Coastal Terminals, Inc. v. United States

            UNITED STATES COURT OF APPEALS FOURTH CIRCUIT

A number of years prior to 1957, a group of independent oil jobbers formed the corporation, Coastal Terminals, Inc., for the purpose of having it provide facilities for the storage of oil and other petroleum products. In 1957, and for a number of years prior thereto, Coastal Terminals owned and operated a deepwater oil terminal at North Charleston, S.C., the facility consisting of real estate, tanks, pipe lines and office space. Prior to 1957, Coastal Terminals determined that it was to its advantage, and to the advantage of its oil jobber stockholders, to acquire inland terminal facilities, to be supplied with oil by Plantation Pipe Line. To this end, Coastal obtained options on three sites continguous to Plantation Pipe Line which would be suitable for the erection of terminal facilities. The first such site, upon which an option was taken in December, 1955, was at Belton, S.C. Later options were taken on sites at Salisbury, N.C., and Doraville, Ga. There was Existing at this time an operating terminal at Wilmington, N.C., which was owned by Coastal Terminals of North Carolina, a separate and distinct corporation of which the taxpayer owned 60% Of the stock and which it hoped to acquire and own outright in the future. Although at that time the taxpayer, Coastal Terminals, had no funds available for the purchase of the sites upon which options had been taken or for the erection of terminal facilities on such sites, as steel was in short supply, the taxpayer obtained commitments from its principal supplier, Chicago Bridge and Iron Company, for the necessary steel, it being understood between Chicago Bridge and Coastal that these commitments might be cancelled if Coastal subsequently found itself unable to finance the purchases. As early as August 1956, Coastal obtained commitments from Chicago Bridge for steel construction at the Belton and Doraville locations.

In the Spring of 1957, Delhi-Taylor Oil Corporation approached Coastal with the view of purchasing Coastal's oil terminal facilities at Charleston. Delhi-Taylor, a Delaware corporation, had its principal offices in Dallas, Texas, and, operating as an independent oil company, was engaged in exploration, production, refining and marketing activities. At the outset, Delhi-Taylor offered to purchase Coastal's terminal facilities at Charleston for $ 1,000,000.00 cash, and Coastal's asking price was $ 1,475,000.00. Eventually, Delhi -Taylor offered $ 1,200,000.00, and Coastal refused to sell for less than $ 1,400,000.00. At that time it was Coastal's intention to continue in the oil business, but it had no available funds to convert the sites on the Plantation Pipe Line, on which it had taken options, into operating terminals, and Coastal did not consider Delhi-Taylor's offering price of $ 1,200,000.00 enough to accomplish that end. Since Coastal and Delhi-Taylor could not agree on a sale, the idea of an exchange of properties was suggested and was discussed. These discussions resulted in an agreement that Delhi-Taylor would acquire from Coastal Terminals of North Carolina, its terminal in Wilmington, N.C., the sites at Belton, N.C., Salisbury, N.C., and Doraville, Ga., construct terminals on the sites, and exchange these four terminals for Coastal's deep water terminal in Charleston.

On May 11, 1957, Coastal and Delhi-Taylor entered into a written agreement entitled, 'The State of South Carolina, Terminal Purchase and Sale Contract, Charleston, South Carolina'. This agreement provided for the sale of taxpayer's Charleston facilities to Delhi -Taylor for a cash consideration of $ 1,200,000.00, with an escrow deposit of $ 60,000.00 as earnest money. The agreement further provided:

     '* * * It is understood that Seller is endeavoring to arrange for

The District Judge, sitting as the trier of facts without a jury, found that:

     'The substance of the transaction was one in which plaintiff

The Government contends that the transaction between Coastal and Delhi-Taylor was a 'sale' for gain, the gain from which is recognizable under Section 1002 of the Internal Revenue Code of 1954, which is as follows:

     'Except as otherwise provided in this subtitle, on the sale or

     '(a) Nonrecognition of gain or loss from exchanges solely in

     '(b) Gain from exchanges not solely in kind. -- If an exchange

The purpose of Section 1031(a), as shown by its legislative history, is to defer recognition of gain or loss when a direct exchange of property between the taxpayer and another party takes place; a sale for cash does not qualify as a nontaxable exchange even though the cash is immediately reinvested in like property.

We are of the opinion that, upon the evidence, the District Court's findings of fact and conclusions of law were amply sustained by the authorities.

'Whether the transaction constituted a sale or an exchange for income tax purposes depends on the intent of the parties and this intent is to be ascertained from all relevant facts and circumstances, and of necessity the case is largely dependent upon circumstantial evidence.'

Sarkes Tazian, Inc. v. United States, (7th Cir.), 240 F.2d 467, 470.

'* * * the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant.'

Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981.

'The transaction here involved may not be separated into its component parts for tax purposes. Tax consequences must depend on what actually was intended and accomplished rather than on the separate steps taken to reach the desired end.'

Century Electric Co. v. Commissioner of Internal Revenue (8th Cir.), 192 F.2d 155, 159.

There was no impropriety or illegality in the undertaking of Delhi-Taylor to exchange property which it did not own at the time of the undertaking. Howell Turpentine Co. v. Commissioner of Internal Revenue, 162 F.2d 319, wherein (p. 322) the court quotes with approval from American Jurisprudence, the following:

     "It is not unusual for persons to agree to convey by a certain

The Alderson case, supra, so far as we know, is the latest decision on the question presented in the instant case. The Tax Court (38 T.C. 215) held that the transaction was a taxable sale and not an exchange within the purview of Section 1031(a) of the Revenue Code. Counsel for the Government relied heavily on this decision in their brief in the instant case. However, prior to the argument of this case, the Court of Appeals for the Ninth Circuit, by its opinion filed May 22, 1963, reversed the decision of the Tax Court, holding that the transaction was an exchange within the purview of Section 1031(a).

The facts are quite analogous to those of the instant case. The Aldersons (hereinafter referred to as 'taxpayers') entered into an agreement on May 21, 1957 with Alloy Die Casting Company (hereinafter referred to as 'Alloy') to sell their Buena Park farm property in Orange County, California, to Alloy for $ 172,871.40, and according to the terms of the agreement Alloy deposited with Orange County Title Company, $ 17,205.00 toward the purchase of the property. From the outset, the taxpayers' desire was to exchange their Buena Park property for other property of a like kind. They intended to sell the property for cash only after they were unable to locate a suitable piece of property to take in exchange. Alloy intended simply to effect a purchase of the property for cash. Alloy did not learn that petitioners wished to exchange their property for like property until the latter part of July, 1957. Sometime after the execution of the purchase and sale agreement, taxpayers located certain property in Monterey County, referred to as the Salinas property, which they desired to obtain in exchange for the Buena Park property. On August 19, 1957, taxpayers and Alloy executed an amendment to their previous agreement providing that the Salinas property would be acquired by Alloy and exchanged for the Buena Park property in lieu of the originally contemplated cash sale transaction. However, the amendment provided that, if this exchange were not effected by September 11, 1957, the original agreement with respect to a purchase for cash would be carried out. On that same day, the daughter and agent of taxpayers delivered to the Salinas Title Guarantee Company, 'Buyers' Instructions' reciting that $ 190,000.00 would be paid for the Salinas property, that $ 19,000.00 was paid therewith out of taxpayers' money on deposit with the title company, and authorizing the title company to convey the Salinas property to Alloy provided a deed from Alloy to taxpayers could be immediately recorded. The Salinas title company acquired title to the Salinas property for a purchase price of $ 190,000.00, the funds being provided bythe $ 19,000.00 deposited by taxpayers' daughter, and $ 172,871.40 being paid to the title company by Alloy, the excess of the amounts deposited being returned to taxpayers. The title company then conveyed the Salinas property to Alloy, who in turn conveyed it by deed to taxpayers, and at the same time the taxpayers conveyed the Buena Park property to Alloy. Taxpayers paid for all documentary stamps on the deeds and all escrow fees.

Upon these facts, the Tax Court held that the transaction was a sale by taxpayers of their Buena Park property to Alloy for cash, and a reinvestment by taxpayers of the purchase price in the Salinas property, Alloy only acting as a conduit through which title to the Salinas property passed.

In reversing the decision of the Tax Court, the Court of Appeals seemed impressed by the fact that, from the outset, it was taxpayers' desire to effect an exchange of property. The Court said:

     'Petitioners, on finding the Salinas property, took steps to

Nor can we agree with the Government's alternate contention that gain to Coastal was recognizable under Sec. 1031(b) and (d) under the theory that Delhi-Taylor's payments to Chicago Bridge and Kaminer for the construction of terminal facilities were payments by Delhi-Taylor of obligations of Coastal. Before any work was done, and in fact, before any binding legal obligations had been incurred by Coastal to either Chicago Bridge or Kaminer, Delhi-Taylor undertook to have these terminals constructed by Chicago Bridge and Kaminer in order to be in position to make the exchange with Coastal. So Delhi-Taylor paid its own legally incurred obligations and not the obligations of Coastal.

It follows that the judgment of the District Court is hereby

Affirmed.