remained to be done were the purely routine and perfunctory acts of transferring title. As far as the taxpayer was concerned, the sales were made by the decree at the time it was entered. No one — not even the Commissioner of Internal Eevenue with his ever changing ability to be fluid in problems of this kind1 — could contend that the machines were being held primarily for sale at the time the decree was entered.
The majority opinion stresses the point many times that the taxpayer entered into a new business on January 1, 1951, after the decree had been entered on June 26, 1950, which had a dual purpose of leasing and selling the same kind of machines that are involved in this case. This is true but the new business had nothing to do with the old business of leasing the machines which were already committed to be disposed of under the decree before any new business was started. The machines leased under the old business which were sold to the lessees under the decree, were never repossessed, never put into stock, never became a part of taxpayer’s merchandise inventory, and never offered to anyone for sale except to the lessees, who had possession of the machines, after the decree was entered. They never became a part of the new business, but were disposed of when the old business was closed out by the decree. There was a forced divestiture of the leased machines by the order of the court and this divestiture became binding when the decree was entered.
There have been many cases where property has been acquired and held for the dominant purpose of rental or for some other dominant purpose, not including sale, and when the property was finally sold, the fact that a sale was made did not deprive the taxpayer of capital gains treatment under Section 117(j). For instance, in the case of Delsing v. United States, 186 F.2d 59 (5th Cir. 1951), the taxpayer was in the business of building and selling homes. He built 45 rental houses under Federal Housing Administration regulations in which he agreed to construct them for rent. The *424tenants were given the right to buy the houses after a stated period of time on specified terms. Before building the houses, he wrote a letter to the FHA saying “these houses are to be built for sale or rent.” The houses were rented for three years and were then sold to the tenants. The taxpayer claimed capital gains treatment, which was denied by the IRS, which contended that the houses were held primarily for sale as shown by the letter and because they were sold. The court held for the taxpayer, saying the houses were capital assets and were not held primarily for sale in the ordinary course of taxpayer’s business. It would appear that the instant case is stronger for the taxpayer than the cited case.
In the case of Dunlap v. Oldham Lumber Co., supra., N.l, the taxpayer was in the lumber business. It bought fifty vacant lots in a subdivision in 1928 with the unrealized expectation that they would be taken into the city limits and public utilities made available. It had hoped to sell lumber to build homes to individuals who would purchase the lots. It sold a few lots from time to time. During one five-year period it sold only one or two lots. Finally, it sold 27 of the lots in 1944 and the remainder in 1945 at a loss. It claimed an ordinary loss on its income tax returns, but this was denied by the Commissioner who held that the lots were capital assets and were not held primarily for sale and the loss was a capital loss and not an ordinary loss. (It will be noted that the Commissioner took exactly the opposite position there than he is taking in the instant case.) The court held:
* * * The conclusion is inescapable that the sale of the lots was most extraordinary and not at all ordinary, and there was no ordinary course of business as to lot sales. By the express terms of the statute property must not only have been “held primarily for sale,” but also for sale in the “ordinary course of the business of the taxpayer.” * * *
We conclude, therefore, that * * * the lots in question were capital assets, * * *. [Emphasis supplied.] [Id. at 785.]
It is significant that in that case the taxpayer intended to eventually sell the lots at the very time it purchased them and actually did sell them in the end. However, the Commissioner paid no attention to these facts and contended the taxpayer did not hold the lots primarily for sale. Yet, in the instant case the Commissioner says that because there were sales, the machines were held primarily for sale. Of course, in that case, the Commissioner was trying to prevent the taxpayer from taking an ordinary loss while here he is attempting to prevent the taxpayer from receiving capital gains. It is amazing how agile he can be in shifting positions when to do so is against the taxpayer and in favor of the government.
The case of United States v. Bennett, 186 F.2d 407 (5th Cir. 1951) is in point.2 There, the taxpayer was in the business of breeding cattle to sell the calves and these sales constituted the main source of his income. In addition, however, when cows or bulls were no longer useful for breeding purposes, he would cull them out of the herd and sell them. His business was a continuing one. He claimed capital gains on the sale of these culls, but the Commissioner contended that the taxpayer intended to eventually sell every calf bom, either as a calf or later on as a cull, and, therefore, all of the cattle were held primarily for sale. The court ruled in favor of the taxpayer and upheld his contention that the cattle were kept primarily as breeders and not for sale and that their sale when they were no longer useful as breeders was purely a secondary or incidental use. In so holding, the court said:
If the statute had been intended to mean what the collector contends for, *425the word “primarily” would not have been in it. Since “primarily” is in the statute, it seems clear to us that to hold, as the collector contends, that the main, the first, purpose of the keeping of these breeder cattle was for sale, does complete violence to the statute and to its purpose and intent.
The construction contended for by the taxpayers seems the more reasonable to us. It has the support of the Albright v. United States, 8 Cir., 173 F.2d 339, and of two tax cases, Emerson v. Commissioner of Internal Revenue, 12 T.C. 875; Fawn Lake Ranch Co. v. Commissioner of Internal Revenue, 12 T.C. 1139; and in principle of Delsing v. United States, 5 Cir., 1951, 186 F.2d 59. [Id. at 411.]
The principal factor that is determinative of whether property is held primarily for sale, according to the cases where the problem has arisen, seems to be the purpose for which it was acquired and held during the period of its use. The fact that it is finally sold is not the dominating nor controlling factor. This was aptly stated by the court in Philber Equipment Corp. v. Commissioner of Internal Revenue, 237 F.2d 129 (3d Cir. 1956), as follows:
The essence of the Tax Court’s alternative ground is that property changes character merely by the fact of its being exposed for sale. We agree with the taxpayer that such a concept is neither logical nor reasonable. [Emphasis supplied.] [Id. at 133.]
In the instant case, the machines were acquired and held for 16.6 years on the average and some of them for 30 years for the sole purpose of renting or leasing them. They were rental property and were not held primarily for sale in the ordinary course of the taxpayer’s business. In fact, as stated above, they were not held for sale at all and no sales were made. The decree could not change the character of these machines overnight by requiring that they be sold to the lessees. Furthermore, the decree ordered them sold in a most extraordinary manner that was not in the normal course of business of the taxpayer.
For all of these reasons and in accordance with the foregoing authorities, I would hold that as a matter of law plaintiff is entitled to recover and would enter judgment accordingly.
COLLINS, and NICHOLS, Judges join in the foregoing dissenting opinion.

. See Dunlap v. Oldham Lumber Co., 178 F.2d 781 (5th Cir. 1950), where the Commissioner took a position different to that taken by him in the instant case.

. See also Davidson v. Tomlinson, 165 F.Supp. 455 (S.D.Fla.1958).