Court Opinion

ID: 9472731
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:08:42.729704+00
Date Added: 2024-06-11T17:43:06.190418
License: Public Domain

JOHNSON, Circuit Judge,
dissenting:
The majority holds that the key to this appeal is the standard of review applied to the district court’s factual findings. I disagree. Though the proper standard of review is undoubtedly in dispute,1 even under the clearly erroneous standard the finding that a Coca-Cola bottling franchise has little or no value is in error.
A factual finding is clearly erroneous if “the reviewing court on the entire evidence *1405is left with the definite and firm conviction that a mistake has been committed,” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948); Lincoln v. Board of Regents of University System of Georgia, 697 F.2d 928, 940 (11th Cir.1983), cert. denied, — U.S. —, 104 S.Ct. 97, 78 L.Ed.2d 102 (1983), and when a trial court’s decision is based solely on documentary evidence, “the burden of establishing clear error is not so heavy as in the normal case.” Green, supra, 603 F.2d at 573. Moreover, the taxpaying corporations and the partnerships involved here were under the control of a few related individuals having no adverse economic interests. Under these circumstances the transactions are subject to special scrutiny. Tulia Feedlot, Inc. v. United States, 513 F.2d 800, 805 (5th Cir.), cert. denied, 423 U.S. 947, 96 S.Ct. 362, 46 L.Ed.2d 281 (1975). After giving this case such scrutiny, I am firmly convinced that the Government has met its burden of establishing a very critical erroneous factual finding by the district court.
The district court held that the gallonage payments consisted entirely of rents for tangible assets and not royalties for franchises. The court endorsed the testimony by expert witnesses that a Coca-Cola franchise has little or no value. With due respect to the district court and the majority, common sense and economic reality dictate a different conclusion. The value of a Coca-Cola franchise is substantial.
Each taxpayer’s franchise granted it the exclusive and perpetual right to bottle and sell Coca-Cola within a prescribed geographic territory. The franchises were transferable, and the partnerships’ ability to bottle and sell Coca-Cola hinged upon their obtaining the franchise rights from the taxpayers. Of course, obtaining the franchise rights did not guarantee a profitable bottling enterprise. A bottler’s profits are a function of its efficiency in managing and operating a bottling plant. To say that “the mere holding of a franchise to bottle and sell Coca-Cola does not assure profit” misses the point. Whether the mere holder of a Coca-Cola franchise realizes a profit depends on the market demand for the franchise. There are no doubt a number of investors willing to purchase the franchise rights from the taxpayers in order that they might set up bottling operations. What these investors are willing to pay is the true value of the taxpayers’ franchises.
In this case, however, the sales of franchise rights were made privately and between entities owned by the same individuals. The failure of these individuals to assign the franchises definite values does not alter the economic reality of the transactions. The economic reality is that the franchises have substantial value. See, e.g., Hugh Smith, Inc. v. Commissioner, 8 T. C. 660, 673 (1947), affd per curiam, 173 F.2d 224 (6th Cir.1949), cert, denied, 887 U. S. 918, 69 S.Ct. 1161, 93 L.Ed. 1728 (1949). Contemporaneous documentation by the taxpayers supports this conclusion. See Montgomery Coca-Cola Bottling Co. v. United States, 615 F.2d 1318, 1325-27, 222 Ct.Cl. 356 (1980).
Taxpayers’ expert witnesses testified to the contrary, stating that in evaluating a Coca-Cola bottling company for purposes of merger or acquisition no value is assigned to the company’s franchise. According to these witnesses, the value of the franchise is entirely dependent on the company’s managerial skills and established good will. Though it is true that managerial ability greatly determines the value of a particular bottling operation, even a well-managed operation can sell no Coca-Cola unless the bottler first purchases the franchise rights.
As for a specific bottling company’s good will, it operates only to the extent customers purchase one bottler’s Coca-Cola instead of another bottler’s Coca-Cola. Yet few consumers know or care which bottler produced the Coca-Cola they consume. The vast national demand among consumers for Coca-Cola products cannot be attributed to an individual bottler’s localized efforts toward creating good will. This demand is primarily the result of extensive *1406national advertising directed and financed by the Coca-Cola Company of Atlanta, Georgia. More importantly, this demand is for a product that can be purchased only from a franchised Coca-Cola bottler. While it is true that a Coca-Cola franchise may not give its holder a competitive edge over makers of other soft drinks, such as Pepsi or Seven Up, it does give its holder an extremely valuable monopoly. Only the franchise holder can tap the established demand for Coca-Cola. The competitive edge over other investors interested in bottling and selling Coca-Cola is absolute.
The district court and the majority note that the payments made to the taxpayers were not sufficient to cover the fair rental value of all tangible and intangible assets, including the franchises, that were leased to the partnerships. I am not convinced that the valjie of “all” the assets has been established, unless the value assigned to the franchises is zero, in which case an error has clearly been made.2
Because the district court erroneously concluded that the Coca-Cola franchises had little or no value, it did not characterize any portion of the 20-cents per gallon payments as royalties. I would reverse this holding and remand for a specific valuation.

. In two separate lines of precedent, this Court has considered the standard of review to be applied when a district court’s decision is based solely on written evidence, as in this case on the transcript of trial proceedings in another court. Some precedent holds that review by this Court "is unconstrained by the usual strictures of the clearly erroneous standard.” Nash v. Estelle, 597 F.2d 513, 518 (5th Cir.) (en banc), cert, denied, 444 U.S. 981, 100 S.Ct. 485, 62 L.Ed.2d 409 (1979); Robinson v. Vollert, 602 F.2d 87, 92 n. 8 (5th Cir.1979). Other decisions apply the clearly erroneous standard, without distinguishing the inconsistent precedent. See Green v. Russell County, 603 F.2d 571, 573-74 (5th Cir. 1979); Seaboard Coast Line R.R. Co. v. Trailer Train Co., 690 F.2d 1343, 1349 (11th Cir.1982). However, the Court applied the clearly erroneous standard in the second line of precedent with the unexplained “ameliorated” qualification. Seaboard Coast Line, supra, 690 F.2d at 1349.

. Moreover, even assuming the payments fell short of the fair rental value of all the assets leased, this would not dispose of the Government's contention that the taxpayers created a facade for tax sheltering purposes. The taxpayers argue that, if their intent had been to shelter income, they would have sheltered more by making payments in excess of the assets’ fair rental value. It is equally plausible, however, that the underpayment evidences an attitude of caution in structuring financial arrangements having the potential for significant tax exposure. The 70-percent penalty tax imposed by Section 541 of the Internal Revenue Code operates specifically to discourage taxpayers from putting large amounts of their income into tax-sheltering corporations. The underpayment in this case may actually be reasonable compensation in light of the risks of audit and penalty assessment.