Hopkins v. Commissioner , 41 B.T.A. 1292 ( 1940 )

WILLIAM R. HOPKINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hopkins v. Commissioner

Docket No. 91753.

United States Board of Tax Appeals

41 B.T.A. 1292; 1940 BTA LEXIS 1073;

May 29, 1940, Promulgated

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The petitioner in 1933 came into possession of cash and securities pursuant to a decree of the Court of Appeals of Ohio in an action brought by him against a trust company to compel it to deliver to him the possession of certain stock purchased in 1920 and the proceeds therefrom, deposited with it under an agreement of purchase. Held, that no capital gain was derived or income received by petitioner in 1933, since the income arising from the agreement and stock was taxable to him in the years during which it was received by the trust company on his behalf.

Ashley M. Van Duzer, Esq., and George P. Bickford, esq., for the petitioner.

W. W. Kerr, Esq., for the respondent.

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VAN FOSSAN

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1933 in the sum of $13,312.86.

The question is whether or not the petitioner realized a capital gain of $111,953.24 or other income by reason of a decree of the Court of Appeals for the Eighth Judicial Circuit of Ohio. The case was presented on a stipulation of facts, supplemented by oral testimony and exhibits.

FINDINGS OF FACT.

The petitioner is an individual residing at Cleveland, Ohio. He has been a lawyer for 40 years. He was the personal counsel for Edwin S. Griffiths, hereinafter mentioned, from 1899 to 1924. During the latter year he became City Manager of Cleveland, Ohio, and served in that capacity until January 21, 1930.

The petitioner became acquainted with Griffiths in 1895 when the petitioner was a student in Western Reserve University. Both were of Welsh descent and had many interests in common. The petitioner obtained for Griffiths his first position, as secretary of the Cleveland Machine & Manufacturing Co., clients of the petitioner. Griffiths was the petitioner's closest friend and each was accustomed at times to leave his business affairs in the other's hands.

Griffiths became president of the Buckeye Engine Co., hereinafter called Buckeye. On July 16, 1920, that company (with the Cleveland Machine & Manufacturing Co.) entered into a written agreement with the E. W. Bliss Co., hereinafter called Bliss, to sell a substantial part of its assets to the latter company. Buckeye was to receive $1,500,000, of which $612,000 was to be paid in preferred stock of Bliss and $880,000 in cash, at the option of Bliss. The option was exercised and the contract performed.

On August 16, 1920, the petitioner entered into the following contract with Griffiths and his wife:

THIS MEMORANDUM OF AGREEMENT entered into at Cleveland this 16th day of August, 1920, by and between EDWIN S. GRIFFITHS and MARGARET RUSK GRIFFITHS, First Parties, and W. R. HOPKINS, Second Party, WITNESSETH:

First Parties, in consideration of One Dollar, the receipt whereof is hereby acknowledged, and other valuable considerations, have purchased for the benefit of Second Party Five Hundred and Seventy (570) shares of the stock of the Buckeye Engine Company at the price of Three Hundred and Fifty Dollars ( $350) per share and have caused said shares to be put into the name of The Guardian Savings & Trust Company with the understanding and agreement that Second Party shall have the right to pay for said stock and have the same transferred to him or to his order upon payment to said The Guardian Savings & Trust Company at the rate of $350 for each share plus interest at Six Percent (6%) from this date to the time of such payment and plus also any and all charges of said Trust Company on account of holding and disposing of said stock in accordance with this agreement. All dividends paid on account of said shares are to be held by First Parties and by them applied to the payment to be made therefor by the Second Party. Second Party agrees to save First Parties harmless from any and all further obligation on account of said stock and especially to pay interest and all charges due on the same whenever the same shall accrue and to pay the entire balance due the First Parties at any time upon notice of their desire to have such payment made.

IN WITNESS WHEREOF, the parties have set their names the day and year above written.

[Signed] EDWIN S. GRIFFITHS

MARGARET RUSK GRIFFITHS

W. R. HOPKINS.

On that day 570 shares of Buckeye were transferred to the name of the Guardian Savings & Trust Co. (whose name was subsequently changed to Guardian Trust Co.) hereinafter called Guardian, and were held with the assets of a trust established by Griffiths and his wife on January 24, 1920. In that trust instrument the donors reserved the right to withdraw from the operation of the agreement all or any part of the trust corpus. The petitioner was made cotrustee.

From January 23, 1923, to August 19, 1925, inclusive, Buckeye distributed to Guardian, as holder of the 570 shares of Buckeye stock, 2,325.41 shares of Bliss preferred stock. Guardian, as holder of the Buckeye stock, on various dates from July 21, 1921, to June 9, 1932, inclusive, also rteceived cash liquidating distributions of that company totaling $306,517.50 and cash dividends on the Bliss stock amounting to $60,012.79. Guardian further received $2,850 in Liberty bonds as a liquidating distribution of Buckeye and also interest on such bonds from December 15, 1920, to June 15, 1932, inclusive, aggregating $1,392.54.

During his term as city manager the petitioner left his private business affairs in the hands of his friends. The transactions relating to the Buckeye stock and other business matters were left entirely in Griffiths' hands.

When, in 1926, the dividends from the Buckeys stock equaled its purchase price, the petitioner made no demand for possession of the stock and no request for settlement, because he owed Griffiths $35,000 borrowed in 1919 and other sums advanced by Griffiths, as well as Federal income taxes paid by Griffiths on the dividends so paid and received.

On January 21, 1930, the petitioner terminated his work as City Manager of Cleveland and immediately went to Florida to join Griffiths, who was ill there. Griffiths died suddenly on January 25, 1930. The petitioner's ownership of the Buckeye stock was never questioned by Griffiths or his wife. Early in March 1930 the petitioner made demand on Guardian for the delivery of the stock. Guardian refused voluntarily to deliver any part of the stock and, consequently, the petitioner on July 11, 1931, brought an action in the Court of Common Pleas of Cuyahoga County, Ohio, to obtain possession thereof and for an accounting. The court entered a decree in the petitioner's favor. Thereupon Guardian appealed to the Court of Appeals which heard the case de novo. That court rendered its decree on May 12, 1933.

The decree recited that Griffiths and his wife purchased for the benefit of the petitioner 570 shares of Buckeye stock and retained constructive possession thereof pursuant to the agreement, by placing it on deposit with Guardian, subject to the rights and interest of the petitioner, and that Griffiths and his wife retained possession of the stock as security for moneys advanced for the purchase of the stock and for all other obligations of the petitioner to them. The court then ordered Guardian to deliver to petitioner the Buckeye stock, Liberty bonds of the par value of $2,850, and 2,325.41 shares of Bliss preferred, and to pay to the petitioner $30,106.37, the amount found to be due him after a proper accounting had under the direction of the court. The judgment took into consideration loans made by Griffiths to the petitioner, income taxes paid by Griffiths for the petitioner's account, and advances made to the petitioner on the contract.

Guardian moved to certify the record before the Court of Appeals for review by the Supreme Court of Ohio, but that tribunal overruled the motion, thus making the decree of the Court of Appeals final.

Griffiths had paid $30,023.37 of such income taxes and Mrs. Griffiths had paid $40,124.59 thereof, but she waived her right to reimbursement for the purposes of the court proceeding. The petitioner knew that such taxes were being paid by Griffiths and Mrs. Griffiths and considered Griffiths his agent in the matter.

The respondent summarized the accounting made under order of the Court of Appeals as follows, and on that basis determined a capital gain of $111,953.24:

Cash	$30,106.39
Advances by Griffiths repaid	15,000.00
Loans by Griffiths repaid	40,700.00
(a) U.S. 4th 4 1/4% Liberty Bonds (par value $2,850, market 101 1/2)	2,892.75
(a) 2,325.41 shares second preferred Class A stock of E. W. Bliss Co. (par $50, market $10)	23,254.10
(a) 570 shares Buckeye Engine Co. stock	0
	$111,953.24
(a) Values as of November 17, 1933.

The following statement was made in the notice of deficiency:

Since the stock of the Buckeye Engine Company had been acquired in 1920 the amount realized as above explained of $111,953.24 constitutes capital gain under the provisions of Section 101 of the Revenue Act of 1932.

OPINION.

VAN FOSSAN: The theory underlying respondent's determination that petitioner received a capital gain in 1933 is not made clear in the notice of deficiency and was not clarified at the hearing or on brief. In his brief respondent sums up his position thus: "On the whole record herein, respondent respectfully submits that this petitioner, after deducting cost of the 570 shares of Buckeye stock, together with taxes and all other charges against the dividends on such stock, is enriched to the extent of $111,953.24, as found by the respondent, upon which he has never personally paid one penny of Federal income taxes." He argues at length about the irregularity of the procedure by which Griffiths returned the dividends and paid the taxes in his own returns. In reply to this petitioner contends that the contract of sale gave title to the stock to petitioner in 1920; that possession was withheld only because payment was to be made out of dividends; that full payment was completed by 1926; that dividends were at all times received for petitioner's account; that the taxes were paid by Griffiths out of money arising from the dividends which belonged to petitioner.

As we view it, the real issue is beclouded by these collateral facts. It must be borne in mind that only the year 1933 is before us. Respondent held that income arose in that year by reason of the court decree and the consequent accounting. He is not charging fraud nor attempting to charge petitioner with income in the prior years. If no income arose in 1933, that is an end of the matter here involved.

The determination of this question turns on the ownership of the Buckeye stock and the dividends. If petitioner owned this stock from 1920 and the dividends were paid for his account as they accrued, there being no sale or exchange, the dividends were not income in 1933 when, in their then present form, they were accounted for pursuant to the court decree. This being true, it matters not that through a misconception of his duty and an unwarranted assumption as to his rights in the premises, the taxes on the dividends were paid as though his own by Griffiths. True, it seems utterly incredible that any lawyer, much less one of the age and experience of petitioner, should have believed that Griffiths could legally return as though it were his own that part of petitioner's income arising from the dividends on the Buckeye stock. But such is petitioner's testimony. Here, however, that fact is not controlling. As observed above, the Government makes no charge of fraud and does not claim deficiencies for those earlier years. Cf. .

That petitioner acquired the Buckeye stock in 1920 is stated as a premise and therefore conceded by respondent in the notice of deficiency. That this is correct is apparent upon an examination of the facts. The agreement of August 16, 1920, was an executed, and not merely an executory, contract. It recites that the Griffiths "have purchased for the benefit of" petitioner and "have caused said shares to be put into the name of" the Trust Co. This is confirmed by the decree in petitioner's suit for accounting, wherein the court found that on August 16, 1920, the Griffiths "did purchase for the benefit of the plaintiff" the 570 shares, and retained "constructive possession" by placing them in trust. The retained possession, the court said, was "as security against moneys advanced." Consequently, in view of the provisions of the contract, and its construction by the Ohio court, it must be held that the petitioner was the owner of the shares from and after August 16, 1920. . The decree does not purport to make the petitioner the owner of the shares from the time of the decree, but on the contrary, confirms his ownership from August 16, 1920.

Since petitioner was at all times the owner of the stock, we pass to the question of the dividends.

Under the statute, income is taxable to one on the cash basis in the year when received. Such is the general rule. Sec. 42, Revenue Act of 1932; art. 331, Regulations 77. However, physical receipt by the taxpayer is not always necessary in order to sustain an application of the rule. There may be receipt by an agent, which is regarded as receipt by the principal, ; there may be constructive receipt, ; . As to dividends, "there are different times at which it reasonably may be claimed the taxpayer receives them." . Dividends on stock in trust received by the trustee and used by it to discharge debts of the owner are income to the owner. ; affd., .

Beginning in 1921, and from then until in 1932, distributions were made on the Buckeye stock. These distributions were received by the Guardian Trust Co., not as owner, nor for the Griffiths, but for the petitioner as the equitable owner; a fact confirmed by the decree later rendered. The trustee can not, in our opinion, be regarded as trustee for the petitioner as he had never appointed it to act in that capacity. If it were to be said that the contract of August 16, 1920, made the Trust Co. a trustee for the petitioner, then the Trust Co. was under the duty of filing returns and reporting the distributions as they occurred, and its failure to do so can not now be charged to the petitioner. A careful appraisal of the facts convinces us that, as the decree of the Ohio court holds, constructive possession of the stock was retained by the Griffiths as security for the petitioner's debts. The Griffiths and Guardian were thus nothing more nor less than agents of the petitioner to collect the income from the Buckeye stock and apply it as far as necessary to the discharge of the petitioner's obligations. Receipt by the agents was receipt by the petitioner, and that receipt occurred prior to 1933.

The decree of the court in 1933 did not create income. It merely declared ownership of the Buckeye stock in 1920 and required an accounting of the proceeds and avails of such stock. The income on the stock followed its ownership and receipt occurred in the preceding years. This is true of the cash as well as the other items comprised in the accounting. The decree did not cause conversion of assets into cash or make the cash income in 1933.

Respondent's position, as above indicated, is primarily based on the ground of untaxed enrichment. If equitable consideration were to be taken into account, we could not fail to note that, though the action by Griffiths in reporting the dividends was entirely without legal sanction and wholly irregular, by reason of the fact that Griffiths' personal income was much greater than that of Hopkins the Government probably was paid an amount of tax on account of the dividends much in excess of what it would have received had petitioner returned them properly and paid the tax in due course.

Petitioner admittedly permitted some of his income to be returned and taxes paid by another. The statute of limitations prevents adjustment of the situation as to the years of actual receipt of income. This fact, however, does not justify the approval of a deficiency as to 1933 if no income was then received.

The respondent seeks to firtify his position by citing various cases which hold that income received as the result of litigation is subject to taxation in the year in which the litigation is terminated. However, in the case at bar we note that the action brought by the petitioner was for the purpose of compelling the return of property already owned, not for the adjudication of a claim. As above indicated, the suit was a simple proceeding against Guardian for an accounting and to repossess property unlawfully withheld from the petitioner by that company. Thus, the cases relied on by the respondent are clearly distinguishable on facts.

We conclude that no income was received by petitioner in 1933 as a result of the decree of the Ohio court, nor was there any capital gain.

Reviewed by the Board.

Decision will be entered under Rule 50.

MELLOTT dissents.