Court Opinion

ID: 9445714
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:37:04.312086+00
Date Added: 2024-06-11T17:30:23.406577
License: Public Domain

TUTTLE, Circuit Judge
(dissenting).
Because of the implications which I think inhere in a reversal of a decision of the Tax Court which affirms a determination in which the Commissioner is given wide discretion, I must respectfully dissent from the opinion of the Court.
The scope of section 45 has been dealt with by this Court in the case of Grenada Industries, Inc., v. Commissioner of Internal Revenue, 5 Cir., 202 F.2d 873, 874. In that case in an opinion written by Chief Judge Hutcheson, it was said:
“A careful examination of the Tax Court’s thorough and painstaking analysis of the facts and its equally thorough discussion and exposition of the meaning and effect of Sec. 45, as applied to the facts of this case, convinces us that the facts have been correctly apprehended and stated and the law as correctly applied to them.”
In that ease the Tax Court said:
“It has been said many times that the Commissioner has considerable *517discretion in applying Section 45, and that the determinations required of him under the statute must be sustained unless that discretion has been abused. Our review of those determinations is not de novo, and we may reverse them only where the taxpayer proves that they are unreasonable, arbitrary, or capricious. See e. g., G. U. R. Co. v. Commissioner, 7 Cir., 117 F.2d 187, 189; National Securities Corp., 46 B.T.A. 562, 564, aff[irme]d 3 Cir., 137 F.2d 600, 602, certiorari denied 320 U.S. 794 [64 S.Ct. 262, 88 L.Ed. 479]; Seminole Flavor Co., 4 T.C. [1215], at 1228.” Grenada Industries, Inc., v. Commissioner of Internal Revenue, 17 T.C. 231, 255.
Having accepted the law as laid down by the Tax Court in the Grenada case as we did, as indicated by the first quotation above, it must be conceded, I would think, that when such a finding by the Commissioner is fortified by a decision by the Tax Court a fortiorari the matter comes to us with considerably more dignity and standing than if we were attempting de novo to determine what allocation would appear to us to be proper as between the related taxpayers. Thus while it is true as stated in the majority opinion that the determinations made by the Tax Court in this case are not inviolate as are findings of fact by a jury or as being reversible only upon a determination by us that the decision of the Tax Court is clearly erroneous, we are not at liberty to substitute our judgment for that of the Commissioner as affirmed by the Tax Court merely because we would have initially decided the matter differently ourselves.
As to whether, then, we can say that the Commissioner’s allocation was unreasonable, arbitrary or capricious, we must look at the facts. To support its finding that the income here involved was really the income of the corporations rather than of the partnership made up of the corporations’ stockholders, the Tax Court had in the record before it the following facts: Although having been engaged in the automobile business prior to 1941, Mr. Pearson and one of his sons were in the Army through 1945 and as Mr. Pearson stated in his testimony: “We were out of the automobile business you might say from 1942 to 1946.” In January, 1946, Pearson and his two sons organized two corporations to sell Ford and Lincoln automobiles respectively. There was in existence a partnership consisting of the same three persons which prior to 1941 had had a contract under which it agreed to buy all of the automobile paper covering automobiles sold by Mr. Pearson individually. This partnership was engaged in 1946 in making investments and in buying and selling war surplus. In March, 1946, contracts were signed and dated back to January 16, 1946, under the terms of which the two corporations agreed to sell to the partnership and it agreed to buy from the two corporations all of the corporations’ automobile paper. In the interim between the date on which these contracts were signed and the date which they bore on their face, therefore before they were in existence, the two corporations had executed in their own names financing agreements with the two finance companies called Retail Protection Agreement for Automobile Dealers. Under the terms of these contracts the two dealer corporations undertook to sell to C.I.T. and Pacific automobile paper, and one of the terms of the contracts provided for the creation of the dealer’s reserve which is here in controversy. During the years 1946 through 1949 every piece of automobile paper representing an automobile sold by the two corporations was transferred directly by endorsement by the corporations named to either C.I. T. or Pacific or some other finance company (a relatively small number of cases). In no case was any paper endorsed by either corporation to the partnership or by the partnership to C.I.T. or Pacific. The partnership never paid a dollar for any of the paper. Although it was testified by Pearson without fully indicating whether he was speaking as president of one of the corporations or as a partner *518in the partnership that he had an “agreement” or an “understanding” with local agents of C.I.T. and Pacific, that they would look only to the partnership and not to the corporations for the carrying out of the agreement to repurchase all repossessed cars, and although Pearson testified that he sent a copy of the agreement with the partnership to each of the finance companies, no written agreement of any kind existed whereby the partnership undertook to assume these formal written obligations of the companies, and no written agreement existed whereby the finance companies agreed to ignore the written obligations of the corporations. It was not until September 6, 1950, after the end of the tax year in question, that a new retail protection agreement was executed with the finance companies under the terms of which it was stated that Raymond Pearson, Inc. acted as the authorized agent of Raymond Pearson & Sons, a partnership, in the execution of the agreement.
Raymond Pearson testified that he acted, when the company endorsed paper over to the finance companies, on behalf of the partnership. He stated that he followed this procedure in order to evade a lVio percent sales tax which -was due the state of Texas on every transfer of a chattel mortgage. It was also apparent that the registration documents filed with the state of Texas did not speak the truth if the court were to accept Pearson’s testimony that the paper actually belonged to the partnership at a point of time between its acquisition by the corporation and its transfer to the finance companies.
In the Grenada ease which, as we have shown above, this Court accepted as setting forth the law in the application of Section 45, the Tax Court stated the principle that in reallocating income the Commissioner should recognize the fair value of the services of the entity whose claimed income the Commissioner seeks to reallocate. Here the Commissioner found that services performed by the partnership were non-existent. The taxpayers contend and the majority of the Court agrees that the interposition of the partnership’s financial worth when it orally assumed the corporations’ obligations to repurchase from the finance companies all repossessed cars amounted to a sufficiently valuable service for this Court to hold that the Commissioner was capricious or arbitrary or unreasonable in disregarding it. I think it clear that since everybody knew that in 1949 there had been no repossessions for three years and that such financial strength would in fact not be needed, and since obviously the oral assurance by the partnership that it would assume the written obligation of the corporations was one which it could under the Texas Statute of Frauds ignore at its own election, and since it is perfectly clear that the finance companies would have a perfectly valid legal right to hold the corporations to the precise terms of their own written agreement since they would not be permitted to vary them by parol testimony to the effect that there was a side understanding that they would not be enforced,1 both the Commissioner and the Tax Court had ample basis for saying that the partnerships’ contribution of services in this situation was non-existent.
If the opinion of the majority of the Court correctly states the law in a situation where the statute expressly gives to the Commissioner broad powers, then we shall indeed have come full cycle since Dobson v. C. I. R., 320 U.S. 489, 64 S.Ct. 239, 246, 88 L.Ed. 248, was decided by the Supreme Court. Of course the Dob-son rule—“The jurisdictional function is exhausted when there is found to be a rational basis for the conclusions approved by the administrative body”— was superseded by the amendment to the Internal Revenue Code which, now contained in 26 U.S.C.A. § 7482, provides that the Courts of Appeals shall have exclusive jurisdiction to review the deci*519sions of the Tax Court in the same manner and to the same extent as decisions of the District Courts in civil actions tried without a jury. Nevertheless the law in this Circuit, as expressed in the Grenada case, requires that before we reverse a decision of the Tax Court upholding the Commissioner in the exercise of his power of reallocation of income, we must find that the Commissioner’s determination was “unreasonable, arbitrary, or capricious,” and that the Tax Court’s affirming of such determination was equally so.
Far from being unreasonable, arbitrary, or capricious I think there was ample basis for the Commissioner’s determination and that the Tax Court’s decision should be affirmed.

. This is not an effort to apply on behalf of the Government the Statute of Frauds or the parol evidence rule. It is relevant to ascertain just how valuable a financial guarantee the partnership should receive consideration for.