Before LUMBARD, Chief Judge, and MEDINA and WATERMAN, Circuit Judges.
The sole questions in the case are whether two payments of $26,000 and $40,000, or parts thereof, constitute capital gains realized by the taxpayer or, as held below, ordinary income. The decision of the Tax Court is reported at 34 T.C. 464. Our jurisdiction is properly invoked under Section 7482 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 7482.
Respondent argues in substance that the transactions involved are complex, that the findings depend upon the demeanor and credibility of witnesses, and that the case involves "no substantial questions of law," but only issues of fact "which the Tax Court had the best opportunity to analyze." We have concluded, however, after a careful study of the trial transcript and all the exhibits, as well as the briefs submitted, that there is no substantial issue of veracity in the case, that the acts and also the intent of the parties clearly appear from the numerous documents received into evidence, and the seeming complexity of the case is the result of a misconception on the part of the Tax Court of what appears on the face of the documents in the light of certain undisputed facts. We find the payment of $26,000 on January 24, 1950 to be a share of the profits of the joint venture as the parties treated it as such, and hence, with respect to this payment, we affirm the decision of the Tax Court holding this payment to be ordinary income. But we reverse the determination of the Tax Court with respect to the $40,000 paid on December 19, 1951, and hold this payment to constitute a capital gain as it did not represent a sharing of profits, but rather an amount paid for the transfer by the taxpayer of its interest in the joint venture, a capital asset.
Certain preliminary observations will, we think, tend to clarify the ensuing statement of facts and discussion. The principal documents relating to the two payments were not prepared by the taxpayer and there is convincing internal evidence that, mirabile dictu, there was no attempt by the taxpayer or anyone else to color these transactions so as to make them fall into the category of capital gains. In other words, the documents reflect the genuine agreements entered into by the joint venturers when the relationship between the parties was terminated. We agree with the Tax Court that the relationship between the participants was, so far as the tax laws are concerned, substantially that of partners. Internal Revenue Code of 1939, Section 3797(a) (2), 26 U.S.C.A. § 3797 (a) (2); see Rogers v. Commissioner, 3 Cir., 1950, 180 F.2d 720; Beck Chemical Equipment Corp., 27 T.C. 840 (1957). This is true even though the terms of the agreement setting up the joint account were informal and oral. Nor is it of any significance tax-wise that no articles of partnership or tax returns were filed for the joint account.
Ayrton Metal Company, Inc., the taxpayer and petitioner herein, a New York corporation, had its principal place of business in New York City. Its affairs were managed by Richard Ayrton and Heinrich Meyer, its president and vicepresident; and Richard Ayrton's brother, Samuel Ayrton, operated a metal trading business in London. It is not disputed that whenever Samuel Ayrton or members of his London staff participated in the events about to be described he was duly authorized to act for the taxpayer. We shall accordingly refer generally to Ayrton, unless the context makes it necessary or desirable to give the names of individuals. The other member of the joint venture was Metal Traders, Inc., hereinafter referred to as Metal Traders, also a New York corporation, and a wholly owned subsidiary of Metal Traders, Ltd., of London. Metal Traders was one of the world's largest dealers in antimony ore. Both Ayrton and Metal Traders are shown by the record in this case to be firms of wide experience in the operation of mines and the purchase and sale of and trading in metals. The men who managed these concerns were keen business men and skillful and resourceful bargainers, as they doubtless had to be if they were to retain any capital with which to bargain in a field so alluring and so competitive.
The Churquini Mine, near Atocha, Bolivia, produced antimony ore. It had formerly been owned by Santiago Wright and upon his death it was known as the Empresa Minera Sucesion Santiago Wright, and it was inherited by his sister, Mrs. Theodosia Monson, a resident of London. James Bennett was Mrs. Monson's representative in London, and he in turn was a friend of Samuel Ayrton. When Samuel Ayrton learned that Mrs. Monson was having trouble with the mine and was not getting any income from it, he discussed the matter with his brother in New York. The upshot was that Richard Ayrton brought the business to Metal Traders, and in October, 1947 the oral agreement was made establishing the joint venture. What Ayrton had was its own expertise and its close relationship with Bennett, and, through Bennett, with Mrs. Monson; Metal Traders had a representative in La Paz, Bolivia, was familiar with mining conditions in Bolivia and was willing to make the advances necessary to the operation of the mine. It was agreed that profits and losses would be shared equally, that the ore would be bought and sold only on mutually satisfactory terms, that Metal Traders would supervise the mine and supply all the capital necessary for buying the ore, that Ayrton would negotiate with Mrs. Monson for the purchase of the ore, and that Metal Traders would manage the joint account and arrange for sales of the ore. The joint account related only to the Churquini Mine.
As it turned out, three contracts were made with Mrs. Monson. Respondent urges us to hold that each of these was a "separate transaction," i. e., a separate joint venture. At least that is the way we read the Government brief. We disagree. The joint venture came into existence at the time of the oral agreement in October, 1947; it was to exist as long as the joint venturers were able to enter into contractual relations with the owner of the mine; it was concerned not only with the first contract with Mrs. Monson, but also with "future contracts." It was a single, unified joint venture, not a series of separate and disconnected joint accounts. And the joint venture continued to exist until it was terminated by mutual consent, a subject to which we shall return.
It is not clear to us that the Tax Court intended to make a finding supporting the respondent's contention that there were three separate joint ventures. Assuming that such a finding was intended, we set it aside as clearly erroneous. There was, as we have just pointed out, a single joint venture, not three separate joint ventures. The interest of Ayrton was not solely in the profits or losses arising out of the operations conducted in connection with the three contracts with Mrs. Monson. Ayrton also had an interest in the joint venture itself, an interest that included, as we shall see, the right to participate in future dealings with Mrs. Monson for the purchase of ore, and further to participate in any purchase of the mine itself.
While little or nothing is said on the subject in the opinion of the Tax Court, the cables and correspondence between the various interested parties prior to the execution of the first contract with Mrs. Monson clearly indicate that the joint venturers were, from the outset of the relationship, concerned with an option to purchase the mine and with the possibility of ultimate purchase.
Probably to support respondent's argument, to the effect that the $40,000 payment was in the nature of a finder's fee, respondent consistently plays down the participation of Ayrton in the operation of the joint venture. But the numerous documents in evidence demonstrate clearly and convincingly that Ayrton did much more than negotiate the various contracts with Mrs. Monson. There were problems concerning the formulation of the terms of the option to purchase the mine, the selection of a trustworthy and efficient superintendent at the mine, foreign exchange, labor troubles affecting production, the amounts of money to be advanced both for Mrs. Monson's personal use and for the operation of the mine and the repayment of these advances. In all these matters Ayrton participated in a far from perfunctory manner, and most of the sales made by the joint venture were made after mutual consultation and agreement between Ayrton and Metal Traders. The $40,000 was no finder's fee.
The first contract with Mrs. Monson was in effect from January 1 to September 30, 1948. It provided for the purchase of the mine's production and included an option to purchase the mine for 40,000 pounds sterling. The terms of this option were set forth in great detail. The result of operations under the first contract was a profit, and on July 7, 1949 Metal Traders sent Ayrton its check for $18,532.04 as Ayrton's share of this profit. Ayrton accounted for this to the tax authorities as ordinary income, which it clearly was, and the tax was paid on this basis.
The second contract with Mrs. Monson began on October 1, 1948 and continued through December 31, 1949.It also provided for the purchase of the output of the mine, and the option to purchase the mine for 40,000 pounds sterling was extended to December 31, 1949.
Before the expiration of the second contract, and while the operations of the joint venture under the second contract were continuing, the third contract with Mrs. Monson was made on November 3, 1949. This contract was in marked contrast to the two previous ones. The price of antimony ore had dropped. It would have been contrary to the interests of the joint venturers, under these circumstances, to continue the option to purchase at 40,000 pounds sterling, and the option was not mentioned in the third contract. Moreover, instead of purchasing the output of the mine, the joint venturers agreed upon the purchase of only 360 tons of antimony ore, to be shipped from January 1950 through April 1950. The price was only $2.50 per unit, about 371/2% less than the purchase price per unit prescribed in the prior contracts.
This brings us to the critical phase of the case.
Trouble started in November, 1949, shortly after the signing of the third contract with Mrs. Monson. About six months earlier, with the mutual assent of the two joint venturers, a contract had been made to sell to the Japanese Ministry of International Trade and Industry 783 tons of antimony ore at $4.99 per unit. The documents show clearly that this entire contract was for the joint account. It developed, however, that Metal Traders had delivered 419.623 tons to the Japanese from its own stocks, because Churquini production was not available on the date fixed for delivery, and Metal Traders proposed to handle these 419.623 tons for its own account. When Ayrton was informed of this it protested. The reason for this was that Ayrton had expected the Japanese contract to take care of the balance of the production of the mine for the duration of the second contract, and on this basis the price of $4.99 per unit would have shown a nice profit. If, on the other hand, there was to remain in inventory 419.623 tons, no one could tell what the loss might be if the market price continued to go down. Ayrton's position in this dispute is expressed in various ways in the correspondence: Metal Traders had no right to deliver part of the Japanese shipment for its own account; Metal Traders should account to the joint venture for the total tonnage produced at the mine during the balance of the second contract at $4.99 per unit, "irrespective whether the material was shipped or not against the [Japanese] contract"; as far as any excess quantity is concerned "we [Ayrton] have to negotiate with you as to how this excess quantity should be settled"; as regards the third contract, "we [Ayrton] should be in to the bitter end." The position of Metal Traders at the outset of this first dispute was that "the sale to Japan has been a subject of the Joint Account only as far as the Churquini production is concerned."
The first offer of settlement by Metal Traders is contained in a letter to Ayrton of November 21, 1949. It says nothing about the termination of the joint venture. The offer is to account for so much of the Churquini production as was delivered to Japan at $4.99 per unit, to consider the Churquini production against the second contract that was not delivered to Japan as entirely for its own account, and "we shall take the corresponding loss for our account." And, as to the third contract Metal Traders proposes to give Ayrton the option to be released from its engagement in the joint venture under the third contract. Finally, if Ayrton does not wish to be released, "then we [Metal Traders] wish you to ...