United States Freight Company and Subsidiaries v. The United States

DAVIS, Judge

(dissenting in part):

My disagreement with Part I of the court’s opinion (on § 165(f)) — I concur substantially with Part II (on § 1234)— is with the reasoning and not necessarily with the result. The difficulty is that there are two separate lines-of-authority, with divergent tendencies, bearing rather directly on our problem. The one, presssed by the Government, is exemplified by Turzillo v. Commissioner of Internal Revenue, 346 F.2d 884 (C.A. 6, 1965), in which the taxpayer-buyer who received money in settlement of an aborted transaction, comparable to the one we have here, was held to have made a “sale or exchange” and therefore entitled to capital gain treatment. 1 The other group of decisions, put forward by plaintiff, hold that the receipt of liquidated damages by a seller for breach of a contract to purchase stock or other property does not result from a “sale or exchange” and *897 must therefore be treated as ordinary income. 2

The court’s opinion, in opting for the latter rule, distinguishes the TurziUo line by saying that in those cases the two parties to the contract settled it by agreement after the breach, while here the liquidated damage provision was included in the contract itself. This is, for me, most unsatisfactory. I cannot see that it should make any difference, for § 165(f) and § 1211(a) purposes, whether the two sides to an uncompleted transaction compromise it by a separate arrangement after the rupture or whether, having foresight, they do it by including a liquidated damages provision in their original contract. In other words, no tax or other useful purpose is served by declaring that this taxpayer has an ordinary loss because it paid $500,000 in liquidated damages to the Pauls under the original agreement to buy-and-sell, but that it would have had a capital loss if the $500,000 had been paid under a settlement reached after the refusal to go through with the purchase.

No other valid distinction has been suggested or has as yet occurred to me. The Government argues that there can be a “sale or exchange” for the breaching buyer in this type of transaction but not for the seller who receives damages and keeps his property. The court’s opinion leans toward this view, but to me it seems unacceptable. The concept of a “sale or exchange” necessarily requires two-sided participation, and I cannot see how a transaction can be a “sale or exchange” for the one and something else for the other. See Union Bag-Camp Paper Corp. v. United States, 163 Ct.Cl. 525, 537-539 , 325 F.2d 730, 738 (1963); Stoddard v. United States, 49 F.Supp. 641, 644 (D.Mass.1943). When Congress desires an artificial, possibly one-sided, reading of “sale or exchange”, it so provides as in Section 1234(a) (b) (loss attributable to failure to exercise a privilege or option).

Thus, my view is that a proper resolution of this case requires us to choose between the divergent groups of precedents, to find in them a harmony which has not yet been discerned, to discover a new but sound principle of “sale or exchange”, or to skirt that concept entirely in disposing of the matter. For me much more digging is called for. I know that I do not have the answer now, and in the circumstances it is better simply to record my disagreement with the approach which commends itself to the majority.

. Other eases cited by the defendant in this connection are: Commissioner of Internal Revenue v. Ferrer, 304 F.2d 125 (C.A.2, 1962); Commissioner of Internal Revenue v. Golonsky, 200 F.2d 72 (C.A.3, 1952), cert. denied, 345 U.S. 939 , 73 S.Ct. 830 , 97 L.Ed. 1366 (1953); Commissioner of Internal Revenue v. McCue Bros. & Drummond, Inc., 210 F.2d 752 (C.A. 2, 1954), cert. denied, 348 U.S. 829 , 75 S.Ct. 53 , 99 L.Ed. 654 ; Commissioner of Internal Revenue v. Ray, 210 F.2d 390 (C.A.5, 1954), cert. denied, 348 U.S. 829 , 75 S.Ct. 53 , 99 L.Ed. 654 ; Metropolitan Bldg. Co. v. Commissioner of Internal Revenue, 282 F.2d 592 (C.A.9, 1960); Bisbee-Baldwin Corp. v. Tomlinson, 320 F.2d 929, 935-936 (C.A.5, 1963); Dorman v. United States, 296 F.2d 27 (C.A.9, 1961). Defendant also puts in this same general category such capital-loss cases as Commissioner of Internal Revenue v. Paulson, 123 F.2d 255 (C.A.8, 1941); Kaufman v Commissioner of Internal Revenue, 119 F.2d 901 (C.A. 9, 1941); C. L. Gransden & Co. v. Commissioner of Internal Revenue, 117 F.2d 80 (C.A.6, 1941); Warren v. Commissioner of Internal Revenue, 117 F.2d 82 (C.A.6, 1941); Bihlmaier v. Commissioner of Internal Revenue, 17 T.C. 620 (1951); and Smith v. Commissioner of Internal Revenue, 39 B.T.A. 892 (1939).

. Taxpayer cites Johnson v. Commissioner of Internal Revenue, 32 B.T.A. 156 (1935); Rooks v. Commissioner, 12 T.C.M. 96 (1953). Knapp v. Commissioner, P-H B.T.A. Memo ¶ 35,427 (1935); Greenleaf v. Commissioner, 9 T.C.M. 1024 (1950); Dexter Sulphite Pulp & Paper Co. v. Commissioner of Internal Revenue, 23 B.T.A. 227 (1931); Mechanic v. Commissioner, 19 T.C.M. 667 (1960); Boatman v. Commissioner of Internal Revenue, 32 T.C. 1188 (1959); Estate of Myers v. Commissioner of Internal Revenue, 18 T.C.M. 1116 (1959), aff’d 287 F. 2d 400 (C.A.6), cert. denied, 368 U.S. 828 , 82 S.Ct. 48 , 7 L.Ed.2d 31 (1961); United States v. Nat’l City Bank, 21 F.Supp. 791, 795 (S.D.N.Y.1937); Melone v. Commissioner of Internal Revenue, 45 T.C. 501 (1966); Binns v. United States, 254 F.Supp. 889 (M.D.Tenn., 1966), aff’d 385 P.2d 159 (C.A.6, 1967); and Smith v. Commissioner of Internal Revenue, 50 T.C. 273 (1968).