Court Opinion

ID: 9467580
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:52:03.346932+00
Date Added: 2024-06-11T17:40:25.232448
License: Public Domain

FAY, Circuit Judge,
dissenting:
I respectfully dissent from the majority’s opinion, except in its recitation of the facts and its treatment of Trust Account 398, with which I concur.
PROCEDURAL MATTERS
Appellant raises a number of procedural issues, some of which were dealt with in the majority opinion, which give me a great deal of concern. The initial question is which party was to bear the burden of proof on the “utility stock issue.” Neither party disputes that in the ordinary case the plaintiff bears the burden of proving his entitlement to a tax refund. What then happened in this case that would make the well-accepted rule inapplicable?
The most important fact is that the appellant-taxpayer was unable to properly prepare his case because the government’s theory of tax liability was constantly changing. The government’s original position, that the corporations were collapsible, was totally abandoned during the administrative review process and replaced with the position that the proceeds from the sale of stock was ordinary income under Code section 482, which regulates transactions between related corporations. This second theory was also abandoned during the administrative review process. The government next issued a deficiency or “ninety day” letter in which it asserted that the receipts from the sale of corporate stock constituted constructive dividends taxable as ordinary income. By way of interrogatory, plaintiff next attempted to have this new theory of liability explained. The government refused, stating that it had no obligation to do so. At the next juncture, the pre-trial stipulation, the government abandoned the constructive dividend theory and reverted to its previously discarded theory of collapsible corporations. In apparent recognition of the unfairness of its continuous shifting in theories, the government stipulated that it would bear the burden of proof on the utility stock issue.1 Taxpayer then moved the court for a continuance, *271arguing among other things that its pre-trial discovery was directed toward the constructive dividend theory of liability, not the government’s latest theory. That motion was denied.
Subsequent to the trial, but prior to the entry of an order, the district judge informed both parties by letter that he would rule for the government. In that letter the court stated its conclusion that appellant-taxpayer had failed to satisfy his burden of proof, apparently ignoring the parties’ stipulation as to the burden of proof on the utility stock issue. The court went on to say it was requesting that counsel for the government prepare a proposed opinion consistent with its letter, and that counsel for appellant would have ten days after receipt thereof within which to respond. In its letter the court said that during the ten day period, “I will await action....” Nonetheless, the proposed opinion was entered as the order of the court on the same day it was delivered by counsel for the government, February 2, 1979. The ten day period earlier afforded appellant was rendered meaningless. Additionally, the memoranda opinion was inconsistent with the court’s earlier ruling for the government, as to one of the utility companies, because the government corrected what was a clearly erroneous ruling. Needless to say that taxpayer’s letter to the court, dated February 9, 1979, in which that as well as other relevant issues were raised, was mooted by the court’s earlier action.
The majority opinion goes to great lengths to explain its affirmance of the District Court’s handling of the case, particularly the burden of proof issue. I will not take issue with my brothers’ conclusion that what transpired was legally justifiable. The issue, I believe, is not whether there was technical compliance with the rules of procedure, the issue is one of fundamental fairness on which those rules and our entire notion of due process are based. No individual or corporation should be required to pay a tax, particularly when the government demands a deficiency, without the government explaining the theory of liability on which that tax is to be assessed. In this case, it is all too clear to me that the Internal Revenue Service was determined to impose tax liability on this taxpayer one way or another. The manner in which it leap-frogged from theory to theory, abandoning each as quickly as they were proposed, must have been as dizzying to the taxpayer as it is to me. Moreover, the taxpayer’s efforts to narrow and clarify the issues for the purpose of a possible settlement were met with a total lack of cooperation by the government. The District Court was made aware of all this in appellant’s motion for continuance. It is beyond my understanding why the court would deny what, in view of the circumstances of the case, was such a totally reasonable request. To have proceeded to trial and ignored the parties’ stipulation as to burden of proof, without at least informing the parties of that decision, only compounded the inequitable position in which the taxpayer found himself. Carnival “shell games” may be entertaining but they have no place in the legal process. Finally, to enter a memorandum opinion which was partially inconsistent with the court’s instructions to the drafting party, and to do so prior to the time in which the appellant was allowed to respond, rendered this trial fundamentally unfair. No one familiar with existing caseloads can ignore the tremendous constraints and pressures under which trial judges operate. However, that should not and must not be allowed as justification for procedures that compromise basic principles of fair play. In my opinion, that has occurred here.
UTILITY STOCK
The central issue in this case is whether certain utility corporations in which taxpayer was a major shareholder were collapsible, thereby giving rise to ordinary income on the sale of the stock therein. The majority holds that they were collapsible corporations. I disagree.
The basic requirements of collapsibility under section 341 are that a corporation be “formed or availed of” for the construction or purchase of property “with a view” to *272the sale or exchange of the stock before realizing the income from the property so purchased or construed. The stock in a corporation which is determined to be collapsible is not, however, irrevocably tainted. The statute provides certain exemptions which, if applicable, allow the recognition of capital gain upon the sale of the stock. Of importance to this case is the exemption provided in section 341(d)(3), whereby the provision of section 341(a) is made inapplicable to gain from the sale of stock in a collapsible corporation which is realized three years or more following the completion of construction. On appeal, the taxpayer asserts, among other things, that section 341(b), defining collapsible corporations, is not satisfied because at the time each corporation was “availed of” there was no “view” to sell the stock,2 or alternatively that the exemption is available because, at the time the stock sale took place, more than three years had passed since the completion of construction. I am persuaded by both of these positions.
The majority opinion responds to appellant’s arguments with three simple statements of the law regarding collapsible corporations. They are: (1) the requisite “view” may exist at any time prior to the completion of construction; (2) construction is not completed until the absolute last bit of work is finished; and (3) the construction of one party can be attributed to another party.3 From these seemingly innocent statements4 comes the conclusion that the requisite “view” to sell would be present in this case if the appellant’s stock were sold at any time while the water and sewer lines were being built and connected to appellant’s central plant, despite the fact that such construction was being carried out by private developers, some of whom were totally unrelated to the appellant. The majority reasons that a water and sewer plant is without utility (pardon the pun) unless it is connected to water and sewer lines running to residences and businesses. Therefore, the facility must be viewed as an entire system, no part of which is complete until all is complete.
Though having some appeal at first glance, the majority position, if followed to its logical conclusion, would achieve results far beyond the intended scope of the statute. Put simply, in the water and sewer business “construction”, within the meaning of section 341, might never end. For example, assume that in 1950 a corporation was formed to provide water and sewer services to what at the time was a rural area south of the city of Atlanta. As part of the agreement to obtain its license, the utility corporation promised that it would provide services to all persons living in a five mile radius of the plant who now or in the future required such services. As time passed the area within the five mile radius of the plant became developed, until in 1965 the developable area was twenty percent inhabited. The utility corporation had had nothing to do with that development except to lay the water and sewer lines needed to provide services to the residents. For the next ten years development in that area came to a standstill, because people chose to live north of the city. In 1975 the building business returned to the area serviced by my hypothetical utility corporation. This time, however, the corporation told the builders that it would provide the services required by its license, but the private developers would have to provide the sewer and water lines. Anxious to develop their property, the builders agreed. The area became popular and it appeared that one *273hundred percent of the developable area would be completed within two or three years. In the meantime, the stockholders in the utility corporation were approached to sell their stock to a large state-wide utility company. The offer seemed reasonable and the stockholders agreed to the sale. Following the legal analysis of the majority opinion, the gain recognized by the stockholders would be ordinary income because the corporation was collapsible. This would be true despite the facts that (1) the utility corporation was never involved in the development of real estate, (2) the corporation was actively engaged in the utility business for twenty-five years before the stock was sold, (3) no construction whatsoever took place for a ten year period, and (4) the water and sewer line construction that took place from 1975 on was done exclusively by private developers having no relationship with either the utility corporation or any of its stockholders. Surely, this illustrates that section 341 could not have been intended to be applied as the majority has done.
This case illustrates what we all must be aware of, that independent statements of the law, while possibly correct in and of themselves, cannot be forced together out of context without totally losing the meaning which they were intended to have. I fear that that is precisely what the majority has done in this case. While I agree with the majority’s first two statements,5 and could imagine a situation in which the third might be applicable, the obvious result of applying them jointly to the facts presented here is to establish a rule, the logical conclusion of which is untenable.
A more reasonable result in this case would be to treat the assets of the utility corporation as independent entities. That is, the utility plant should be treated as a non-eollapsible asset, if construction on it was completed more than three years before the stock was sold, and the sewer and water lines, assuming there is sufficient relationship between the utility corporation and the builder to justify attributing the construction by the latter to the former, should be evaluated separately. This notion of looking at the individual assets of the corporation rather than the corporation as a whole is not new to the law of collapsible corporations, at least with respect to the three year exemption,6 and it makes particular sense in a case such as this in which the alternative is to view construction as continuing ad infinitum. In addition to the conclusion that the exemption of section 341(d)(3) applies to certain assets, this approach also justifies the conclusion that at the time construction of the plant was completed there was no “view” to sell the stock and, therefore, the corporation was not collapsible. While this conclusion would be justified, given the absence of evidence presented by the government to contradict appellant’s assertion that there was no such “view”, I rest my conclusion on the applicability of the three year exemption. I do so because I would be reluctant to reverse a judgment of the District Court on the question of intent, even when the appellant was the only party to offer evidence going to that issue.
KING & SMITH, INC. — THE MINUTE MAID OPTION
The final issue on which I disagree with the majority opinion is its conclusion that the sale of stock in King & Smith, Inc. gives rise to ordinary income because it was a collapsible corporation. While I agree with the majority’s instincts that this is the type of situation to which section 341 was intended to apply, I am forced by the majority’s own analysis to conclude that the section is not applicable.
As was the case with the utility stock issue, the question here is whether the taxpayer had the requisite “view” to sell the stock at the relevant time. Fortunately, there is no construction involved here, only the purchase of an option, so there is no dispute that the view to sell the stock must have been present at the time the option was purchased.
In discussing whether the option was in fact “purchased” property within the meaning of section 341(b)(3) the majority says, *274“It is clear from the record that the corporation first held the option to purchase the property in order to develop it.... Although taxpayer sold his stock in King & Smith, Inc. in order to raise capital after only one sale to South Gate Development, the lower court properly found that the corporation held the option primarily for sale to customers in the ordinary course of business.” Opinion at 268. What this says to me in clear unequivocal language is that at the time the option was purchased, the relevant time for our inquiry, the taxpayer intended to develop the property, not to sell the stock of the corporation that held the property as its major asset. Accordingly, the requisite “view” was not present and the corporation cannot be collapsible. To reach any other conclusion is inconsistent with the majority’s own language. Nonetheless, the majority opinion concludes that the requisite “view” was present at the time the option was purchased. The central facts leading the majority to its conclusion were that the corporation’s financial circumstances at the time of the sale were similar to those that existed at the time the option was purchased. The majority reasons that this satisfied Treasury Regulation section 1.341-2(a)(3) which states that a corporation is formed or availed with the requisite “view” if the sale of stock is attributable to circumstances present at the time of the purchase. I believe this reasoning is flawed. There is a substantial difference between saying that similar facts existed at the time of purchase and sale, and saying that the sale was attributable to the facts that existed at the time of the purchase. I believe that the majority’s earlier conclusion that the option was originally purchased for development and sale in the ordinary course of business is inconsistent with its attribution analysis. It may very well have been the case that at both the times of purchase and sale the corporation was undercapitalized. Nonetheless, if the option was purchased for the purpose of development, it is logical that the corporation intended to improve its undercapitalized position. The fact that it was unsuccessful in its efforts cannot be determinative. The reason for the sale of the stock was the financial condition of the corporation at the time of the sale, not the condition at the time of the purchase. This must be true because, implicit in the majority’s treatment of the issue, the option was purchased for the purpose of altering the weak financial condition existing at the time of said purchase. Since this is true, I must disagree with the majority’s conclusion that King & Smith, Inc. was a collapsible corporation.
CONCLUSION
The mission of the Internal Revenue Service goes to the very survival of our way of life. Taxes are essential for the operation of our government. Congress imposes the rules for the imposition of most of our taxes. In the main, ours is an “honor system”. Should a taxpayer fail to pay his fair share under existing rules, the Internal Revenue Service has an obligation to vigorously pursue the collection of each and every cent due and owing. When such matters reach the courts, however, the parties are equal and should be accorded equal treatment. Equal treatment, in civil cases, equates with full disclosure. Years ago we abolished “trial by ambush”. Dead and buried, it should remain underground. I’m concerned it has been resurrected here and, therefore, I most respectfully dissent.

. Though ultimately concluding that the resolution of the issue is unnecessary, the majority says that the stipulation as to the burden of proof is “ambiguous.” I am unable, however, to discern even the slightest ambiguity in the stipulation. One of the things on which both parties agreed in the stipulation was “[t]hat plaintiffs have the burden of proof on each issue except the utility stock issue.” Since there are only two parties to this action, and it was agreed that one party would bear the burden of proof on all issues but one, the stipulation indicates by negative pregnant that the other party, in this case the government, bears the burden on the remaining issue.
The majority concludes that the meaning of the stipulation need not be resolved because “[a] court is not bound by the parties’ stipulation of law. ...” Opinion at 258. While that is a correct statement of the law, it begs the question of whether appellant was unfairly surprised by the District Court’s failure to indicate that the stipulation would not be followed. Had appellant been aware of the court’s decision, it is quite likely that his case would have been presented differently.

. There has been much discussion in the academic community as to the proper interpretation of section 341. For example, does “availed of” modify “construction or purchase” or “with a view” or both? In this Circuit, at any rate, there is agreement that the corporation must be “availed of’ “with a view” to sale. See United States v. Ivey, 294 F.2d 799, 806 (5th Cir. 1961); Payne v. Commissioner, 268 F.2d 617, 621 (5th Cir. 1959).

. While the majority offers precedential support for the first two propositions, none is offered for the third. The reason for that is clear to me. Though it may be the case that in certain circumstances construction can be attributed to related parties, it is inconceivable that one corporation can be attributed the construction done by another corporation that had no relation to nor involvement with the former.

. But see note 3 supra.

. See text accompanying note 3 supra.

. See, e. g., Rev.Rul. 70-93 (1970).