Court Opinion

ID: 9460494
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:52:24.984804+00
Date Added: 2024-06-11T17:31:52.718175
License: Public Domain

STUART, District Judge
(dissenting).
I must respectfully dissent from the majority opinion. In my opinion the question here is basically one of fact and consequently appellate review must be quite restricted. The Tax Court’s findings must stand unless clearly erroneous. Commissioner v. Duberstein (1960), 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218.
In this case the Tax Court found:
Both the representatives of Lakeside and those of Productions and Toy were aware of the difference in tax consequences between a sale of Toy’s assets and a license to use them. The Clokeys were adamant that the Toy assets be sold so they could report their profit as long-term capital gain and would have refused to sign the agreement if they believed it to be a license. Lakeside’s attorneys were primarily responsible for drafting the document which, after some revisions, became the final agreement between the parties. Toy’s attorney, Harry L. Nelson, Jr., was in on reviewing and revising the drafts of the agreement, but was not experienced in tax matters. In the early stages of drafting the Lakeside attorney used a licensing agreement which Lakeside and another party had negotiated as a model for the agreement with Toy; however, in preparing the final draft Lakeside’s attorneys included the language in paragraph 1, supra, ‘The Seller, hereby sells, assigns and transfers to Lakeside,’ as an accomodation [sic] to the desires of the Clokeys. Despite the accomodating [sic] language the Lakeside attorneys hoped that the final agreement embodied a license although they knew that the sellers held the opposite view. Appendix pp. 81-82.
*1348In my opinion, these fact findings are not clearly erroneous.
It is, of course, the general rule that in the field of taxation the substance of the transaction as revealed by the evidence as a whole controls over the form employed. Haag v. Commissioner of Internal Revenue, 334 F.2d 351, 355 (8th Cir., 1964).
Coca-Cola Company v. Commissioner (8th Cir., 1966), 369 F.2d 913, 917.
The Commissioner should not be bound by the form of the contract when the evidence discloses the transaction to be something other than that indicated by the contract language. However, I do not believe a party to a contract should be permitted to insert sales language in a contract, knowing the other party is insisting on a sale for tax purposes, and hope that the final agreement is actually a license, even though parties did not specifically agree how the transaction was to be treated for tax purposes.
Such concept places the Commissioner in a most difficult and impractical position. He would not be able to accept the express language of any contract but would in each instance be required to look behind the contract to determine its exact nature to prevent each party to the contract from treating it in the manner most favorable to it for tax purposes. I believe there is a sound distinction between a situation in which one of the parties to a contract seeks to establish a tax advantage by attempting to prove his contract is something other than it says it is and one in which the Commissioner seeks to go behind the wording of a contract to show what the transaction actually was. Parties should not be able to insulate themselves from just tax consequences by the form of the agreement. On the other hand the Commissioner should be able to rely on the form as expressing the true intent of the parties, and the parties should be es-topped from contending otherwise. I do not believe the Commissioner should have the burden of looking behind every agreement to determine the just tax consequences.
In my opinion Coca-Cola Company v. Commissioner (8th Cir., 1966), 369 F.2d 913 indicates the proper decision here. In that case the taxpayer agreed to purchase certain stockholdings for $350,000 from Scull, who also agreed to release his employer from the terms of an employment contract. On settlement date a second instrument was executed cancel-ling the employment contract. Neither instrument mentioned any monetary consideration for termination of the employment contract. For tax purposes, the taxpayer attempted to accrue as an expense $109,352.02 for the purchase of the employment contract. This court said:
Barbieri and his tax advisors immediately realized the tax implications of the agreement, but purposely avoided making any changes in the contract, apparently fearful that any change might cause the Scull group to back down from their previous agreement. 369 F.2d p. 915.
•x- * -x- There is solid support for the inference drawn by the Tax Court that Barbieri and Johnson believed that if they amended the agreement to alter its tax consequences Scull might refuse to go through with the sale. It is plainly evident, as the Tax Court concluded, that Barbieri and Johnson, by failing to voice any objections, acquiesced in the obvious tax implications of the agreement and thus adopted, as their own, Eskin’s intent in drafting the agreement. In other words, as the Tax Court stated, “the contemplated tax results were part of the bargain.”
As thus posited, we are not favorably impressed with the plea that a court should rewrite the contract and relieve the taxpayer of the plight, tax-wise, in which it finds itself, a dilemma which in our view is the creation of its own deliberate judgment. 369 F.2d p. 917.
*1349* * * Certainly the courts are at liberty to pierce the form of a particular transaction to arrive at the just tax liability. This Court, however, is not prone to encourage a taxpayer who enters into a written contract fully apprised of its meaning and effect from a tax standpoint to seek escape therefrom on the theory that it does not represent the actual agreement. 369 F.2d p. 918.
The Tax Court there, as here, went on to find the contract stated the actual agreement. Although I feel this should not be necessary under these circumstances because of the deliberate use of sales language and the limited scope of review, I also agree that this transaction constituted a sale rather than a license.
The Tax Court determined the taxpayer failed to establish the requisite control necessary to transform the agreement from a sale to a license. The contractual provisions are as consistent with preservation of security interests (as they were denominated in the contract) as with licensing controls.
The majority believes that retention of ownership of the cartoon strips in Productions assured Toy of substantial control over the marketing of Gumby dolls. I do not believe this is a realistic evaluation of the situation. True, the successful promotion of Gumby toys was tied to the showing of the cartoons, but Lakeside was the only customer for the cartoons. Productions could profit from the cartoons only if Lakeside were willing to purchase the barter time Produc-
tion received as payment from television stations. An express provision in the contract required Productions to make reasonable efforts to ensure the exhibition of Gumby cartoons on television stations designated by Lakeside. Cooperation was necessary for either to profit. Productions could gain nothing by refusing to show cartoons over stations Lakeside designated. I believe Lakeside rather than Productions had the practical domination over the situation.
In the cases cited by the majority for the general proposition that we must concern ourselves with substance not form, Commissioner v. Court Holding Co. (1945), 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981; Griffiths v. Commissioner (1939), 308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319; and Haag v. Commissioner (8th Cir., 1964), 334 F.2d 351, were situations where the Commissioner was attacking the form and seeking to get to the substance. In Coca-Cola v. Commissioner (8th Cir., 1966), 369 F.2d 913, this court frowned upon the attempt of the taxpayer to urge the agreement was other than stated and held the form! stated the actual agreement.
Under my view of the case, it becomes necessary to decide the question of depreciation. In my opinion there was no evidence to support the Tax Court’s determination that the taxpayer failed to show a reasonable approximation of the useful life of the Gumby doll. The result which would then follow does not vary substantially from that reached by the majority opinion.