The opinion
RIVES, Circuit Judge
(dissenting).
I think that the decision of the Tax Court should be affirmed. Under the applicable Section 117 of the Internal Revenue Code of 1939, “The term ‘capital assets’ * * * does not include -i:- * , * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” During the taxable years 1943 and 1944, the principal business' of the taxpayer corporation was the sale of real property, timber and minerals. Nevertheless, according to the present decision, gain from the sale of its properties is saved from taxation as ordinary income because sometime prior to 1883 its original incorporators had invested in bonds of the Selma, Rome and Dalton Railroad Company, and their purpose in creating the taxpayer corporation was to salvage their investment in those bonds.
Not just one liquidation, but several successive liquidations are involved. The Selma, Rome and Dalton Railroad Company was beset with financial difficulties, and, after protracted litigation extending from 1872 to 1883, the mortgages securing its bonds were foreclosed and the mortgaged lands were conveyed to representatives of the bondholders. The taxpayer corporation was then organized in 1883 and the representatives of the bondholders of the defunct railroad company conveyed to it the lands in exchange for the 10,000 shares of the capital stock of the taxpayer corporation of the par value of $100.00 per share, which were issued to the former bondholders in proportion to the amount of bonds owned by each. Thus the investment in the bonds had been converted into real property, and then the real property had been exchanged for shares of capital stock of the taxpayer corporation.
The record does not show that any of the original bondholders owned stock in the taxpayer corporation during the taxable years 1943 and 1944, or, in fact, for many years prior thereto. Realization upon their investment did not have to await the more than three score years during which the property conveyed by them to the taxpayer corporation was being sold by it, because whenever they saw fit they could transfer and assign their shares of the capital stock of the taxpayer corporation.
It seems to me that the Tax Court soundly answered the taxpayer's contention when it said:
“Petitioner’s argument that its sale of land, timber, and mineral properties over three-quarter of a century was a liquidation presupposes the existence of a fact which is at complete variance with the record herein; namely, that petitioner originally acquired its properties for purposes of investment and not for sale. That, of course, was not the case. The bondholders of the railroad may have used petitioner as the vehicle for ‘liquidating’ their large land holdings, but petitioner, itself, was a separate taxable entity. It acquired the land from the bondholders for the purpose of selling it, together with all timber and mineral rights appurtenant thereto; and from 1883 to the date of the hearing, it never deviated from that purpose. It was, therefore, from the date of its incorporation, regularly engaged in the business of selling its properties, which was the purpose for which it was formed. All of its properties were its stock in trade, held for sale in the normal course of its business, and all gains derived therefrom are taxable to it as ordinary income.”
*875 The failure of the Selma, Rome and Dalton Railroad Company during reconstruction days in Alabama and Georgia, the tenacious efforts of its six bondholders to recoup their losses, whether they were of Scotch ancestry, their close association in the acquisition of the lands of the defunct railroad and the original incorporation of the Alabama Mineral Land Company to the exclusion of any carpetbagger agents of northern speculators, whether they retained or sold their stock, what happened to»it in the hands of their descendants or assignees, — all of these are matters of much human and historical interest; but they do not change the character of the business of the taxpayer corporation in the years 1943 and 1944 from that of selling the extensive properties held by it primarily, if not solely, for sale to customers in the ordinary course of its trade or business.
It seems to me that the taxpayer cannot overcome the difficulties presented by the properties having passed through the hands of three separate legal entities (treating the six bondholders as one): first the defunct railroad, then the bondholders, and then the taxpayer. It might be said, however, that the substance of the transactions was the same as if the bondholders had succeeded to the stock of the defunct railroad company and had used that company as the vehicle for liquidation. The short answer, of course, is that that did not occur, and what actually took place governs the tax treatment.
If, however, the defunct railroad company had itself undertaken to liquidate its lands by engaging over the years in the essentially separate business shown by the facts of this case, I would think that it had lost its preferred tax status. As said in Galena Oaks Corporation v. Scofield, 5 Cir., 1954, 218 F.2d 217 , 220:
“Congress intended to alleviate the burden on a taxpayer whose property has increased in value over a long period of time. When, however, such a taxpayer endeavors still further to increase his profits by engaging in a business separable from his investment, it is not unfair that his gain should be taxed as ordinary income.”
Compare Baker v. Commissioner of Internal Revenue, 5 Cir., 248 F.2d 893 .
The Supreme Court has recently said; that:
“ * * * Since this section [117] is an exception from the normal tax requirements of the Internal Revenue Code, the definition of a capital asset must be narrowly applied and its exclusions interpreted broadly. This is necessary to effectuate the basic congressional purpose.”
Corn Products Refining Co. v. Commissioner, 1955, 350 U.S. 46, 52 , 76 S.Ct. 20, 24 , 100 L.Ed. 29 .
With deference, it seems to me that the majority goes to the opposite extreme.
I therefore respectfully dissent.