Kelleher v. Commissioner , 34 B.T.A. 902 ( 1936 )

CAMPBELL KELLEHER, EXECUTOR, ESTATE OF DANIEL KELLEHER, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kelleher v. Commissioner

Docket No. 65998.

United States Board of Tax Appeals

34 B.T.A. 902; 1936 BTA LEXIS 631;

August 7, 1936, Promulgated

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The stock of a bank was increased in number of shares and reduced in par value, and the bank sold such new shares on behalf of some of the stockholders. Held that the bank in selling such stock was acting in the capacity of agent for the stockholders and that the decedent, one of such stockholders, derived taxable income from all the sales of his stock made prior to his death, the proceeds thereof being available to him at all times and most of the proceeds having been paid out in discharge of his personal indebtedness prior to his death.

David D. Jarvis, Esq., for the petitioner.

Elden McFarland, Esq., for the respondent.

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MCMAHON

This is a proceeding for the redetermination of a deficiency in income tax of the decedent, Daniel Kelleher, for the period January 1 to February 20, 1929, in the amount of $25,045.90.

The following errors are alleged:

(a) The respondent erred in concluding in the taxable income of Daniel Kelleher, the decedent, for the taxable period above indicated, the amount of $4,677.58 as the decedent's share of alleged community income derived from the sale of 300 shares of stock in Seattle National Bank, instead of determining that the decedent derived no income therefrom.

(b) The respondent erred in including in the taxable income of Daniel Kelleher, the decedent, for the taxable period above indicated, the amount of $199,559.75 as the decedent's share of alleged community income, treated by respondent as capital net gain, derived from the sale of 6,071 shares of stock in Seattle National Bank, instead of determining that the decedent derived no taxable income therefrom.

FINDINGS OF FACT.

The petitioner is the executor of the estate of Daniel Kelleher, deceased, with an office at Seattle, Washington. He was appointed executor on February 27, 1929. Daniel Kelleher died on February 20, 1929. He will hereinafter be referred to as the decedent.

At the time of his death the decedent was chairman of the board of directors of the Seattle National Bank, which will hereinafter be referred to as the bank. In 1928 the authorized capital stock of the bank was $2,000,000, consisting of 20,000 shares of $100 par value per share. A 100 percent stock dividend had been declared in January 1928, increasing the capitalization from $1,000,000 to $2,000,000. The principal associates of the decedent in the bank were J. W. Spangler, president, B. P. Truax, vicepresident, S. H. Brownell, Sr., and S. H. Brownell, Jr. The decedent was the executor of the estate of E. W. Andrews. At that time the majority of the stock of the bank was owned by the members of the Kelleher family, the Brownell family, the Spangler family, the Truax family, and the estate of E. W. Andrews.

The bank at that time was in prosperous condition. For some years the bank stock had sold at about $300 per share. In the summer of 1927 a large block of stock was purchased for $329 per share. Thereafter the stock began rising in value and in the latter part of 1928 and in January 1929, the stock was selling at $500 per share. It was hoped and believed by the stockholders of the bank that the value of the stock would continue to increase indefinitely.

The decedent took a trip east in the fall of 1928, returning in the latter part of November 1928. While there he had a discussion with Brownell, Sr. They believed that it would be advisable for the bank to broaden its good will be a wider distribution of its stock among its customers and friends in the same manner that larger banks in the East and Central West had done.

The decedent, upon his return from the East, had a discussion with Spangler and Truax with regard to the plan employed by the eastern banks of reducing the par value of the shares and selling them to clients and friends. At that time the decedent, Spangler, and Truax constituted the executive committee of the bank.

The decedent, in his individual capacity and as executor of the estate of E. W. Andrews, and his associates reached an oral understanding that they would employ the same methods with regard to the stock of the bank as was employed by the large eastern banks. It was thought that it would be for the benefit of the bank, and ultimately for the benefit of the remaining holdings of these stockholders. There was no written agreement among them in regard to it. Each of these associates agreed that they would deliver or contribute to the bank a part of their then holdings of bank stock when the bank had completed the disposition of the stock. Their participation was in proportion to their respective holdings of stock. No definite amount of stock to be sold was determined upon originally and there was then no definite volume fixed for those persons who were to sell their stock. The plan was that the bank was to make the sales of stock. The sales were to be made to those by whom it was thought desirable to have the stock held. There was no written agreement with the bank nor was there any mention of any agreement in any minutes or records of the bank. The matter was not formally submitted to the board of directors of the bank. It was discussed informally with the directors and with practically every officer of the bank. The arrangement between these associates as individuals and as members of the executive committee was agreed to by the rest of the directors. There was no formal authorization or action taken by the bank authorizing it to sell or deal in its own stock. The decedent was the active head of this small group of officers of the bank who were to contribute some of their stock to be sold. He acted in a dual capacity, as representative of the bank and as representative of the group of stockholders. The decedent, Spangler, and Truax carried on negotiations on behalf of the associates with themselves as members of the executive committee. It was decided to submit the plan to the stockholders of the bank. It was necessary for the stockholders to approve the change in the capital structure of the bank. At the annual meeting of the stockholders held on January 10, 1929, the par value of the stock of the bank was reduced from $100 per share to $20 per share and the number of shares was increased from 20,000 shares to 100,000 shares. The market value of the stock before it was thus reduced in par value was about $500 per share. After it was reduced its market value was about $100 per share.

The bank did not agree to buy the stock from the stockholders, but did agree to sell their stock, and these stockholders agreed to deliver the stock when, and in the amount, necessary.

The bank began disposing of the stock about the beginning of the year 1929 and continued the sales up to the date of the death of the decedent. All the officers of the bank actually arranged the sales of stock. The sales of the stock terminated about the time of the death of the decedent, which was preceded by his brief illness. There were two reasons for this. The decedent had been identified with the bank for a great many years and there was a little uncertainty in the minds of the officers of the bank as to what influence his death might have upon the bank. Furthermore, upon his death there would arise some possible legal entanglement because of the fact that an estate rather than an individual would be involved. After the death of the decedent, the surviving associates told the officers of the bank they would not be willing to sell any more stock.

When the stock was sold by the officials of the bank the purchasers received, on payment of their money, interim receipts signed by decedent as chairman of the board of directors of the bank. Later, upon delivery of an interim receipt to the bank, the purchaser was given the number of shares to which he was entitled under the interim receipt. Each purchaser paid the full purchase price, $100 per share, before he received his interim receipt. Each interim receipt provided for the delivery of shares of stock "having a par value of Twenty Dollars ($20.00) per share." A few interim receipts were issued by the bank dated December 31, 1928, although the majority of them began to be issued January 2, 1929.

The new stock was available for delivery about January 25, 1929, and that was the first day for the cancellation of the interim receipts. Between January 25 and February 20, 1929, the date of the death of the decedent, interim receipts representing approximately 20,320 shares of the new stock had been canceled. From December 31, 1928, until February 20, 1929, there had been issued interim receipts representing 22,698 shares of the new stock.

The associates agreed among themselves that the proceeds from sales of this stock should be kept in three separate accounts carried by the bank - the Kelspatru account, the Seattle National Co. Trust account, and the decedent's personal checking account. This was done. This was for the purpose of obscuring the details of the transaction from those who were not entitled to know them. It was contemplated that when the matter was finally wound up all of the proceeds of these sales would have to be accounted for to all the associates. It was contemplated that amounts in the account would then be adjusted and the final settlement would be made just as if they were kept in one account. The moneys in the decedent's checking account were subject to withdrawal by decedent's personal check, but it was understood and agreed that the proceeds of the sale of the stock deposited in his account were not his property by reason of being deposited therein.

The decedent, like all the other officers of the bank, participated in the sales of stock. He sold to friends and clients. However, the proceeds of sales deposited in his personal checking account were not entirely the proceeds from sales made by him. The proceeds from some of the sales which he made went into other accounts. There was no fixed method of depositing the money in any one account.

The Kelspatru account and the Seattle National Co. Trust account were under the management of H. S. Grande, manager of the bond department of the bank. He acted under the joint direction of the decedent, Spangler, and Truax.

Certain advances were made to the decedent and other associates from the Seattle National Co. Trust account and from the Kelspatru account in order to enable them to pay loans owing by them, for which they had pledged as security their $100 par value stock of the bank. This was necessary in order that the stock might be available for delivery by its owners. There was paid from the Seattle National Co. Trust account on January 5, 1929, an amount of $120,000 to another bank on behalf of the decedent to discharge his indebtedness to that bank and to obtain the release of the bank stock held as collateral to that loan. This constituted a payment to decedent of a part of his share of the proceeds of sales of stock. There was withdrawn by decedent from the Kelspatru account on January 21, 1929, an amount of $197,300, proceeds of sales of stock.

There had been appropriated by the decedent and his associates prior to the decedent's death, $1,673,825 of the proceeds of the sales. On March 4, 1929, there was $596,975 remaining unappropriated. This was appropriated on that date, except $5,000 which was appropriated on May 29, 1929. The participations of the associates were in the ratio of the stockholdings of the associates. The ratio of the decedent's participation was 1723/5106. Upon the final calculation it was found that there had been deposited in the decedent's checking account approximately $70,000 more than the amount that was due to the decedent's family. The petitioner at that time repaid the $70,000, and it was appropriated by the surviving associates in accordance with their ratios.

The decedent, as head of the associates, had, at some time before his death, received from his associates stock of the bank to be surrendered to the bank when it should be determined how much stock each associate had to contribute. In his dual capacity, decedent represented the bank and acted for himself and his associates and it was not necessary for him to make any other delivery to the bank. At the time of his death, decedent had not otherwise delivered any of the stock to the bank. At that time none of the associates knew how many shares of stock had been sold by the bank or what their participation in number of shares of stock was, or how much cash was due to each associate. The decedent was able at all times to deliver the required number of shares. At all times the balance in the decedent's checking account was maintained considerably in excess of the aggregate deposits made therein of proceeds of sales of stock. There was nothing in the agreement among the associates to prevent delivery of the shares at any time and obtaining the proceeds, but as a matter of convenience it was decided that decedent should not actually deliver the stock to the bank until the sales had been concluded as originally contemplated. On March 4, 1929, it was determined how much of the old stock each associate would have to contribute and it was delivered to the bank for cancellation by this petitioner on that date. The old certificates were canceled March 4, 1929, as of January 10, 1929. The decedent's participation amounted to 6,371 to the new shares of the bank, which included 300 shares which had been purchased in 1928 and sold between January 1 and February 20, 1929. The total amount due to the decedent was $637,100, representing the selling price of 6,371 shares of stock at $100 per share.

In determining the deficiency the respondent increased the net income reported on the return of the decedent for the period January 1 to February 20, 1929, by an amount of $195,559.75, representing decedent's community share in the capital net gain on the sale of 6,071 shares of the new stock. He also increased net income reported in the return by an amount of $4,677.58 representing decedent's community share of the additional ordinary gain on sale of 300 shares of the new stock of the bank.

OPINION.

MCMAHON: The only issue presented for our decision in whether the respondent erred in determining that the decedent derived taxable income in the taxable period January 1 to February 20, 1929, upon the sale of 6,371 shares of the new stock of the bank having a par value of $20 per share. This number of shares includes both the 6,071 shares and the 300 shares referred to in the assignments of error. No question is raised as to the correctness of the amount of profit determined by the respondent or as to his determination that a part of it constituted ordinary gain and a part capital net gain. Furthermore, there is no controversy between the parties as to whether only one-half of the gain derived is taxable to the decedent in view of the community property laws of the State of Washington. The only question is whether the amount determined by the respondent from the sales of both the 6,071 shares and the 300 shares was income in such taxable period, it being the contention of the petitioner that the transaction was not closed until after the death of the decedent, his death having occurred February 20, 1929. The petitioner concedes that sales of the new stock were made during the period, but contends that the sales by the bank were a part of the plan or transaction which was not completed prior to February 20, 1929. In any event we are satisfied that the sales of the new stock had been completed. The purchase price had been received by the bank and interim receipts had been issued and most of the new certificates had been delivered prior to the death of the decedent. The applicable provisions of the statutes and regulations are sections 22, 41, and 42 of the Revenue Act of 1928, and article 332 of Regulations 74.

It is true that certificates for the new shares of stock of the bank having a par value of $20 per share which were sold never were delivered to the decedent nor did the decedent, during his lifetime, physically transfer the old certificates to the bank for cancellation. However, the decedent in holding his own old stock and that of his associates acted in the dual capacity of representative of himself and associates and as representative of the bank, being chairman of its board and member of its executive committee, and further delivery of the old shares would add nothing of consequence. When, on January 10, 1929, the stockholders at a meeting increased the number of shares of stock from 20,000 to 100,000 shares and reduced the par value of each share from $100 to $20, each stockholder then became entitled to his proportion of the new shares and became entitled to certificates representing the same upon perfection of the amendment to the charter of the corporation and surrender of the old certificates. The cancellation of the old certificates and the issuance of new certificates, the decedent being in possession of the old certificates for the bank, were matters of form and routine only. Transfer of stock on the books of a corporation is not essential to ownership of the shares represented by them. . The old certificates were, in fact, canceled on March 4, 1929, as of January 10, 1929. There was nothing to prevent their cancellation previous to February 20, 1929; and in this respect the decedent was in control of the situation. Furthermore, as the new shares were sold the corresponding old certificates should have been canceled. To the extent that this was not done, as appears from our findings of fact, the business of the bank was, in this respect, conducted loosely to say the least.

The bank, in selling these new certificates through its officers, as appears from our findings, was acting in the capacity of agent for decedent and his associates. It is well settled that income received by an agent is income to the principal at the time received by the agent. ; ; and . The bank received payment for all the shares sold prior to the death of the decedent. The payments received by the bank constituted income of the decedent and his associates at the time received by the bank; and the decedent is taxable on his share of the income. Of similar import are ; petition to review denied in ; certiorari denied, ; and . Furthermore, before the date of the death of the decedent there had been appropriated by the associates $1,673,825 of the total amount of the proceeds of $2,270,800. The decedent himself had appropriated, prior to the time of his death, at least $317,300, and there is no showing that he could not have appropriated all of his share of the proceeds of the sale of the stock at any time prior to his death. The evidence shows that there was nothing in any agreement, written or oral, preventing appropriation at any time. Thus there was no time set for the termination of the selling and the evidence shows that there was not even an agreement as to the amount of stock that was to be sold. The only reason the assciates did not appropriate the proceeds in full prior to decedent's death was because it was more convenient to wait until it was finally decided that no more stock would be sold. So far as the record shows, the proceeds of the sales of the stock were all available forthwith to decedent, prior to his death, as the money was paid for the new shares. There were no controlling contingencies to bar prompt appropriation, which was in the control of the decedent. the proceeds from the sales of decedent's stock must therefore be regarded as, at least, constructively received by him; actual receipt is not essential. ; affirmed in ; ; ; and Regulations 74, art. 332, supra.As stated in this Parris case, "The test as to constructive receipt is whether the debtor has funds standing to the credit of the taxpayer which the debtor is able to pay and which are available and subject to the taxpayer's demand." (Emphasis supplied.) This language is particularly apt in the instant proceeding in view of all of the capacities which the decedent possessed and the completeness with which he dominated the situation, and especially as to those proceeds in his personal account subject to withdrawal by him only. We also quote from Regulations 74, art. 332, as follows:

Income not reduced to possession. - Income which is credited to the account of or set apart for a taxapayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. * * *

It is immaterial that the decedent and his associates did not know, at or prior to the time of the decedent's death, the amount of all of the stock sold or the proceeds thereof. They could have known. All the factors necessary to a computation of these amounts were available at all times, and there remained merely a matter of computation. In reality the decedent and his associates each sold his own shares of stock, notwithstanding that they did so in conformity with some rather indefinite plan of cooperation or concert of action; they did not even enter into a clear-cut agreement, much less a written formal agreement; and the proceeds of the sales were in their control and available to them at all times, especially those of the decedent, who dominated the situation. In the situation here presented there is no sound basis for approving the postponement, at the election of the decedent or otherwise, of the incidence of Federal income taxation under the applicable statutes and regulations. As stated in , "If he [the taxpayer] elected not to take possession of income which was subject to his demands because of some benefit which would thereby accrue to him, the amount is nevertheless constructively received." (Emphasis supplied.)

Under all the facts and circumstances shown here the respondent was correct in determining that the decedent derived taxable income in the period January 1 to February 20, 1929, from the sale of his new stock, and respondent's determination is approved; in any event, the petitioner has not established that the action of the respondent is erroneous.

, and , are distinguishable.

The decedent had, prior to his death, paid out from the Seattle National Co. Trust account in the discharge of his personal indebtedness, $120,000, which was all he was entitled to from that account, and had withdrawn $197,300 from the Kelspatru account, which was all he was entitled to from that account. These were the only accounts involved other than his personal account; and, at the time of his death, there was $70,000 in that account in excess of what belonged to him, subject to withdrawal by him only. None of the proceeds in his personal account other than the $70,000, and none of the proceeds thus taken by him from the other accounts, were recoverable from his estate after his death. This, looking to substance, is the ultimate result viewed from decedent's standpoint as to what actually happened before his death in reference to the proceeds of the sales of his stock. It may be added that the $70,000 only was paid to his associates by his estate after his death.

Reviewed by the Board.

Decision will be entered for the respondent.

LEECH

LEECH, dissenting: There is certainly no apparent reason here to disregard the separate corporate entity of the bank and what was actually done.

The majority opinion finds as a fact that the proceeds of the sales of split-up stock, though deposited in petitioner's account, "were not his [decedent's] property by reason of being deposited therein." The amount so deposited was substantially more than the amount ultimately determined as due decedent. Under the agreement between the decedent, his associates and the bank, disclosed in the findings of fact, decedent had no right to any part of those proceeds, without restriction as to its disposition, except as loan or advance, until the old stock was delivered to the bank. True, when decedent died, his estate was liable to the bank for advances to decedent, and was obligated to perform decedent's contract to deliver the old stock to the bank. But, under that same agreement, he could not have secured the proceeds of the sale without delivery of the old stock and, in fact, he did not deliver any of that stock to the bank during his lifetime. Therefore, the sale of the stock in question was not complete at the time of his death, and no part of those proceeds was taxable income to decedent. .

The doctrine of constructive receipt should be sparingly applied. We refused to apply the rule in . The facts there were, at least, no stronger for petitioner than here. The decision in that case, in my judgment, is contrary to the conclusions reached in the majority opinion.

BLACK agrees with this dissent.