Court Opinion

ID: 9449678
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:19:10.962092+00
Date Added: 2024-06-11T17:31:56.373803
License: Public Domain

JOHN R. BROWN, Circuit Judge
(concurring).
I concur fully in the Court’s action and opinion. I would add this by way of emphasis.
Running through several of our prior opinions is the asserted concept that capital gains versus ordinary income is to be determined by the status of current earnings were the asset to have remained in the hands of the transferor. On this approach it is reasoned that if the current income would have been taxable ordinary income, then the sales price which represents the substitute for such future earnings is likewise taxable ordinary income.
I think this is both bad economics and faulty law. A person acquires property for one of two, or both reasons. The first is to receive earnings, i. e., income. The other is to hold the property for appreciation resulting from long or short range economic conditions, inflation or the like. Normally, of course, the predominant reason is to acquire the earning capacity represented by the earnings which the property will generate.
Hence it is that among those who trade in corporate securities on established national exchanges or over-the-counter markets, there are recognized rales of thumb by which the present value, hence market price, is determined for a given stock. The same is true in the contemporary, frequent practice of large-scale corporate acquisitions by one corporation of the stock or assets of another corporation. Value — market or sales price — is determined by capitalizing earnings. Whether the formula is the conservative one of 6- or 7 times earnings, or something less, or one considerably more speculative, what the buyer offers is his estimate of the present, discounted value of the future earnings of the assets or enterprise.
But although this sales price is determined by future earnings, and to the seller it takes the place of what he would have received had he continued his ownership, under no stretch of the imagination is it “ordinary income” either in the business world or in the sometimes more weird, tax world. Were this so, then every such sale for a price in excess of cost would entail this analysis and this, tax consequence. There would first have to be ascertained what portion of the excess represented the present value of future earnings and what portion represented merely capital appreciation, from enhancement in value caused by inflation, scarcity or the like. Then as a second step, that portion or the excess of sales price representing future earnings “would be taxed as ordinary income, the remainder as capital gains.
Conceding that Congress might compel this, that the ubiquitous and voracious tax gatherer might demand it, or that courts might ultimately sustain it, the fact is that as yet none has gone so fast so far. And that is so because of the practical economic realities which are, after all, of dominant significance in tax affairs. Income is one thing. When income, and income alone is sold or transferred, it keeps this status. But when the thing which generates the income is transferred, what is paid and received is not vicarious income, whether viewed from an economic or a tax standpoint. It is, as the economist and the businessman views it, the present, discounted value of its future earnings. If the “thing” generating such future earnings is “property” of a kind which the tax law recognizes as one entitled to capital gains or losses when used in the tax law sense, that present, discounted value is a capital gain, not ordinary income notwithstanding the economic fact that without such capacity to earn “ordinary income” in the hands of its owner the asset would be valueless.
Tax law, by the hand of man, the Acts of Congress, and the doubtful clarification by Judges is complex enough without making it more so through the importation of bad economics. For before we realize it, economics which knows no *62law of stare decisis, is infected by poor -or bad law to set in train tax consequences because of what Courts have ■said, not because of what the actualities really are.
On Petition for Rehearing
PER CURIAM.
Upon considering the petition of the appellant for the rehearing of this case -en bane, it is ordered and decreed that .said petition be and it is denied.
Thereupon, on consideration of appellant’s petition for rehearing, it is ordered .and decreed that said petition be and it Is denied.