LEWIS R. MORGAN, Circuit Judge.
This matter on appeal involves a tax refund suit submitted to the district judge primarily on stipulated facts. The taxpayer alleged overpayment of taxes in the amount of $64,348.04 on income from the sale of corporate stock. The district judge below found that the corporations in question were collapsible corporations under Section 341 of the Internal Revenue Code and that the income from the sale of stock by a major stockholder should be treated as ordinary income. Despite plaintiff's contentions that the income should have been treated as capital gain, we affirm the decision of the lower court.
Plaintiffs, Rolland L. King and his wife, Arlene P. King,
The corporations in question included South Gate Water and Sewer Company, in which the taxpayer was a 50 percent stockholder; Greater Sarasota Sewer Company,
The taxpayer King and his partner Smith formed King & Smith, Inc. in 1954 to develop a residential area east of Sarasota known as Forest Lakes. During its first year the corporation bought an option to purchase 1200 acres east of Sarasota at $2,000 per acre (hereinafter referred to as the Minute Maid option). King & Smith, Inc. ceased developing property by the end of 1955 because the individuals King and Smith had formed another corporation, South Gate Development Company, Inc. (hereinafter referred to as South Gate Development), in March of 1955 to continue the real estate development projects. By March of 1956 the land subject to the Minute Maid option held by King & Smith, Inc. had greatly increased in value primarily because of the success of the real estate developments of the corporation. At this time the taxpayer and his partner Smith sold all of their stock in King & Smith, Inc. to one D. H. Burk for approximately $1,673,000.00, with most of the purchase price payable over time as the remainder of the Minute Maid option was exercised. A part of the option had been exercised, with some of the land having been sold to South Gate Development. In 1955, because of a requirement that residential developments have a central water supply, King and Smith formed a utility corporation, South Gate Water & Sewer Company, Inc. (hereinafter referred to as South Gate Water), to supply water to the areas developed by South Gate Development. King and Smith each owned 50 percent of the stock in the utility corporation, which obtained a water franchise from the county and constructed a central water plant. South Gate Development constructed the water lines that were to carry water from the South Gate Water plant to the individual lots. After completion, these lines were conveyed by South Gate Development to South Gate Water without payment of consideration. In 1959 South Gate Development ceased developing property and in May of the same year, King and Smith sold all of their stock in South Gate Water to General Water Works Corp., an unrelated corporation engaged in the operation of several utility systems. Part of the purchase price was paid at closing and the remainder was paid over a period of time based upon the number of new customers connected to the system.
In 1958 Sarasota County instituted a requirement that all residential developments must be serviced by a central sewer system. King and Smith incorporated the Greater Sarasota Sewer Company to satisfy this requirement for their real estate developments, with each owning 50 percent of the stock in the corporation. The corporation obtained a sewer franchise from Sarasota County covering parts of the South Gate subdivision and other areas of Sarasota and built a plant and central disposal system. South Gate Development constructed several sewage collection systems, lift stations and other appurtenances in the area of its development within the Greater Sarasota Sewer Co. franchise. These systems were connected to the plant and central disposal system of Greater Sarasota Sewer Co. and after completion were conveyed to the sewer company without consideration. In 1965 King and Smith sold all of their stock in Greater Sarasota Sewer Co. to Florida Cities Water Company (hereinafter referred to as Florida Cities), a subsidiary of a company which operates several private utility systems. Part of the payment was made at closing and the remainder was scheduled to be paid semiannually based on the number of connections made to the system.
The taxpayer King, along with three other parties, formed in 1960 Gulf Gate Utilities, Inc. (hereinafter referred to as Gulf Gate Utilities) in which King was a 45 percent stockholder. The corporation obtained from Sarasota County both a water and sewer franchise covering an area of land south of the city known as the Gulf
In mid-December of 1965 both Greater Sarasota Sewer Co. and Gulf Gate Utilities filed consents with the Internal Revenue Service under section 341(f) of the Internal Revenue Code to have subsection 2 of that provision apply to the assets of the corporation. These consents, if effective, would prevent the gain from the sale of stock from being treated as ordinary income under section 341. In the years 1968, 1969 and 1970, the taxpayer reported the income from the sale of stock of all three utility companies and King & Smith, Inc. as capital gain.
The taxpayer also claims overpayment of taxes on the sale of trust property in which the taxpayer owned a 45 percent beneficial interest. The taxpayer and three other parties created a trust that operated through the Sarasota Bank & Trust Company, Account No. 398. The trust acquired approximately 390 acres of land lying east of the then developing Gulf Gate Shopping Center. Between the years 1961 and 1962 the trust sold small quantities of the property to the Sarasota County School Board, the Hillsboro Enterprises, and the R. L. King Co. with a majority of the property being sold in January of 1963 to the First Development Corporation, in which taxpayer at that time was a 25 percent shareholder. The taxpayer reported the income from the sale of the trust property as capital gain. Having set out the factual background of the transactions involved in this case, we now turn to the legal issues before the court.
A threshold issue crucial to the outcome of this appeal involves the question of burden of proof. In the Commissioner's statutory notice of deficiency, the theory relied upon by the government was that the income from the sale of stock was constructive dividends to the taxpayer. The parties engaged in discovery on this theory, but three weeks before trial the government changed its theory of defense to a theory based on section 341. The taxpayer insisted that he should not bear the burden of proof regarding this new theory, and with an amended pretrial stipulation the taxpayer attempted to shift the burden of proof to the government. The stipulation indicated "[t]hat plaintiffs have the burden of proof on each issue except the utility stock issue."
The district judge in his opinion found that the plaintiffs had the burden of proof on all issues regardless of the fact that the government had changed its theory of deficiency before trial. Although the Tax Court rules provide for a shift in the burden of proof in certain situations,
Other courts have held that the burden remains on the taxpayer even when the Commissioner relied on an entirely different theory of deficiency at the time the assessment was made. Blansett v. United States, 283 F.2d 474 (8th Cir. 1960); Roybark v. United States, supra, 218 F.2d 164. In two separate appeals from Tax Court decisions, Cummings v. Commissioner, 410 F.2d 675 (5th Cir. 1969) and Bernstein v. Commissioner, 267 F.2d 879 (5th Cir. 1959), the Fifth Circuit similarly held that it was immaterial that a deficiency assessment was based on an improper theory. If the deficiency was appropriate under any theory, the assessment must be sustained. Therefore, the rule in the Fifth Circuit, at least in a tax refund suit in district court, is that a shift in theory by the government before trial does not shift the burden of proof to the government. If a change in theory presents undue hardship to the taxpayer, it is within the discretion of the trial judge to continue the case. The parties, however, should not attempt to stipulate the burden of proof because, as a matter of law, the stipulation may be erroneous. In this case where the taxpayer attempted to stipulate the burden of proof, the court was not bound by the erroneous stipulation of law and the burden remained on the plaintiff.
The principle substantive matter on appeal to this court concerns the application of the collapsible corporation provision of Section 341 of the Internal Revenue Code of 1954
Based on the foregoing definition, the taxpayer first argues that the utility corporations in question were formed principally for the operation of the utility franchises, not for the construction of property. Although this stated purpose is a reasonable one and the one most likely found in the corporations' articles of incorporation, the court is not bound to accept the self-serving statements of the taxpayer as to intent. The purpose of a corporation is determined from the function of the corporation, not the underlying motives of the taxpayer. See Braunstein v. Commissioner, 374 U.S. 65, 83 S.Ct. 1663, 10 L.Ed.2d 757 (1963); Estate of Van Heusden v. Commissioner, 369 F.2d 119 (5th Cir. 1966). In a case such as this one where the only live testimony is that of the taxpayer, the court may look to the activities that took place and from those activities draw the inference that the corporation was formed for the construction of property. See Payne v. Commissioner, 268 F.2d 617, 621 (5th Cir. 1959). This judicial finding is subject to the clearly erroneous standard on review, and we find that in this case the determination was not clearly erroneous. Furthermore, the language of section 341 provides that a corporation availed of for the construction of property may also be deemed collapsible.
Taxpayer further suggests that the construction of the utility system was incidental to the purpose of the corporation and consumed only a brief period of time when considered in light of the entire length of the franchise grant.
In addition to our technical examination under the regulation, we find in agreement with the lower court that the construction of the water and sewer systems was not incidental, but rather was crucial, to the operation of the utility franchises. Without the construction of the utilities' water and sewer systems, the purposes of the utility corporations could not be accomplished. The district court did not err in finding that for the purposes of section 341 treatment, the corporations in question were formed, or at least availed of, principally for the construction of property.
Taxpayer further argues that the limited activity of the utility corporations toward the building of the utility systems was not sufficient to constitute "construction" by the corporation. The taxpayer suggests that the corporation primarily only purchased and installed equipment for the central plants, with the bulk of the construction on the utility systems' water lines and sewer connections being done by private developers. The taxpayer's argument, however, must fail. The courts have held that minimal acts constitute sufficient activity to satisfy the requirement of construction or production of property. See, e. g., Farber v. Commissioner, 312 F.2d 729 (2d Cir.), cert. denied 374 U.S. 828, 83 S.Ct. 1867, 10 L.Ed.2d 1051 (1963) (payments of fees for zoning permits and payment for utility connections held to be sufficient for a finding of collapsibility); Abbott v. Commissioner, 258 F.2d 537 (3d Cir. 1958) (contract for sale of land with agreement to install streets, sewers and utilities sufficient for a finding of collapsibility). Furthermore, the provision of section 341(b)(2)(A) permits a finding of collapsibility if the corporation "engaged in the manufacture, construction, or production of property to any extent." (emphasis added). The construction activity of the corporations that consisted of constructing the central water and sewer plants of the utility systems was sufficient to satisfy the requirement of construction under section 341(b).
Recent cases have held that the development of intangible property is included in the concept of production or construction of property. Estate of C. A. Diecks, 65 T.C. 117 (1975) (development of cable vision system and related franchise in production of property within the meaning of § 341(b)(1)); Computer Sciences Corp., 63 T.C. 327 (1974) (development of a computer program for preparation of income tax return was production of property within the meaning of § 341(b)(1)). We hold in this case that in addition to the construction of the system, the development of the utility system franchises was production of intangible property within the meaning of § 341(b)(1).
The final definitional challenge by the taxpayer is based on the controversial phrase of section 341(b)(1) requiring that the construction of property, etc. occur "with a view to" the sale or exchange of
Taxpayer has emphatically argued to this court that a utility corporation has never been held to be a collapsible corporation and could not be because of the positions previously argued. We have disposed of the technical arguments made under section 341(b)(1). Concerning taxpayer's final appeal, the Code section in question sets no limitation on the kinds of corporations subject to its provisions. Although section 341 (formerly section 117(m)) was originally designed to control tax abuses in the movie and construction industries, any corporation which satisfies the definitional requirements may be collapsible. The Tax Court in Estate of C. A. Diecks, supra, 65 T.C. 117, held that a cable vision corporation operating under a franchise grant was collapsible. The factual similarity between the two kinds of corporations is obvious. Both the utility and the cable services involve franchises that provide from a centralized network services to individual homes. The cable and utility networks providing the service are operated and maintained by the corporations. Although many utility corporations may not satisfy the statutory requirements, the special circumstances of this case permit a finding that the corporations were collapsible. Therefore, despite taxpayer's argument that a utility corporation has never been held to be collapsible, we find in agreement with the lower court that the corporations in question satisfied the basic statutory requirements and were indeed collapsible corporations.
Having concluded that the corporations were collapsible under section
In a final argument urging exemption from section 341 treatment, taxpayer suggests that the exception of section 341(e) is applicable. The provisions of section 341(e) were enacted primarily to provide exceptions in situations where property held by corporations, if held by individuals, would have afforded capital gain treatment on its sale.
Crucial to the application of section 341(e) to a corporation is the definition of
As the district court found, the statutory requirements of collapsible corporations were satisfied as to the South Gate Water and Greater Sarasota Sewer corporations, and none of the limitations or exceptions applied to prevent collapsible treatment. The district court was not clearly erroneous in its findings of fact and correctly concluded that these corporations were collapsible. We now turn to the question of collapsibility concerning the King & Smith, Inc. corporation.
As the first corporation in this scenario of development corporations, King & Smith, Inc. was formed on January 15, 1954, to engage in real estate development, and in the middle of that year it acquired the Minute Maid option to purchase 1200 acres of land at $2,000 per acre. In March of 1956 the taxpayer sold his stock in the corporation at a time when the option was the only significant asset of the corporation. The government asserts, and the court below found, that the corporation was a collapsible corporation because the option was property purchased with a view to the sale of stock by its shareholders before the realization by the corporation of a substantial part of the taxable income to be derived from the property. Taxpayer, on the other hand, argues that the option was not "purchased" property within the meaning of section 341(b). Because the "purchased" property provisions apply only to "section 341 assets," these arguments require consideration of subsection (3) defining "section 341 assets."
Section 341(b)(3) includes property held for a period of less than three years which is (A) stock in trade of the corporation, or other property of a kind that would properly be included in the inventory of the
Taxpayer cites the case of Levenson v. United States, 157 F.Supp. 244 (N.D.Ala.1957), in support of his argument that the option was not a section 341 asset. That case involved the assignment of rights under an executory contract to purchase approximately 1700 trailers. In that case the defendant conceded that the contract was not stock and trade or property held by the corporation primarily for sale to customers, and the court held that the 1700 trailers subject to the executory contract were not property properly included in the inventory of the corporation. That holding pertained to matters not in issue in this case. Furthermore, the corporation in Levenson was not attempting to sell the contract itself, whereas the corporation in the present case was selling the option to purchase land. The case more appropriate for analogy is Estate of Van Heusden v. Commissioner, supra, 369 F.2d 119, where Judge Tuttle, writing for the court, held that the single sale of an option to purchase land to an ascertained purchaser was a sale of property held by the corporation primarily for sale to customers within the meaning of section 341(b).
Having determined that the Minute Maid option was a section 341 asset under section 341(b)(3), we must address the taxpayer's argument that the requisite view as to the sale of stock did not exist. The taxpayer asserts, in a manner similar to his arguments pertaining to the other corporations, that King & Smith, Inc. was formed principally for the construction or development of property rather than for the purchase
Taxpayer makes the final argument that the property held by Trust Account 398, in which taxpayer was a 45 percent beneficiary, was a capital asset within the hands of the trust and that the gain attributable to that property was capital gain in the hands of the beneficiaries of the trust. Section 1221 of the Internal Revenue Code
The factors to be considered in determining whether property was held primarily for sale to customers are set out in United States v. Winthrop, 417 F.2d 905 (5th Cir. 1969), and approved in Biedenharn Realty Co. v. United States, 526 F.2d 409 (5th Cir.) (en banc), cert. den. 469 U.S. 819, 97 S.Ct. 64, 50 L.Ed.2d 79 (1976). These factors include the taxpayer's purpose for acquiring the property; the duration of ownership of the property; the extent and nature of taxpayer's efforts to sell the property; the number, extent, continuity and substantiality of the sales; the extent of subdividing, developing and advertising to increase sales; the use of a business office for sale of the property; the character and degree of supervision or control exercised by the taxpayer over any representative selling the property; and the time and effort that the taxpayer habitually devoted to sales. However, the ultimate determination is not to be made solely on these factors which have no independent significance. The determination of capital gain treatment must be based on the situation in its entirety and made in light of the policy behind the capital gain provisions. See United States v. Winthrop, supra, 417 F.2d at 910-11; Biedenharn Realty Co. v. United States, supra, 526 F.2d at 415. Because the lower capital gain tax is a tax preference not appropriate for profits arising from the operation of a business, the definition of capital asset must be strictly construed and its exclusions broadly applied. Corn Products Co. v. Commissioner, 350 U.S. 46, 52, 76 S.Ct. 20, 24, 100 L.Ed. 29 (1955). On the
Having concluded that the corporations in the case were collapsible and that the income from the trust account was ordinary income, the decision of the lower court is
FAY, Circuit Judge, dissenting:
I respectfully dissent from the majority's opinion, except in its recitation of the facts and its treatment of Trust Account 398, with which I concur.
Appellant raises a number of procedural issues, some of which were dealt with in the majority opinion, which give me a great deal of concern. The initial question is which party was to bear the burden of proof on the "utility stock issue." Neither party disputes that in the ordinary case the plaintiff bears the burden of proving his entitlement to a tax refund. What then happened in this case that would make the well-accepted rule inapplicable?
The most important fact is that the appellant-taxpayer was unable to properly prepare his case because the government's theory of tax liability was constantly changing. The government's original position, that the corporations were collapsible, was totally abandoned during the administrative review process and replaced with the position that the proceeds from the sale of stock was ordinary income under Code section 482, which regulates transactions between related corporations. This second theory was also abandoned during the administrative review process. The government next issued a deficiency or "ninety day" letter in which it asserted that the receipts from the sale of corporate stock constituted constructive dividends taxable as ordinary income. By way of interrogatory, plaintiff next attempted to have this new theory of liability explained. The government refused, stating that it had no obligation to do so. At the next juncture, the pre-trial stipulation, the government abandoned the constructive dividend theory and reverted to its previously discarded theory of collapsible corporations. In apparent recognition of the unfairness of its continuous shifting in theories, the government stipulated that it would bear the burden of proof on the utility stock issue.
Subsequent to the trial, but prior to the entry of an order, the district judge informed both parties by letter that he would rule for the government. In that letter the court stated its conclusion that appellant-taxpayer had failed to satisfy his burden of proof, apparently ignoring the parties' stipulation as to the burden of proof on the utility stock issue. The court went on to say it was requesting that counsel for the government prepare a proposed opinion consistent with its letter, and that counsel for appellant would have ten days after receipt thereof within which to respond. In its letter the court said that during the ten day period, "I will await action...." Nonetheless, the proposed opinion was entered as the order of the court on the same day it was delivered by counsel for the government, February 2, 1979. The ten day period earlier afforded appellant was rendered meaningless. Additionally, the memoranda opinion was inconsistent with the court's earlier ruling for the government, as to one of the utility companies, because the government corrected what was a clearly erroneous ruling. Needless to say that taxpayer's letter to the court, dated February 9, 1979, in which that as well as other relevant issues were raised, was mooted by the court's earlier action.
The majority opinion goes to great lengths to explain its affirmance of the District Court's handling of the case, particularly the burden of proof issue. I will not take issue with my brothers' conclusion that what transpired was legally justifiable. The issue, I believe, is not whether there was technical compliance with the rules of procedure, the issue is one of fundamental fairness on which those rules and our entire notion of due process are based. No individual or corporation should be required to pay a tax, particularly when the government demands a deficiency, without the government explaining the theory of liability on which that tax is to be assessed. In this case, it is all too clear to me that the Internal Revenue Service was determined to impose tax liability on this taxpayer one way or another. The manner in which it leap-frogged from theory to theory, abandoning each as quickly as they were proposed, must have been as dizzying to the taxpayer as it is to me. Moreover, the taxpayer's efforts to narrow and clarify the issues for the purpose of a possible settlement were met with a total lack of cooperation by the government. The District Court was made aware of all this in appellant's motion for continuance. It is beyond my understanding why the court would deny what, in view of the circumstances of the case, was such a totally reasonable request. To have proceeded to trial and ignored the parties' stipulation as to burden of proof, without at least informing the parties of that decision, only compounded the inequitable position in which the taxpayer found himself. Carnival "shell games" may be entertaining but they have no place in the legal process. Finally, to enter a memorandum opinion which was partially inconsistent with the court's instructions to the drafting party, and to do so prior to the time in which the appellant was allowed to respond, rendered this trial fundamentally unfair. No one familiar with existing caseloads can ignore the tremendous constraints and pressures under which trial judges operate. However, that should not and must not be allowed as justification for procedures that compromise basic principles of fair play. In my opinion, that has occurred here.
The central issue in this case is whether certain utility corporations in which taxpayer was a major shareholder were collapsible, thereby giving rise to ordinary income on the sale of the stock therein. The majority holds that they were collapsible corporations. I disagree.
The basic requirements of collapsibility under section 341 are that a corporation be "formed or availed of" for the construction or purchase of property "with a view" to
The majority opinion responds to appellant's arguments with three simple statements of the law regarding collapsible corporations. They are: (1) the requisite "view" may exist at any time prior to the completion of construction; (2) construction is not completed until the absolute last bit of work is finished; and (3) the construction of one party can be attributed to another party.
Though having some appeal at first glance, the majority position, if followed to its logical conclusion, would achieve results far beyond the intended scope of the statute. Put simply, in the water and sewer business "construction", within the meaning of section 341, might never end. For example, assume that in 1950 a corporation was formed to provide water and sewer services to what at the time was a rural area south of the city of Atlanta. As part of the agreement to obtain its license, the utility corporation promised that it would provide services to all persons living in a five mile radius of the plant who now or in the future required such services. As time passed the area within the five mile radius of the plant became developed, until in 1965 the developable area was twenty percent inhabited. The utility corporation had had nothing to do with that development except to lay the water and sewer lines needed to provide services to the residents. For the next ten years development in that area came to a standstill, because people chose to live north of the city. In 1975 the building business returned to the area serviced by my hypothetical utility corporation. This time, however, the corporation told the builders that it would provide the services required by its license, but the private developers would have to provide the sewer and water lines. Anxious to develop their property, the builders agreed. The area became popular and it appeared that one
This case illustrates what we all must be aware of, that independent statements of the law, while possibly correct in and of themselves, cannot be forced together out of context without totally losing the meaning which they were intended to have. I fear that that is precisely what the majority has done in this case. While I agree with the majority's first two statements,
A more reasonable result in this case would be to treat the assets of the utility corporation as independent entities. That is, the utility plant should be treated as a non-collapsible asset, if construction on it was completed more than three years before the stock was sold, and the sewer and water lines, assuming there is sufficient relationship between the utility corporation and the builder to justify attributing the construction by the latter to the former, should be evaluated separately. This notion of looking at the individual assets of the corporation rather than the corporation as a whole is not new to the law of collapsible corporations, at least with respect to the three year exemption,
KING & SMITH, INC. — THE MINUTE MAID OPTION
The final issue on which I disagree with the majority opinion is its conclusion that the sale of stock in King & Smith, Inc. gives rise to ordinary income because it was a collapsible corporation. While I agree with the majority's instincts that this is the type of situation to which section 341 was intended to apply, I am forced by the majority's own analysis to conclude that the section is not applicable.
As was the case with the utility stock issue, the question here is whether the taxpayer had the requisite "view" to sell the stock at the relevant time. Fortunately, there is no construction involved here, only the purchase of an option, so there is no dispute that the view to sell the stock must have been present at the time the option was purchased.
In discussing whether the option was in fact "purchased" property within the meaning of section 341(b)(3) the majority says,
The mission of the Internal Revenue Service goes to the very survival of our way of life. Taxes are essential for the operation of our government. Congress imposes the rules for the imposition of most of our taxes. In the main, ours is an "honor system". Should a taxpayer fail to pay his fair share under existing rules, the Internal Revenue Service has an obligation to vigorously pursue the collection of each and every cent due and owing. When such matters reach the courts, however, the parties are equal and should be accorded equal treatment. Equal treatment, in civil cases, equates with full disclosure. Years ago we abolished "trial by ambush". Dead and buried, it should remain underground. I'm concerned it has been resurrected here and, therefore, I most respectfully dissent.
There is no disagreement as to the following issues of law:
See Daytona Beach Kennel Club, Inc., 69 T.C. 1015 (1978) (where the government conceded that its change in position constituted a new matter, requiring a shift in the burden of proof). But see Estate of Zac Emerson, 67 T.C. 612 (1977) (where court held that, where the new theory did not alter the amount of the deficiency or require the presentation of new evidence and was not inconsistent with the former theory of defense, the burden of proof did not shift).
Sec. 341. COLLAPSIBLE CORPORATIONS.
(a) Treatment of Gain to Shareholders. — Gain from —
to the extent that it would be considered (but for the provisions of this section) as gain from the sale or exchange of a capital asset held for more than 6 months shall, except as otherwise provided in this section, be considered as gain from the sale or exchange of property which is not a capital asset.
(b) Definitions. —
(d) Limitations on Application of Section. — In the case of gain realized by a shareholder with respect to his stock in a collapsible corporation, this section shall not apply —
(e) [as added by Sec. 20(a), Technical Amendments Act of 1958, P.L. 85-866, 72 Stat. 1606] Exceptions to Application of Section. —
does not exceed an amount equal to 15 percent of the net worth of the corporation. This paragraph shall not apply to any sale or exchange of stock to the issuing corporation or, in the case of a shareholder who owns more than 20 percent in value of the outstanding stock of the corporation, to any sale or exchange of stock by such shareholder to any person related to him (within the meaning of paragraph (8)).
(f) [as added by Sec. (a), Act of August 22, 1964, P.L. 88-484, 78 Stat. 596] Certain Sales of Stock of Consenting Corporations. —
exceeds the adjusted basis of such asset shall be treated as gain from the sale or exchange of such asset. Such gain shall be recognized notwithstanding any other provision of this subtitle, but only to the extent such gain is not recognized under any other provision of this subtitle.
The collapsible corporation idea was initially used primarily in the motion picture industry, but quickly spread to other business ventures, particularly those in the building construction industry. See B. Bittker & J. Eustice, supra at ¶ 12.01.
The argument has not been made that § 341(d)(3) applied to prevent collapsibility of South Gate Water because the facts revealed that construction of one of the central water plants was not completed by South Gate Water until 1957. The stock of the corporation was sold in 1959, less than three years after completion of construction.
For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include —
(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
* * * * * *
The majority concludes that the meaning of the stipulation need not be resolved because "[a] court is not bound by the parties' stipulation of law...." Opinion at 258. While that is a correct statement of the law, it begs the question of whether appellant was unfairly surprised by the District Court's failure to indicate that the stipulation would not be followed. Had appellant been aware of the court's decision, it is quite likely that his case would have been presented differently.