John and Betty MacGuire v. Commissioner of Internal Revenue

450 F.2d 1239

• Court: Court of Appeals for the Fifth Circuit
• Decided: December 7, 1971
• Docket: 19-60084
• Status: Published

Opinions

MORGAN, Circuit Judge:

On their joint federal income tax returns for 1961, taxpayers John and Betty MacGuire reported a long-term capital gain of $700,000 on a claimed disposition of stock in a Mexican corporation, Cia. Ganadera Sahuarito, S.A. (hereinafter Sahuarito). By a notice of deficiency dated August 6, 1965, the Commissioner determined that the $700,000 should be taxed as ordinary income, and that there was a deficiency in the taxpayers’ return of $436,521.74. Taxpayers sued in the United States Tax Court to set aside the ruling of the Commissioner. The Tax Court sustained the Commissioner’s determination, and the taxpayers have appealed to this court. We affirm the decision of the Tax Court.

I. Background

This tax dispute grows out of a complicated series of transactions in Mexico and Texas which took place over a span of two decades, and we shall attempt here only to outline the principal events. In 1942, Betty MacGuire’s father, Lee Moor, formed a cattle corporation in Mexico known as Sahuarito. Moor was the largest shareholder, owning 1,950 of the 3,000 shares issued. The remainder of the shares were owned by three of Mr. Moor’s employees, Fernando Villa-lobis (450 shares), Ashley Mershon (300 shares), and Robert Cook (300 shares). Under its charter, Sahuarito was permitted to engage in the cattle business but was barred from owning land. Consequently, Mr. Moor supplied funds to “straw owners” who bought land and leased it to Mr. Moor. In addition Villa-lobis owned some 145,173 acres of land acquired previously in an unrelated transaction which he leased to Moor. Moor in turn subleased all this land to Sahuarito. On this land, a total acreage in excess of 300,000 acres, Sahuarito raised thousands of imported pure bred Hereford cattle. In 1950, the ranch foreman Mershon quit and his stock in Sahu-arito was retained as treasury stock. Cook also quit in 1950, and, at the behest of Moor, transferred his shares to the taxpayer John MacGuire.

In 1951, Mr. Moor acquired, for the benefit of the taxpayers, another Mexican cattle company known as Terre-nates,¹ located 120 miles south of Sahu-arito. Moor acquired a 98 percent interest in the company and Villalobis, two percent. Shortly thereafter, Moor transferred a 90 percent interest in Ter-renates to John MacGuire, and the remaining eight percent to his daughter, Betty MacGuire. Terrenates owned 98,-963 acres of land.

In September 1951, armed Mexican soldiers expropriated the Sahuarito lands and informed Moor’s employees that all cattle on the ranch must be removed or be auctioned off as strays. Shortly thereafter, Villalobis and the former ranch foreman Mershon protested the order to a Mexican judge, but were informed that the Sahuarito lands had been sold to Mexican citizens and that the cattle must be removed. As a result, between 5,400 and 5,500 head of cattle were removed from Sahuarito by the end of 1952. Approximately 2,950 were driven over land to Terrenates and the rest were sent to slaughter houses in Juarez. As of June 30, 1952, the only asset shown on Sahuarito’s books was an account receivable from Terrenates in the amount of $47,350.87. By December 31, 1952, Sahuarito’s books reflected no assets. Shortly after Sahuarito was confiscated, Mr. Moor converted his 1,950 shares into treasury stock and delivered them to Villalobis. Thereafter, the sole remaining stockholders in Sahuarito were Villa-lobis with 450 shares and the taxpayer John MacGuire with 300 shares. At the request of Moor, Vallalobis then filed with the Mexican government a fomaal notice of suspension of operations by Sahuarito.

The ranching operations at Terrenates were small at the time of the expropriation of Sahuarito, there being only about 1,000 head of cattle on the ranch. The cattle from the two ranches were not kept separate but were combined into one large herd on the Terrenates ranch. From 1952 until 1958, cattle from this combined herd was sold from time to time in Texas and the money was deposited to the account of Terrenates. No effort was made to segregate the proceeds from the sale of cattle which had originally been on the Sahuarito ranch since Sahuarito was considered to be out of business. Lee Moor bought many of these cattle and, at the time of his death, owed a note for them payable to Terre-nates in the sum of $467,641.99, which was paid out of his estate after his death.

Lee Moor became ill in 1957 and died on December 15, 1958. Although John MacGuire owned 90 percent of Terre-nates, he did not begin managing the company until Moor became ill in 1957. Between July 31, 1958, and December 31, 1960, MacGuire borrowed a total of $577,019.66 from Terrenates and issued personal notes therefor. The funds were obtained by MacGuire by depositing to his personal bank accounts checks payable to Terrenates. In addition Mac-Guire wrote checks on the Terrenates checking account and deposited them in his personal accounts. All of the monies so obtained by MacGuire were deposited in bank accounts in El Paso.

MacGuire testified that his purpose in concentrating these funds in Texas was to strengthen his bargaining position in a dispute which he anticipated with Moor’s employee Villalobis. As noted, MacGuire and Villalobis were the sole remaining shareholders in Sahuarito. Villalobis had never been compensated for the loss of his lands on the Sahuarito ranch. In addition, he had never received any of the proceeds from the sale of cattle by Terrenates which originated from the Sahuarito ranch. MacGuire anticipated that, with Moor out of the way, Villalobis would now assert a claim against a portion of the assets of Ter-renates. Because of the possibility of litigation in the Mexican courts, Mac-Guire deemed it prudent to remove the liquid assets of Terrenates from Mexico.

II. The Disputed Transaction

On January 31, 1961, taxpayer Mac-Guire borrowed $600,000 from the First National Bank of Dallas through the Chelmont State Bank (where Terrenates had an account) and deposited the proceeds in his personal account. He then repaid his total indebtedness to Terre-nates, $577,019.66 plus interest of $21,-380.97, by depositing his check for $598,-390.63 in the Terrenates checking account in the Chelmont State Bank. Mac-Guire then drew two checks aggregating $700,000 on the Terrenates checking accounts (one in the amount of $655,000 drawn on the Chelmont State Bank; the other for $45,000 drawn on the account at the State National Bank of El Paso) and deposited them to his personal account at the Chelmont State Bank. The next day, MacGuire drew a cheek on his personal account to the Chelmont State Bank in El Paso in payment of the $600,-000 loan of the previous day plus interest for one day in the amount of $83.00. On the same day, he closed out the Ter-renates checking account at the State National Bank. It is the taxpayers’ receipt of this $700,000 which is the subject of this tax dispute. During the course of this litigation, taxpayers have advanced no fewer than four different explanations of that transaction which would, in their view, qualify the transaction for capital gains treatment.

Taxpayers’ initial story was that the $700,000 was received as consideration for the sale of 100 shares of Sahuarito stock to Terrenates. At the time of the transaction, MacGuire advised his bookkeeper that such a sale had occurred, and the bookkeeper made the appropriate notations in the taxpayers’ accounting records to reflect such a sale. Adhering to the same story, the taxpayers on their joint federal income tax return for the taxable year 1961 reported the $700,000 as a long-term capital gain from the sale of the 100 shares of Sahuarito to Terrenates. However, the Commissioner, on audit, denied the long-term capital gain treatment and determined that the $700,000 was taxable as ordinary income.

In September 1964, Internal Revenue Agent Felix Lopez interviewed taxpayer in the presence of his auditor and counsel as well as Lopez’s supervisor. At this juncture, the taxpayers’ story changed. He stated that the $700,000 was received from the sale of 300 (not 100, as reported on his 1961 tax return) shares of Sahuarito stock to an unknown purchaser (not to Terrenates as originally claimed). Taxpayers’ auditor indicated that it was his error that the 1961 return reflected a sale of 100 shares instead of 300 shares. When MacGuire was asked how the sales price of $700,-000 was arrived at, he stated that Villa-lobis had handled the sale, and that the taxpayer did not know who the purchaser was.

Agent Lopez then discussed the transactions with Villalobis, who stated that MaeGuire’s stock in Sahuarito had been purchased by one Jose Terasas, but was unable to explain how the $700,000 sales price was reached. When questioned as to the value of the Sahuarito stock, Villa-lobis acknowledged to the agent that Sahuarito’s land had been expropriated and its cattle sold. Agent Lopez suggested that the stock must have been worthless, and Villalobis replied that Sahuarito might have had money received from the sale of cattle. This was the entire explanation of Villalobis for the $700,000 transaction. Villalobis did not make any contention at this meeting, as was later claimed, that an element in the transaction was the transfer to him from petitioner of an ownership interest in Terrenates.

In the Tax Court, MacGuire once again altered his story. There taxpayer claimed that the $700,000 was received in exchange for a transfer of a portion of taxpayers’ interest in Terrenates to Villalobis and for the settlement of their interests in Sahuarito. Taxpayer asserted that an oral agreement had been reached with Villalobis on April 9, 1961, under which Villalobis was to receive an enlarged interest in Terrenates and taxpayer was to retain the $700,000 already taken from the Terrenates accounts in El Paso. In return, Villalobis allegedly agreed not to bring suit against Mac-Guire or Terrenates in Mexico to recover his share of the proceeds from the sale of Sahuarito cattle. Villalobis’ share was originally to have been increased from two percent of Terrenates to 50 percent. A petition was filed with the Mexican Foreign Office in November 1961 to effect transfer of interests to Villalobis, but was denied because Mexican citizens did not own at least a 51 percent interest in the business. Thereafter, Mac-Guire agreed to transfer to Villalobis a 55 percent interest in Terrenates. A second petition was filed with the Mexican Foreign Office on February 20, 1962, and was approved on March 20, 1962. On March 24, 1962, Terrenates’ ownership register was changed to reflect a 55 percent interest in Villalobis and his wife, and a 45 percent interest in taxpayer and his wife Betty. In addition, the taxpayers advanced an alternative theory in the Tax Court that the $700,000 was received by MacGuire as a non-taxable distribution in liquidation of Sahuarito, which was liquidated in 1952.

In the Tax Court, the Commissioner offered no affirmative theory as to why the $700,000 should be taxed as ordinary income, but rather relied on the presumption of correctness attaching to his determinations. The Tax Court ruled that the burden of proof was on the taxpayers to produce sufficient evidence to justify capital gains treatment. The Tax Court concluded as a finding of fact that the taxpayers had failed to present sufficient evidence to convince the court that the $700,000 was received by Mac-Guire as consideration for the transfer of his interest in Terrenates to Villa-lobis and the settlement of interest in Sahuarito. The Tax Court also rejected the taxpayers’ theory that the $700,000 was received by MacGuire in liquidation of his interest in Sahuarito.²

III. Conclusion

On appeal, appellant argues that the Tax Court improperly relied upon the presumption of correctness attaching to the Commissioner’s determinations. Appellant contends that the presumption of correctness disappears upon the introduction of substantial evidence by the taxpayer. Cf. Stout v. Commissioner of Internal Revenue, 4 Cir. 1959, 273 F.2d 345, 350. Appellant argues that it was “fundamental error for the Tax Court to reject substantial evidence that was corroborated and uneontradicted in preference to the Commissioner’s presumption”. We disagree.

As a preliminary matter, it should be noted that we do not have here a case in which the Commissioner offered no evidence and merely rested on the presumption of correctness. The Commissioner called two witnesses. Hugh Gibbons, MacGuire’s former bookkeeper, was subpoenaed by the Government and gave testimony which directly contradicted MacGuire’s story. The Commissioner also called revenue agent Lopez who testified concerning the contradictions in the taxpayers’ stories at the various stages in the case.

The Tax Court committed no error with respect to the burden of proof. This was a case in which it was stipulated that the taxpayers withdrew $700,000 from a corporation (Terrenates) controlled by them. The burden was on the taxpayers to establish by a preponderance of the evidence that this income was derived from a transaction which qualified for long-term capital gain taxation, Helvering v. Taylor, 293 U.S. 507, 55 S.Ct. 106, 79 L.Ed. 648 (1935). That burden is not shifted by the mere fact that the taxpayers introduced evidence on their behalf. United Aniline Co. v. Commissioner of Internal Revenue, 1 Cir. 1963, 316 F.2d 701.

Thus, the sole substantial question in this appeal is whether there was sufficient evidence in the record to support the Tax Court’s ruling. Whether the $700,000 was received, as the taxpayers now claim, in consideration for the transfer of interest in Terrenates and the settlement of interests in Sahuarito is a question of fact on which the Tax Court’s decision cannot be disturbed unless shown to be clearly erroneous. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). After a careful review of the record, we conclude that there was ample basis for the Tax Court’s refusal to find that the $700,000 was received in consideration for the transfers of taxpayers’ interests in Terrenates and settlement of their interest in Sahuarito. The record revealed numerous inconsistencies in the stories advanced by the taxpayers. No purpose would be served by restating those contradictions here since the Tax Court’s opinion ably points them out.³ It is sufficient to observe that the evidence fully supports the Tax Court’s conclusion that “the record is not at all clear. Indeed it is extremely cloudy and * * * what emerges is still confused, sketchy and basically highly implausible factual setting on which * * * [taxpayers] rel[y]”.

There is no merit in the appellants’ contention that the Tax Court was bound to accept the taxpayers’ evidence because it was “corroborated and uncontradicted”. As we have noted, the taxpayers’ story was both contradictory and contradicted. Moreover, it is well established that the Tax Court is not bound to believe even uncontradicted testimony of interested parties where the testimony appears highly improbable. Clark v. Commissioner of Internal Revenue, 9 Cir. 1959, 266 F.2d 698; Thomas E. Snyder Sons Co. v. Commissioner of Internal Revenue, 7 Cir. 1961, 288 F.2d 36; Hal-labrin v. Commissioner of Internal Revenue, 6 Cir. 1963, 325 F.2d 298; Winters v. Dallman, 7 Cir. 1956, 238 F.2d 912; Pool v. Commissioner of Internal Revenue, 9 Cir. 1957, 251 F.2d 233. As this court held in Boyett v. Commissioner of Internal Revenue, 5 Cir. 1953, 204 F.2d 205, 208:

The Tax Court not only may, but should, base its findings on the testimony it believes to be true, rejecting after due consideration that which it believes is false. Although positive and uncontradicted testimony as to a particular fact will ordinarily be accepted, a court may reject testimony which, as here, is inherently improbable or manifestly unreasonable, even though no contradictory testimony is offered.

In sum, there was ample basis in the record for the Tax Court’s refusal to believe appellants’ story that the $700,-000 was received in consideration for the transfer of interest in Terrenates and settlement of interests in Sahuarito. Having rejected this explanation, neither the Tax Court nor the Commission was under a duty to offer an alternative theory of the transaction which would result in ordinary income treatment. Taxpayers’ receipt of $700,000 income was undisputed. In the absence of a convincing showing otherwise, the $700,-000 was properly taxable as ordinary income.

Accordingly, the judgment of the Tax Court is

Affirmed.

1 . Terrenates was a Mexican limited liability company taxable as a corporation.

2 . This argument has been abandoned by the appellants on appeal.

3 . The Tax Court, in its Memorandum Findings of Fact and Opinion, noted the following :

How can one reconcile the original claim of Mr. Villolobis [sic] that he sold the 300 shares of stock of Mr. MacGuire in Sahuarito to a Mr. Jose Terasas, and embellish his claim with tlie details that the proceeds were put in a Terrenates bank account in Mexico and that Terrenates permitted Mr. Mac-Guire to withdraw the sales price from its bank account in the United States, with his claim at the trial that the Sahuarito stock of Mr. MacGuire was not actually sold by him, but he let Mr. MacGuire keep the $700,000 taken from the Terrenates bank accounts in El Paso in return for Mr. MacGuire turning in his 300 shares of Sahuarito stock, Mr. MacGuire transferring to him an interest in Terrenates and his agreeing not to sue Mr. MacGuire?

How can one reconcile the testimony of Mr. MacGuire that the 300 shares of Sahuarito stock were transferred away from him in connection with his agreement witli Mr. Villolobis, [sic] and the testimony of Mr. Villolobis [sic] that he did not remember if the 300 shares of stock were mentioned by him and Mr. MacGuire and whether the shares played any part in connection with their negotiations?

* * * [How can one explain] that with the disposition of 300 shares of Sahuarito stock by Mr. MacGuire claimed to be an integral part of the $700,-000.00 transaction, that at the trial Mr. Villolobis [sic] did not remember receiving any Sahuarito shares from Mr. MacGuire? How can one reconcile the testimony of Mr. Villolobis [sic] that the disposition of the 300 shares of Sahua-rito stock of Mr. MacGuire that formerly belonged to Mr. Cook was an integral part of the $700,000.00 transaction with his testimony that in 1902 ho thought Mr. Cook still had his 300 shares? And how can you reconcile this testimony with the testimony of Mr. Villolobis [sic] that he sold these same shares to Jose Terasas?

Other portions of the record also present unanswered questions, which cast doubt on petitioners’ contentions:

Is it reasonable that Mr. MacGuire, who owned 98 pez'cent of Terz'enates and who had $700,000.00 under his complete control, would voluntarily go to a 2 percent owner who does not know of the $700,000.00 and suggest the transaction that is now alleged to have taken place?

How can one reconcile Mr. MacGuire’s claim that Terrenates was worth one and one-half million dollar's on Januaz-y 31, 1961, with his balance sheet prepared as of one month earlier on December 31, 1960, reflecting his 98 percent interest in Terrenates to have a fair market value of $100,000.00?

None of the $700,000.00 received by Mr. MacGuire could be identified by him as Sahuarito money.

Why did Mr. MacGuire, who maintained a double entry set of books kept by a bookkeeper and audited by a firm of cez-tified public accountants, not recoz-d the $700,000.00 tz-ansaetiozi as it is now explained to the Couz-.t if the status of the ciz'cumstances on January 31, 1961, was as it is now claimed?

Doesn’t it seem peculiar that for a transaction of this size and magnitude, there was no writtezz agreement?

How can it be said there is a bona fide connection between the receipt by Mr. MacGuire on January 31, 1961, of $700,000.00 belongizzg to Terrenates and the transfer by Mr. MacGuire to Mr. Villolobis [sic] of an interest in Terrenates and stock in Sahuarito, when it was only after Mr. MacGuire “got my full amount, 700,000, * * *. Then I made my deal with Mr. Villalobos”?

Why is it petitioners were uzzable to explain at the trial even approximately how much of the $700,000.00 received by Mr. MacGuire was in liquidation of Sahuarito and how much was received by him for transferring an interest in Terrenates to Mz\ Villolobis [sic] ?

In attempting to show a connection between the receipt by Mr. MacGuire of $700,000.00 and the transfer by Mr. MacGuire to Mr. Villolobis [sic] of an interest in Terrenates and stock in Sahuarito, how can one z-econcile the testimony of Mr. Villolobis [sic] that the deal with Mr. MacGuire was not made until April 9, 1961, with the fact that Mz\ MacGuire took over to himself on January 31, 1961, complete possession of the $700,000.00 and expended almost all of this amount on his personal obligations on the same date?