Court Opinion

ID: 9444595
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:05:51.744733+00
Date Added: 2024-06-11T17:29:55.597531
License: Public Domain

FRANK, Circuit Judge
(dissenting).
Congress, in Section 23, prescribed the items which may be deducted in computing net income. In Section 23(g) (1), it provided that “losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117.” Then, in Section 117, sub-paragraph (a) (1), Congress explicitly defined “capital assets” to mean “property held by the taxpayer (whether or not connected with his trade or business)”. Had Congress stopped there, perhaps it would be proper to do, as my colleagues do, i. e., to find in Section 23(a) (1) (A) and (f) exceptions to the definition contained in Section 117(a) (1). But Congress, in Section 117(a) (1), went on very explicitly to enumerate the exceptions to the definition, by saying that the term “capital assets” does “not include”
“stock in trade of the taxpayer”;
“other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year”;
“property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business”;
“property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in Section 23(i)”>
“an obligation of the United States or any of its possessions, or of a State or Territory, or any political subdivision thereof, or of the District of Columbia, issued on or after March 1, 1941, on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue”;
“real property used in the trade or business of the taxpayer.”
The property in the instant case does not fit into any of those exceptions. I think that a court, facing such explicit statutory exceptions, has no power to invent another by recourse to other general statutory provisions — Section 23(a) (1) (a) and (f) — which do not refer to Section 117 and to which Section 117 does not refer. See, e. g., United States v. Colorado & N. W. R. Co., 8 Cir., 157 F. 321, 332, 15 L.R.A., N.S., 167; Rybolt v. Jarrett, 4 Cir., 112 F.2d 642, 645; Brooks v. St. Louis-San Francisco Ry. Co., 8 Cir., 180 F.2d 185, 187, 15 A.L.R. 2d 1154; Cunard S. S. Co. v. Mellon, 262 U.S. 100, 128, 43 S.Ct. 504, 67 L.Ed. 894; Spring City Foundry Co. v. Commissioner, 292 U.S. 182, 189, 54 S.Ct. *948644, 78 L.Ed. 1200; Fairbanks, Morse & Co. v. Harvey, 114 Vt. 425, 47 A.2d 123, 126; Connecticut Light & Power Co. v. Walsh, 134 Conn. 128, 57 A.2d 128, 131, 1 A.L.R.2d 453.1
The last clause of Section 117(a) (1) is illuminating: From “capital assets” it except 3 “real property” — no other— if “used in the trade or business of the taxpayer”. My colleagues, in effect, treat that clause as if it read “any property used in the trade or business of the taxpayer.” This, I think, an improper judicial amendment of the statute.
The Ta,x Court found that the property here was “held for sale in the ordinary course” cf taxpayer’s business. Assuming, arguendo, that this finding was justified by the evidence, still it cannot help taxpayer For the only exception in Section 1.17(a) (1) which approximates that finding is “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business’’. The Tax Court’s finding significantly omits “primarily”; and, if it had made a finding containing that word, the finding, on this record, would have been “clearly erroneous.”
In this Circuit, there are but two decisions which bear on this case: In Exposition Souvenir Corp. v. Commissioner, 2 Cir., 163 F.2d 283, the taxpayer, a concessionaire, purchased .debenture bonds,.of New York World’s Fair 1939, Inc., as required by a contract in which the Fab* awarded concession rights to the taxpayer corporation, held the debentures until six months after the close of the Fair, and then sold them at a net loss. The taxpayer urged, in the alternative, that the debentures were held for sale in the ordinary course of business or that the loss constituted an ordinary and necessary business expense deductible under I.R.C. § 23(a) (1) (A). The Tax Court ruled against both contentions and this court affirmed. The loss in ;hat case, as in the case at bar, was a business expense, in that the concessionaire would probably not have purchased World’s Fair debentures except to secure the concession. So here, taxpayer, in all probability, would not have purchased government bonds but for the expectation of contracting with the Finnish government. The bonds in both cases were capital assets, and did not lose that status because their purchasers were not primarily motivated by hopes of interest payments or a rise in their market value. In the earlier case of Helvering v. Community Bond & Mortgage Corporation, 2 Cir., 74 F.2d 727, per Manton, J., the taxpayer, in order to extinguish a troublesome agency contract, bought up the capital stock of the company with which it had contracted, re-issued the stock to dummy stockholders, and promptly voted cancellation of the agency contract and the dissolution of the company. This court allowed the cost of the capital stock to be deducted as an ordinary and necessary expense of doing business. The question was not raised whether the loss was .a capital loss. Without discussion of that question, the court treated the case just as if the taxpayer had directly paid money for cancellation of an exclusive-agency contract. Such a decision cannot serve as a precedent here. See Webster v. Fall, 266 U.S. 507, 511, 45 S.Ct. 148, 149, 69 L.Ed. 411: “Questions which merely lurk in the record, neither brought to the attention of the court nor ruled upon, are not to be considered as having been so decided as to constitute precedents.” See also, Helvering v. Cement Investors, 316 U.S. 527, 530 note 1, 62 S.Ct. 1125, 86 L.Ed. 1649; Bard-Parker Co., Inc., v. Commissioner, 2 Cir., 218 F.2d 52, 57.
Helvering v. New Haven & S. L. R. Co., 2 Cir., 121 F.2d 985, related not at all to the question whether assets were or were not “capital assets” under Section 117, but solely to the application of the reorganization provisions of the statute. *949There the Commissioner attempted to isolate particular steps in a reorganization plan. We held — on familiar principles in connection with reorganizations for tax purposes — that he could not “atomize a plan.”
I turn to cited cases decided in other circuits: In Commissioner of Internal Revenue v. The Hub, 4 Cir., 68 F.2d 349, 350, the taxpayer, a Wheeling, West Virginia, clothier, joined with other Wheeling retailers in organizing the Ohio Valley Industrial Corporation. The purpose of the corporation was to arrest the economic decline then experienced in Wheeling, by planning for and assisting in the settlement of new industry in the Wheeling area. Taxpayer’s subscriptions to the capital of the corporation were permitted to be deducted as a business expense. In that case, however, the stock of the corporation, as distinguished from the government bonds in the instant case or from the Fair bonds in Exposition Souvenir, could not be regarded as an investment. The Ohio Valley Industrial Corporation was a nonprofit corporation, exempt from state and local taxes. The certificate of incorporation, after declaring that “ ‘This Corporation is not organized for personal gain, but only as a civic-undertaking,’ ” specifically provided that “ ‘there shall never be any dividends declared from profits, and all profits accruing shall be placed in a surplus fund for the objects and purposes of the Corporation.' ” In those unusual circumstances, the court did not consider the stock purchase a purchase of capital assets.
In Edwards v. Hogg, 5 Cir., 214 F.2d 640,2 the taxpayer, engaged in the business of selling liquor, purchased all the shares of stock of a distilling company for the sole purpose of obtaining the liquor owned by the distilling company, and which the taxpayer intended to sell to its own customers in the ordinary course of its business. Looking through the distilling company to its assets, it was apparent that the purchase of that company’s stock was but a means of acquiring the liquor which was then in short supply, i. e., obtaining the liquor was taxpayer’s essential purpose. The liquor itself was property of a kind which came within one of the exceptions explicitly stated in Section 117(a) (1).3 Gilbert v. Commissioner, 1 Cir., 56 F.2d 361, presents a case where a building contractor received, as compensation, shares of stock in the company for which the building was erected. As found by the trial court, he accepted them in lieu of cash and intended to convert them into cash as soon as possible (a practice not uncommon among engineering and contracting firms of that day). The court found that, in those circumstances, the stock was property held by the taxpayer primarily for sale in the course of his trade or business. I think a better rationale of that decision would be that, whenever a taxpayer receives property as compensation, the situation is to be regarded as if he had received cash and had then invested it in that property; the cash value of the property is therefore part of his ordinary gross income and taxable as such. Section 117 has no application to a case of that sort. If, however, such a taxpayer retains the property, then it is a “capital asset”— i. e., an investment in that property— and Section 117 applies to its subsequent disposition.
There is no need to consider here the problem which would arise if a taxpayer, as part of a contract, obligated himself to buy some securities, from the other party to the contract, at a price above the market price. For that was not the case here. Indeed, the contract here did not require taxpayer to buy any government bonds but merely to put such bonds in escrow, a requirement which could have been met without a purchase of bonds, if the taxpayer had *950already o'vned a sufficient amount of them.
My conclusion here derives from no ardent desire to add to the government’s revenues ty invariably interpreting statutes adverse to taxpayers; see, e. g., my dissenting opinion in Babcock & Wilcox Co. v. Pedrick, 2 Cir., 212 F.2d 645. But I thirk that courts should not allow what they deem fairness to taxpayers to over-ride one of the most sensible canons of statutory construction, i. e., that, where a statute sets forth specific exceptions, further exceptions, by way of mere unplication, are not permissible.4 Moreover, to hold for the taxpayer here may well mean unfairness to other taxpayers who, having acquired securities in situations just like this, but having made a gain on the sale of the securities seek to claim that their taxable profits are capital gains, not ordinary income.

. Of course, this rule of interpretation may yield where (1) if applied the statute would approach the absurd or (2) the legislative history clearly shows a different legislative purpose, '

. The court, on the issue relevant here, adopted the conclusions of the district court, reported in Hogg v. Allen, 105 F. Supp. 12, 21.

. See Western Wine & Liquor Co., 38 T. C. 1090, 1099; Charles A. Clark, 19 T.C. 48, 51.

. See cases cited supra.