Opinion · Court of Appeals for the Second Circuit

Bedell v. Commissioner of Internal Revenue

30 F.2d 622

Type: Opinion
Court: Court of Appeals for the Second Circuit
Jurisdiction: Federal
Date: 1929-02-04
Topic: general

stating that “it is absurd to speak of a promise to [provide a service] in the future as having a ‘market value,’ fair or unfair” | “ * * * it is absurd to speak of a promise to pay a sum in the future as having a -‘market value’, fair or unfair”, per L. Hand | “* * * it is absurd to speak of a promise to pay a sum in the future as having a ‘market value’, fair or unfair”, per L. Hand

Citator

Cited by: 44 opinions

BEDELL v. COMMISSIONER OF INTERNAL REVENUE,30 F.2d 622(2nd Cir. 1929)

BEDELL v. COMMISSIONER OF INTERNAL REVENUE.

No. 144.

Circuit Court of Appeals, Second Circuit.

February 4, 1929.

Page 623

Appeal from the United States Board of Tax Appeals.

Application by Alfred M. Bedell for review of a ruling of the Commissioner of Internal Revenue. On appeal, the Board of Tax Appeals affirmed the ruling of the Commissioner, and the applicant petitions for a writ of review. Affirmed.

Bedell, the appellant, was engaged in the business of selling women's clothes at retail, which he conducted through numerous corporations under his control. He alleged that he also spent a large part of his time in buying and selling bonds, stocks, mortgages, real estate, and other choses in action. In November, 1919, one Cohen suggested to him that he should advance $50,000 as earnest upon a contract for the purchase of a building in New York City, then owned by the Valentine Building Company. The proposed purchaser was to be the Broadway-John Street Company, a corporation of which Cohen was president and which he directed, and there was prospect of an immediate resale of the property at a substantial advance. They agreed that Bedell should advance the money upon Cohen's promise that he should divide any profits on a resale, in equal shares if he used the money, otherwise if he did not. Besides the interest so given, Cohen agreed to secure Bedell for his advance by Cohen's interest in another building, in case the purchaser defaulted or the venture was unprofitable.

Bedell through an attorney advanced $50,000 directly to the Valentine Company, which executed a contract to sell the building to the Broadway-John Street Corporation, the title to pass and the balance to be paid on February 28, 1920. Thereupon Cohen, for the Broadway-John Street Company, negotiated with various persons for a resale, and finally on December 12, 1919, closed a contract with the White Oil Company at a substantial advance; $75,000 of the purchase money being deposited in escrow to await closing. This transaction was in form a contract for the sale of the building by the Broadway-John Street Company to the White Oil Company, title to be delivered and the price paid on February 29, 1920. In anticipation of the closing day, the White Oil Company took title directly from the Valentine Company on February 2, 1920, and paid the price. Cohen thereupon repaid to Bedell his original advance and half the profits as agreed. The appellant's first point is that the contract of resale between the Broadway-John Street Company and the White Oil Company was in substance an assignment of the first contract with the Valentine Company, and created a chose in action, the immediate value of which measured his profits which should therefore be entered in his return for 1919, a year in which he suffered heavy losses.

If this question were decided against him, the appellant asserted that in any case he was entitled to bring his losses in 1919 into hotchpot with his income for 1918 and 1920, by virtue of section 204(a)(1), and section 204(b), 40 Stat. 1060. This depends upon whether his losses by the sale in that year of the securities held since March 1, 1913, resulted from the "operation of any business regularly carried on" by him. He testified that he had spent approximately half his time in buying and selling for profit real estate and negotiable securities, and that his stocks and bonds he bought and sold through six or seven brokers' offices, where he spent about three hours three or four days a week, and in one of which, with several other persons, he had a private room; that he also bought and sold real estate through real estate companies, and to accomplish this made personal visits to the buildings with an architect and a builder, both regularly paid. He filed an income tax return for 1919, showing a large net loss, made up from the sale of the securities, held since March 1, 1913, as above stated, and a single profit from the sale of a bond. There were no transactions involving real estate.

The board held that the profits of the sale of the building were realized in 1920, and that the appellant did not regularly carry on the business of buying and selling securities during the year 1919.

Lyle T. Alverson, of New York City (Adolph Bloch, of New York City, on the brief), for appellant.

Mabel Walker Willebrandt, Asst. Atty. Gen., Dorothy A. Moncure, of Washington, D.C., Morton P. Fisher, of Baltimore, Md., and C.M. Charest and C. Colden Miller, both of Washington, D.C., for appellee.Page 624

Before MANTON, L. HAND, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge (after stating the facts as above).

If the transaction of December, 1919, was in fact what it purported to be, the White Oil Company only promised to pay for the delivery of title on February 29, 1920. Even the deposit was in escrow; that is, it was conditional upon the completion of the sale, and nothing whatever was due unless the title passed. Had the Broadway-John Street Company already taken title and paid the price, we do not understand that the appellant maintains that a contract of sale would measure the profit before the time of payment; at any rate it is clear that it would not. While equity regards a vendee before payment as owner, still the payment is for the title, and is conditional on its delivery, as much as in the case of chattels where title has not passed. Of course, it is true that an obligation, even a conditional obligation, is in some sense property, and, like anything else that can be transferred, may be said to have a value, but nevertheless payment is made in exchange for title, and will never be made if it is not conveyed. To speak of the profit as resulting because its amount can be presently ascertained, though performance remains uncertain, seems to us a perversion of language.

If, on the other hand, we abandon the form of the transaction and assume that the contract with the White Oil Company was an assignment of the contract with the Valentine Company, the result is no different, though the assumption is unreal. So viewed, the White Oil Company became the vendee, and upon the passage of title became liable to the Valentine Company for the agreed price, and to the Broadway-John Street Company for the difference between it and the price in its own contract. The White Oil Company did not pay down that difference for an assignment of the contract, taking its risk of performance; on the contrary, even as regards the initial payment, its promise was conditional upon performance by the Valentine Company. It was paying for the title as much as though it was vendee of the Broadway-John Street Company, which in truth it was. For that title it was to pay in part to the Valentine Company and in part to its assignor; it made no difference that performance was not to be made by the assignor.

While, therefore, we do not think that the case is like a promise to pay in the future for a title which passes at the time of contract, we would not be understood as holding by implication that even in that case the profit is to be reckoned as of the time of sale. If a company sells out its plant for a negotiable bond issue payable in the future, the profit may be determined by the present market value of the bonds. But if land or a chattel is sold, and title passes merely upon a promise to pay money at some future date, to speak of the promise as property exchanged for the title appears to us a strained use of language, when calculating profits under the income tax. Section 202(b) of the Act of 1918 provided for an exchange of property and made the profit depend upon "the amount of its [the property received] fair market value, if any" — a phrase which was amended in the law of 1921 (42 Stat. 227) to "readily realizable market value." There is a difference between the two, but it is absurd to speak of a promise to pay a sum in the future as having a "market value," fair or unfair. Such rights are sold, if at all, only by seeking out a purchaser and higgling with him on the basis of the particular transaction. Even if we could treat the case as an exchange of property, the profit would be realized only when the promise was performed. We agree with the board upon the first point.

Upon the second, the evidence is in conflict. The appellant swore that he gave much of his time to trading in stocks, bonds, and real estate, and sought to set off his losses in 1919 against his profits in 1918 and 1920, as provided in section 204(b). Apparently these losses are not quite the same as those contained in his return for 1919, for the stipulated figures do not tally with them. Whether the stipulated losses include some profits on real estate and negotiable securities we do not know; we have only the record to go on; that is, Bedell's testimony, his return, and the stipulation. In the first place, we are by no means satisfied, even if we were bound by his oral testimony, that it proved him to have been regularly carrying on a "business" of any kind. A trader on an exchange, who makes a living in buying and selling securities or commodities, may be said to carry on a "business"; a person who frequents brokers' offices, and continually dabbles in real estate is conceivably quite different. Most men who have capital change their investments, and may speculate all the time; we should hardly call this a business, though the line is undoubtedly hard to draw. But the board apparently assumed that, if Bedell had shown that he was so engaged during 1919, it would have been enough; it thought that the proof was defective because of his return for thatPage 625year. Saving the doubt we have suggested, we are content to dispose of the case on that assumption.

It is of no consequence whether Bedell was bound to file any return at all; he chose to do so, and it was fair to take him at his word when he swore that it was "a true and complete statement" of all his gains. He might have persuaded the board of its incorrectness, for it was only an admission against interest; but he did not succeed, and we have no jurisdiction to review the findings of fact when supported by any evidence. Avery v. Commissioner (C.C.A. 5)22 F.2d 6, 7, 55 A.L.R. 1277; Royal Packing Co. v. Commissioner (C.C.A. 9)22 F.2d 536; Henderson Iron Works v. Commissioner, 58 App. D.C. 114,25 F.2d 538; Blair v. Curran (C.C.A. 1)24 F.2d 390; Bishoff v. Commissioner (C.C.A. 3)27 F.2d 91.

The return shows that he did substantially no "business" of the kind during that year, nothing but to sell the securities which he had held for six years. Although the return was put in evidence on his cross-examination, he made no effort to reconcile its contents with his testimony, and some reconciliation was necessary if his version was to be accepted. Realizing the force of this objection, he insists that, if he regularly carried on the business as he professed in 1918 and in 1920, it was a matter of no moment that in 1919 he was inactive. The discrepancy might indeed have justified the board in disbelieving his whole story, but its finding was limited to the year 1919, and raises the question of law whether a cessation during that year deprived him of the benefit of section 204(b), though he traded regularly in 1918 or 1920. In any business there will indeed be periods of inactivity, during which it would hardly be true to say that the business was not being "regularly carried on." Such in any case would be plainly true when one was speaking of an ordinary commercial or industrial enterprise. It seems to us, however, impossible to regard the business of buying and selling securities and real estate as having a similar continuity when for a whole year the person supposedly engaged in it does nothing at all or substantially nothing. Assuming that he is ever in a business, while so engaged, he will be in it and out of it as he trades or does not. Here again it is a question of degree, and the length of the intervals will determine the conclusion. An interval of two weeks would scarcely count; but, when for a year he does nothing, it seems to us past reason to speak of the supposititious business as being still carried on.

Finally, the objection is taken that the board found only that he was not dealing in securities, and made no finding as to real estate. The implied argument appears to be that the business was single, and included negotiable securities, mortgages, and real estate, and that, if he continued dealing in real estate, he continued in the "business," though he did nothing in securities. We decline to accept that interpretation of the statute. If he did not deal in securities, his real estate business would not carry his losses in the securities held for six years. It is absurd to speak of such activities collectively as a single business. There is no evidence that the losses stipulated were losses in real estate; so far as appears, they were in securities.

Order affirmed.