G.I.C. Corporation, Inc. v. United States , 121 F.3d 1447 ( 1997 )

United States Court of Appeals,
Eleventh Circuit.
No. 96-4889.
G.I.C. CORPORATION, INC., Plaintiff-Appellee,
v.
UNITED STATES of America, Defendant-Appellant.
Sept. 17, 1997.
Appeal from the United States District Court for the Southern District of Florida. (No. 95-168-Civ-
Kehoe), James W. Kehoe, District Judge.
Before HATCHETT, Chief Judge, BARKETT, Circuit Judge, and RONEY, Senior Circuit Judge.
RONEY, Senior Circuit Judge:
We affirm judgment for taxpayer G.I.C. Corporation, Inc. on its refund claim for a loss due
to a sale of assets in 1984 and against the Commissioner on its tax deficiency counterclaim. The
district court correctly decided the issues before it, and the Commissioner has waived consideration
of the separate issue of the validity of the sale under Florida law by failing to properly present that
issue to the district court.
In its 1984 tax return, G.I.C. took a $7,229,948 capital loss deduction based upon the sale
of three of its subsidiaries. In 1987 and 1988, G.I.C. filed amended tax returns seeking a refund of
the $1,580,818 it had paid in 1984, based on operating losses it suffered in 1985 and 1986. The
refund request prompted the IRS to reevaluate G.I.C.'s 1984 return and to question the validity of
its 1984 capital loss deduction for the $7,229,948 asset sale. After a series of decisions, the
Commissioner ultimately disallowed the deduction. In 1995, G.I.C. filed this action for a refund.
The Commissioner then filed a notice of deficiency in the amount of $1,474,822 representing the
additional 1984 taxes owed by G.I.C. as a result of the disallowance of the capital loss deduction.
The Commissioner counterclaimed for the deficiency in this refund action.
The Commissioner challenged the 1984 capital loss sale on two grounds: (1) if there was
a sale at all, G.I.C. had retained the option to repurchase the stock on the same terms, and, thus, the
capital loss deduction should be disallowed as a "wash sale" under Internal Revenue Code section
1091, and (2) there was no valid sale of stock in the three subsidiaries in 1984.
In their joint pretrial stipulation, the parties framed two issues to be tried by the district court
and agreed on the law to be applied as to each issue, as follows:
6. Issues of fact that remain to be litigated at trial, which may in part be also issues of law,
are:
a. As to the applicability of the wash sale rule, whether it was J.E.D. Corp. who had the option to
sell the subsidiaries back to G.I.C. Corp. or whether G.I.C. Corp. had the option to buy them
back.
As to this issue, the parties' next paragraph agreed on the law as follows:
7. Issues of law on which there is agreement:
a. If it was J.E.D. Corporation that had the option to sell the subsidiaries back, there was no wash
sale. If G.I.C. Corporation had the option to buy the subsidiaries back, then the sale was a
wash sale.
The district court found as a fact that the J.E.D. Corporation had the option to sell the
subsidiaries back, so under the stipulation there was no wash sale that would deprive G.I.C. of the
loss if there was a sale. The decision on this point is not appealed.
As to whether there was a sale, the parties stipulated at 6(b) the second issue of fact to be
litigated, as follows:
As to the propriety of taking the capital loss in 1984, whether the sale of the subsidiaries was
subject to a condition precedent or a condition subsequent.
Then as to the applicable law, the parties agreed at 7(b):
If the requirement of court approval was a condition subsequent, then a sale occurred. If the
requirement was a condition precedent, it was not.
This issue turned on the fact that the fifty-percent-each shareholder husband and wife were
involved in divorce proceedings, at total odds with each other so that a majority of stock could not
be voted to approve the sale. The husband and wife were litigating over whether the Florida court
with jurisdiction over the divorce proceedings should approve the sale. It was assumed by the
parties to this litigation that such court approval was a condition of the sale. The question presented
to the district court was whether such approval was a condition subsequent, so that a sale for tax
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purposes occurred even though no approval was obtained in 1984, or whether it was a condition
precedent, so that no sale occurred because there was no court approval in 1984.
The district court found as a fact that court approval was a condition subsequent, so that
pursuant to the parties' stipulation, a sale occurred for tax purposes.
We note that the Florida court did not later approve the sale, so this condition was not
fulfilled. Under settled tax law, however, a sale subject to a condition subsequent that is in a later
year not met, does not change the treatment of the event as a sale for tax purposes in the year in
question. See Herbert J. Inv. Corp. v. United States, 500 F.2d 44, 46 (7th Cir.1974) (adopting
opinion of district court, 360 F.Supp. 825, 827 (E.D.Wisc.1973) ("a sale may be completed for tax
purposes despite the existence of future contingencies")); see also Major Realty Corp. v. CIR, 749
F.2d 1483, 1486 (11th Cir.1985) (transfer of ownership completed upon passage of title or passage
of burdens and benefits of ownership, whichever occurs first); Sullivan v. United States, 618 F.2d
1001, 1004 (3d Cir.1980) (binding taxpayers "by the form and terms of their agreement as construed
for Federal income tax purposes .... alleviate[s] problems for the Commissioner in the collection of
taxes and in the administration of tax laws").
On appeal, the IRS contends primarily that, as a matter of law, the sale was invalid under
Florida Statutes, section 607.241 (1983), so that G.I.C. was not entitled to its 1984 capital loss on
the sale. Section 607.241 requires that a sale of corporate assets be authorized by a majority of the
corporation's shareholders. Such authorization did not occur either before or after the sale in this
case. This argument assumes that the state court approval would not be sufficient compliance with
the provisions of section 607.241 to make the sale valid and that even stockholder approval cannot
be a condition subsequent, but must be a condition precedent, to a sale valid for tax purposes. There
is serious doubt whether either of these assumptions is true, a doubt which may have led to the
stipulation of trial counsel. It is not appropriate, however, for us to resolve these issues on this
appeal. These are new arguments on appeal not made to the district court.
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The stipulation is clear that a finding that a sale occurred in 1984 depends only on the factual
resolution of the issue of whether court approval of that sale was a condition precedent or
subsequent. At oral argument, the Commissioner contended that regardless of the language of the
stipulation, the requirement of shareholder approval to the validity of the sale was an obvious and
significant issue in the case below. Our review of the record, however, does not bear out that
contention.
G.I.C.'s complaint does not mention the section 607.241 requirement, nor does the
Commissioner's answer. As set forth above, the pretrial stipulation conspicuously left out section
607.241 in its enumeration of issues. The Commissioner's subsequently filed memorandum of law
in support of its motion for summary judgment does briefly raise section 607.241, but never directly
asserts that the absence of shareholder approval makes the sale void as opposed to voidable. In its
reply memorandum on summary judgment, the Commissioner completely abandons any argument
that section 607.241 shareholder approval is an absolute prerequisite to a sale for tax purposes,
stating, "the parties knew, and intended, that judicial approval was the sine qua non for the sale to
become a reality." The Commissioner's trial brief restates the summary judgment memorandum's
arguments, focusing on the court approval issue. At trial, G.I.C.'s opening argument reiterated the
issues set forth in the pretrial stipulation. The Commissioner's opening argument mentions section
607.241, but only as the motivation for establishing the divorce court approval requirement, because
the wife would not vote her fifty percent of the shares to approve otherwise. In its Rule 52 motion
to dismiss at the close of G.I.C.'s case, the Commissioner asserted that the two issues were whether
the divorce court approval was a condition precedent and whether G.I.C. had a buy-back option, the
issues set forth in the pretrial stipulation. The Commissioner's closing argument was silent as to the
607.241 requirement. Finally, after the district court's ruling on only the pretrial stipulation issues,
there was no motion for rehearing or reconsideration pointing out the alleged mistake.
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Since the district court followed the pretrial stipulation, the Commissioner argues that this
Court is not bound by that stipulation of law. While a court may not be bound by a stipulation of
law, there seems to be no good reason in this case why the United States should not be.
The Commissioner's argument is barred under two separate rules of procedure and prudence.
First, parties are bound by their stipulations and a pretrial stipulation frames the issues for trial. See,
e.g., Hodges v. United States, 597 F.2d 1014 (5th Cir.1979) (district court did not abuse its
discretion in precluding IRS from asserting defense to refund suit not raised in pretrial order). A
district court, of course, has discretion to consider issues not raised in a pretrial stipulation or to
disregard issues of law stipulated by the parties in order to grant a party relief from a stipulation in
order to prevent "manifest injustice." Fed.R.Civ.P. 16(e); see also Noel Shows, Inc. v. United
States, 721 F.2d 327 (11th Cir.1983) (trial court not limited by stipulation as to whether evidence
should be admitted at trial); King v. United States, 641 F.2d 253, 258 (5th Cir. Unit B. Mar.1981)
(district court properly disregarded stipulation of burden of proof in tax refund case); Equitable Life
Assurance v. MacGill, 551 F.2d 978, 983 (5th Cir.1977) (mistaken pretrial stipulation that Florida
law would entitle insured to reasonable attorneys' fees should he prevail in suit to enforce policy not
binding on the district court); cf. Blohm v. Commissioner, 994 F.2d 1542, 1552 (11th Cir.1993)
(district court did not abuse its discretion in granting the CIR's motion for relief from the binding
effect of a stipulation of fact).
Since the Commissioner did not request the district court for relief from the stipulation,
however, we do not have a district court determination to review for abuse of discretion. See
Hodges, 597 F.2d at 1018 n. 6 (cases "where the attempted assertion of new issues has been actively
passed upon by the trial judge [are] to be distinguished from those situations where the issues are
native to the appeal.").
Second, the appellate court does not generally consider issues not first presented to the trial
court. Narey v. Dean, 32 F.3d 1521, 1526 (11th Cir.1994); FDIC v. Verex Assurance, Inc., 3 F.3d
391, 395 (11th Cir.1993). The difficulty of surmounting that rule under these circumstances is
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evident: the Commissioner has not presented any cases where this Court has entertained a legal
theory on appeal that had been avoided by stipulation in the district court.
Our own review has found only cases where we have held parties to be bound by their
pretrial stipulations, barring consideration of legal issues raised first on appeal. See, e.g., Local '92,
Int'l Ass'n. of Bridge, Structure & Ornamental Ironworkers v. B & B Steel Erectors, 850 F.2d 1551,
1557 (11th Cir.1988); Noell v. American Design, 764 F.2d 827, 834 (1988) (11th Cir.1988);
Feazell v. Tropicana Products, Inc., 819 F.2d 1036, 1040 (11th Cir.1987) (no manifest injustice
warranting this Court's disregard of pretrial stipulation of burdens of proof and production where
plaintiff's "first objection ... is raised before this court despite the fact that the cases she relies upon
existed at the time of her trial"); see also Wilson v. Bailey, 934 F.2d 301, 305 (11th Cir.1991)
(stipulation that validity of consent agreement was not at issue binding on plaintiffs in this Court).
The one case cited by the Commissioner where the appellate court disregarded a stipulation,
Estate of Sanford v. CIR, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20 (1939), is distinguishable. In
Sanford, the Supreme Court granted certiorari to consider three separate cases applying a new
federal estate tax provision at the request of the Commissioner whose attorneys had been making
inconsistent arguments in different cases applying that provision. In resolving that issue of general
public concern, the Court merely refused to rely upon a stipulation in the record regarding how the
provision had been interpreted in practice.
The district court having correctly decided the issues presented to it by stipulation and the
appellant having established no good reason why it should not be bound by its stipulation, it is
appropriate for this Court to address only the issues argued to the district court.
AFFIRMED.
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