Court Opinion

ID: 9448154
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:24:27.563985+00
Date Added: 2024-06-11T17:31:18.686952
License: Public Domain

WISDOM, Circuit Judge
(dissenting).
The issue in this case for the jury to decide was whether the taxpayers were entitled to treat their profits from the sales of the lots in question as capital gains or as ordinary income — an issue that would seem more suitable for decision by a court than by a jury. In determining whether, in a tax sense, subdivided real estate is held for sale to customers in the ordinary course of business, proper elements for the jury to consider, among many other relevant elements, include: (1) the intent of the taxpayer; (2) the history and use of the property; (3) the general conduct of the operation: the number, frequency, and continuity of transactions; and (4) the activities of the taxpayers in connection with promoting and handling sales. Here, many of the important evidentiary facts are undisputed. The inferences to be drawn from the facts, however, do not point in only one direction. The jury must resolve the conflict in the inferences and come up with an answer in accord with a highly technical tax concept. In this situation, therefore, although the case turns on the facts, the jury comes about as close as it is possible for a jury to come to being a law-finding agency. This is not unusual in tax refund cases, but when such law-finding requires the jury to understand and apply a section of the Internal Revenue Code so uncertain that it means one thing in the Ninth Circuit and another thing in the Fifth Circuit — it is apparent that there are flaws in the jury system not dreamt of when Blackstone called it “the glory of English law”.
I make these observations because, with respectful deference to the views of the majority, as I see it, the trouble lies with the use of a jury in such a case, and not with the jury’s verdict in this case. Juries today are being asked to decide questions beyond their competency to der cide. Had I been on the jury, I think that, perhaps, I might have decided in favor of the taxpayers. Had there been no jury, I think that, perhaps, because of Barrios and other Fifth Circuit decisions, I should feel compelled to hold for the taxpayers; the Government’s position goes beyond the congressional purposes of the statute. But the taxpayers asked for a jury and appellate review is restricted to the confining limits of the “substantial evidence” rule. Applying to this case the same sort of test we apply in a negligence case, or to jury cases generally, I cannot bring myself to saying that there was no rational basis for the jury’s verdict.
In Barrios’ Estate v. C. I. R., tried without a jury, relied on in the majority opinion as the case most like the present case, Judge Cameron, speaking for a *431unanimous court, pointed out the broad scope of appellate review when the conclusion of the trial court as to the ultimate fact is merely a product of the court’s legal reasoning: “The question presented to the Tax Court was one of law, the case being submitted upon stipulation and the testimony of [the] taxpayer and two purchasers of lots from her.” [265 F.2d 518.]
In Barrios the land was bought for farming purposes and the subdivision and sale of farm land in 1939 resulted from the completion three years before of the Intercoastal Canal which “created such drainage problems that it was not feasible to * * * farm, and its operation was abandoned”. Here, the evidence shows that Houma had a rapid expansion as a result of oil and gas development in the Houma-Thibodeaux area. This undisputed evidence and the evidence generally of Mrs. Coles’ activities with respect to the property furnish a rational basis for a jury to infer that Mrs. Cole, an experienced business woman, capitalized on the demand for Houma residential lots by holding the real estate for sale to customers in the ordinary course of business; or, for the jury to conclude that the taxpayers failed to carry the burden of proof necessary for recovery of a tax refund.
Intent, a fact issue, is an important element in these subdivision cases. Traditionally, of course, intent is regarded as a jury question. Here, the taxpayers deducted from ordinary income more than $3000 for “business” expenses for each of the tax years in question. These deductions covered expenditures for automobile expenses (depreciation, repairs, washing, greasing, gasoline, insurance), purchase of a typewriter and adding machine, telephone calls, stationery, legal expenses, and other items attributable to activities related to the “business” of holding, improving, and selling the property. The 1955 return stated, with respect to automobile expenses, “85 per cent attributable to business”. It is undoubtedly true that the tax returns, in treating profits from the real estate transactions as capital gains, are inconsistent with the taxpayers’ deducting such expenditures as business expenses' — -but such inconsistency does not erase the fact that the deductions were claimed; it is for the jury to choose between two conflicting inferences as to intent, drawn from the tax returns. On this point, the district court instructed the jury: “You will understand that if people are in a business they have a right to claim business deductions. And if they are not in the business, they have no right to claim business deductions. That is one of the issues in the case, * * * ” To me, this is a pertinent, correct instruction. Relying on it, a jury might rationally decide that the Coles thought they were in the real estate business and their deductions indicate that it was a business; if the Coles did not think so, but still claimed deductions for business expenses related to the real estate, they were something less than credible witnesses.
As I read the court’s charge, it was extremely fair and, if favorable to either party, favorable to the taxpayers. For example, the court spoke of the jury having to decide whether Dr. and Mrs. Cole “were in the business of selling real estate during the years involved”. This language is more restrictive than the statutory language. The statute treats the gains as ordinary income, even if a taxpayer is not “in the real estate business”, provided that the property is held primarily for sale to customers. The statute merely requires that the property be held for sale to customers in the ordinary course of the business. The Coles’ counsel fully understood the importance of the instruction, as is evident from his motion for a Judgment N. O. V. or, in the alternative, a New Trial: the motion states that “there was no evidence in the record upon which the jury could predicate a finding that Dr. C. Grenes Cole and Mrs. Hallette B. Cole, plaintiffs, were engaged primarily in the business of selling real estate for a profit.” Government counsel objected to the court’s instruction that the jury should decide whether the taxpayers were in the real *432estate business, and objected to the court’s entire charge. (The taxpayers’ counsel also objected to certain charges. These objections I would classify as somewhere between trivial and insubstantial.)
The jury was conscientious. After retiring, it returned for additional instructions. The foreman stated: “The question has come up in our discussions, and this has come up in the verdict, which reads, ‘Were the lots in suit held and sold by the taxpayers primarily in the course of their business ? ’ There have been discussions relative to the meaning or clarification of ‘their business’.” The court then reread to the jury “all the criteria which courts have considered in determining whether or not the taxpayers were in a business”. These instructions are detailed, but they show how carefully the court considered the case in charging the jury. As I understand the ease, the instructions correctly state the law as the Fifth Circuit interprets it.
The district court was very careful in its charge to give all of the criteria bearing on the question at issue. It refrained from taking any short cuts that might mislead a jury. With deference, I suggest that the case cannot be reduced to an “either-or” classification of the Coles as “investors” or “dealers”. Mertens puts it: “Classification of a taxpayer as an ‘investor’ or ‘dealer’ is not enough, however, to determine the tax consequences to him of a disposition of real estate. The Code does not use these terms in the statutory provisions described above, and which class best suits the taxpayer is not the ultimate object of inquiry in determining whether a taxpayer is to be accorded capital gain or loss treatment. The ultimate question is whether the taxpayer has been holding the property primarily for sale to customers in the ordinary course of his business. That is the question to be answered, and not whether he is a dealer or investor * * *. Similarly, it is necessary to remember the ultimate question in considering certain factors which on various occasions have received emphasis by the courts in determining the treatment to be accorded a taxpayer. These factors are often said to show whether or not a taxpayer is a dealer. In and of themselves, however, they have no independent significance, but only form part of a situation which in the individual case must be considered in its entirety to determine whether or not the property involved was held primarily for sale in the ordinary course of business.” 3B Mertens, Law of Federal Income Taxation, § 22.138, p. 622.
In my humble judgment, the only thing clearly irrational about this case is that the law compels a jury of laymen to function as a court in deciding a doubtful, unsettled, legal question that would be a toss-up if it were submitted to a court composed of tax experts.