Source: http://openjurist.org/553/f2d/434/dahlgren-v-united-states
Timestamp: 2017-08-22 15:17:39
Document Index: 546210999

Matched Legal Cases: ['§ 1239', '§ 1239', '§ 1239', '§ 1239', '§ 1239', '§ 1239', '§ 1239', '§ 351', '§ 368', '§ 59', '§ 1239', '§ 1105', '§ 301', '§ 1239']

553 F2d 434 Dahlgren v. United States | OpenJurist
553 F. 2d 434 - Dahlgren v. United States
553 F2d 434 Dahlgren v. United States
553 F.2d 434
77-1 USTC P 9457
Harold P. DAHLGREN et al., Plaintiffs-Appellees,
See 557 F.2d 456.
Frank D. McCown, U. S. Atty., Ft. Worth, Tex., Scott P. Crampton, Asst. Atty. Gen., Wm. A. Friedlander, Murray S. Horwitz, Attys., Gilbert E. Andrews, Chief, Appellate Sec. Tax Div., U. S. Dept. of Justice, Washington, D. C., Martha Joe Stroud, Asst. U. S. Atty., Dallas, Tex., for defendant-appellant.
The issue before the jury in this income tax refund suit was whether ownership by taxpayer of 79.975% of the capital stock of the company to which he made a sale of depreciable property was ownership of "more than 80 percent in value of the outstanding stock . . . ." (emphasis added) within contemplation of § 1239(a)(1) of the Internal Revenue Code of 1954.1
The jury answered special interrogatories stating that they found from a preponderance of the evidence that "(Dahlgren) did not own more than 80% in value 'of the stock of Dahlgren Manufacturing Company.' " The Commissioner, on appeal, did not contend that this was not a fact issue but places his appeal from the verdict and ensuing judgment on three separate grounds, hereinafter outlined.
After engaging extensively in the art of commercial offset lithographic printing, Dahlgren obtained a patent on the "Dahlgren Continuous Duty Dampening System" (CDDS) in 1965. On February 1, 1966, he transferred his 85% interest in that patent to Dahlgren Manufacturing Company, which he had formed in 1959 and which already owned the remaining 15% of the patent. On this date, Dahlgren was the record owner of 79.975% of the stock in this company. The remaining 20.025% of the stock was held in two blocks of approximately 10% each. Prior to this transfer, according to testimony at the trial, a long-time associate, Broun, had an oral agreement with Dahlgren that if he would stay on and work with Dahlgren for an unspecified period he would "own a percentage of that company" and would have a job as long as the company continued to produce.2 The trial court also admitted in evidence a state trial court judgment entered in 1970, in which Broun was adjudged to be entitled to 10% of Dahlgren's stock as of February 1, 1964.
The Government's grounds of appeal are: (1) the trial court erred in not charging the jury as requested in several numbered charges to the effect that there is an inherent value attribute in a majority or controlling block of corporate stock which gives it a per share value greater than stock not in such majority block.3 (2) that evidence of the Broun agreement and of the state court judgment was inadmissible because the claim for refund filed by Dahlgren did not contain facts adequately to apprise the Commissioner of Internal Revenue of the "exact basis" . . . "of the ground upon which the. . . refund (was) claimed." (3) finally, the Commissioner attacks the admissibility in evidence of the state court judgment on the ground of relevancy and materiality and, especially, without a limiting instruction that it was not "controlling as to the facts in this case."
"The issue here, of course, is whether Parker's corporation is sufficiently Parker's slave to justify invocation of § 1239. We have concluded that Parker owned, for purposes of § 1239, exactly 80 per cent of the corporation's outstanding stock. The decisive question now is whether this 80 per cent is, under § 1239, 'more than 80 per cent in value of the outstanding stock.' (Emphasis in original).
. . . § 1239 says 'more than 80 per cent in value.' The words 'in value' in § 1239 must have some meaning. Trotz v. Commissioner of Internal Revenue, 10 Cir. 1966, 361 F.2d 927, 930. We cannot indulge in statutory interpretation by excision. Statutory explication may be an art, but it must not be artful. Further, we cannot say that by using 'in value' Congress intended us to consider only the factors of voting power or number of shares. 'If the 80% determination is to be (merely) on the basis of the number of shares outstanding, no reason exists for the use of the words 'in value'.' Trotz v. Commissioner of Internal Revenue, supra, 361 F.2d at 930. Or, if number of shares and voting power were the sole indicia, Congress could have limited § 1239 by using terms similar to those which § 351 draws from § 368(c), in an analogous situation within the Code's framework. 'In value' is a broader phrase, and we think that it calls for the familiar, though difficult, process of fair market valuation. (footnote omitted).
'The value of property is an underlying factor in a great number of income tax cases, particularly in such areas of the law as those involving the receipt of income, the computation of gain or loss, depreciation and depletion.' 10 Mertens, Law of Federal Income Taxation § 59.01 (1964 revision). Value is not a strange or alien concept in tax law, and we have held that 'There is no distinction, for most purposes * * *, in the meaning of fair market value as used in an estate tax case and one involving income tax.' Champion v. Commissioner, 5 Cir. 1962, 303 F.2d 887, 892-893.
We next note that in the present case Eaves owned exactly 20 per cent of the outstanding stock, and Parker owned exactly 80 per cent. Therefore, if any fact can be found which shows that the value per share of Parker's stock exceeded by any amount, no matter how small, the value per share of Eaves's, then Parker owned more than 80 per cent in value of the outstanding stock. While it is true that Parker and Eaves owned the same class of stock, Eaves's stock was burdened with impedimenta from which Parker's stock was free. We hold that as a matter of law these impedimenta must have decreased the value per share of Eaves's stock, and as we need only show that this value per share was lower by any indeterminate amount, no matter how miniscule, than the value per share of Parker's stock, we are able to render judgment here without remand.8 76 F.2d 407-408.
This Court, further, in the Parker case based its decision equally on the fact that Parker had absolute control of the corporation. We said: "We reiterate that in the present case it is sufficient for the rendering of judgment to note that the restriction on Eaves's stock and its minority qualities combine to have some depressing effect, no matter how small, on its value per share." 376 F.2d at 410. (Emphasis added.)
"The phrase 'in value' as used in § 1239 must have an intended meaning. If the 80% determination is to be on the basis of the number of shares outstanding, no reason exists for the use of the words 'in value.'
" 'Even absent any contemplated change in management, control increases the value of an investment by protecting it. The power to change the management, even while unexercised, protects the investor with control against an abrupt change by someone else and against a gradual deterioration of the incumbent management. Therefore, in a sense, controlling shares are inherently worth more than noncontrolling shares for reasons relating solely to investment value. When control is diffused, the same reasoning establishes, to a lesser degree, that shares enabling their holder to particpate in control are worth more than those that do not. This is the strongest part of any argument against a broad reading of (Perlman v. Feldmann, 2 Cir. 1955, 219 F.2d 173, cert. denied 349 U.S. 952, 75 S.Ct. 880, 99 L.Ed. 1277 (1955)). It is the kernel of truth in the assertion that a premium paid for controlling shares are inherently worth more than minority shares.' Andrews, The Stockholder's Right to Equal Opportunity in the Sale of Shares, 78 Harvard L.Rev. 505, 526 (1965) (Footnote omitted)." 376 F.2d 410.
Dealing with this subject, Wright and Miller, Federal Practice and Procedure, contains the following apt observation: "If the request directs the court's attention to a point upon which an instruction to the jury would be helpful, the court's error in failing to charge may not be excused by technical defects in the request," citing Florist's Nationwide Telegraphic Delivery Network v. Florist's Telegraph Delivery Association, 371 F.2d 263 (1967) 7th Cir., Marshall v. Isthmian Lines, Inc., 334 F.2d 131 (1964), 5th Cir., and Messer v. L. B. Foster Co., 254 F.2d 412 (1958), 5th Cir. The quotation continues: "Ultimately it is the responsibility of the court to be sure that the jury is properly instructed," citing McClendon v. Reynolds Electrical & Engineering, 432 F.2d 320 (1970) 5th Cir., in which we quoted the following language from 2 Barron and Holtzoff, Federal Practice and Procedure, § 1105, p. 470 (1961):
"Now, you understand that all of the requested issues and instructions that have not been given have been marked 'denied' and I have noted your objection.
MR. GOODFRIEND: (Counsel for taxpayer) Thank you, Your Honor, thank you.
Upon being so instructed by the court, Government counsel adequately protected its right to appeal from any erroneous failure of the trial court when it made the following comment:"May it please the Court, the defendant believes that its requested instructions numbers 1 through 25 were necessary to a proper understanding by the jury of the issues involved in the case, and note its exception to the court's failure to give those instructions. It is understood that the Court has noted on the requested instructions that the request had been denied."
"We have as the Court has instructed us, the Court has expressly noted the denial of all our other instructions, requested instructions, and therefore I will not restate those, at the Court's request but as I understand it, our error, if any, on those instructions is preserved."
(b) Grounds set forth in claim. (1) No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit."
26 C.F.R. § 301.6402-2 (Emphasis added).
Here the deficiency notice sent to the taxpayer by the Commissioner mistakenly stated that the taxpayer's ownership was numerically 80% (instead of 79.975). The notice states:"Section 1239 provides ordinary income tax treatment of any gain recognized from sale or exchange of a depreciable property between an individual and a corporation in which the individual owns more than 80% in value of the outstanding stock. As noted above Mr. and Mrs. Dahlgren owned exactly 80% of the outstanding stock of Dahlgren Manufacturing Company (this, as indicated above, is in error. It should be 79.975%). The question remains did the taxpayer own more than 80% of the value underlined and quoted of the outstanding stock. The C.L. Parker, C.A. 5, 67-1 U.S. Tax Court at P 9380, 376 F.2d 402 held in a similar situation that the taxpayers' 80% stock interest would have more value than the 20% minority stockholders' stock. The court further stated that the restriction on transfer of the minority stockholder stock and his lack of control over corporate affairs reduced the value per share of his stock below that of the taxpayers."
MR. WARREN: I object to it on the ground, Your Honor, that in addition to the fact that it does not appear to be relevant to these proceedings, it contains prejudicial I think very prejudicial statements to the Government which I am reluctant to state in the hearing and the presence of the jury, but nonetheless, the United States was not a party to this action. It ought not to bound by it.
I believe it to be the law that a retroactive Judgment of a State Court is not to be is not to be considered as binding upon the United States in a tax case. I believe that it is offered for the purpose of showing that Mr. Broun owned stock of this Dahlgren Manufacturing Corporation prior to the time
MR. HAUER: We offer Plaintiffs' Exhibit 9, Your Honor, not for anything other than as a Judgment which conclusively has determined the rights between Steve Broun and Harold Dahlgren. We don't offer it for any other purpose, and we think it's admissible I believe for that respect, because as between them it conclusively determines their rights. When Mr. Warren says that it's not binding on the Government, it is nonetheless some evidence of evidence which is admissible in this case.
THE COURT: But just read that part of it, and not the whole instrument, and point out that
THE COURT: And I will say that it isn't binding on the Government. It is just evidence of the interest of Mr. Broun and Mr.
"MR. WARREN: At this time
No one could doubt the devastating effect on the value of Dahlgren's block of stock, theretofore assumed to be 79.975% of the total, of a state court judgment adjudging and decreeing that Broun was, and had been since 1964, the owner of 10% interest in Dahlgren Manufacturing Company, Inc. This is especially true in light of the fact that the trial court withdrew its original order sustaining the objection upon taxpayer's counsel's further statement that it was offered "not for anything other than a judgment which conclusively has determined the rights between Steve Broun and Harold Dahlgren .. . because as between them it conclusively determines their rights . . . ." The court then said: "It may be introduced for that purpose." And later said: "That part of it you may read which adjudicates their rights" and subsequently "I will say that it isn't binding on the Government. It is just evidence of the interests of Mr. Broun and Mr. . . . ."
On this appeal, taxpayer's counsel contend that the evidence was submitted solely for the purpose of showing the sincerity and firmness with which Broun was asserting his right to an interest in Dahlgren's stock. The record does not bear this out. Both parties agree that the state court judgment is not binding as to the facts upon which it is based in a manner that will be controlling as against the United States. The Government relies upon the case of Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) for the proposition that "when the application of a federal statute is involved, the decision of a state trial court as to an underlying issue of state law should a fortiori not be controlling." We need not consider whether Bosch would control a state court determination of a fact issue in a plenary adversary suit in a state court trial in which application of undisputed state law to a given fact situation resulted in a judgment creating property rights that might later bear upon the application of a federal taxing statute.4 The difficulty with this bit of evidence is that it was not relevant for any purpose. The issue which it was introduced to provide the answer to, was not the issue which was before the Court. That issue is what was the value of the Dahlgren block of stock, then 79.975% of all the shares, on February 1, 1966, the day of the transfer of Dahlgren's patent to it. As we have previously said in Parker, supra, in applying § 1239, " 'in value' is a broader phrase, and we think that it calls for the familiar, though difficult, process of fair market valuation." 376 F.2d at 408. The thing to be valued would, of course, be Dahlgren's shares of stock outstanding in his name subject to any restrictions, burdens or impediments imposed upon them. This, of course, would mean that the taxpayer could prove the outstanding agreement with Broun which the jury would be required to evaluate as one of the limiting factors of Dahlgren's stock, depending on what it determined to be the likely value of that contract. It would also mean that the proof to be adduced by the Government in order to exceed the 80% "in value" determination would have to show more than if Dahlgren's stock were held free and clear of such claims. The same is true with respect to any other outstanding contractual obligations that might have been a claim against the stock itself.
SEC. 1239. Gain from sale of certain property between spouses or between an individual and a controlled corporation
(b) Section applicable only to sales or exchanges of depreciable property. This section shall apply only in the case of a sale or exchange by a transferor of property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167.
"THE REPORTER: 'QUESTION: Please state whether or not any agreement was entered into between you and Harold Dahlgren at that time with respect to your staying on.'
A. He said that if I would help him get this product to the market, if I would stay and continue to work with him, he had faith in the product, I had faith in the product, if I would continue, to help him we could build a company, I would own a percentage of that company and that I would have a job as long as that company continued to produce and we could both enjoy the fruits of our work.
A. I said, 'I got nothing to lose. I didn't have any money then, I had nowhere to go, I might as well stay and give it a whirl.'
No. 15. In determining whether the plaintiffs have proved by a preponderance of the evidence that Plaintiff Harold P. Dahlgren did not own more than 80 percent in value of the outstanding stock of Dahlgren Manufacturing Company, Inc., on February 1, 1966, you are instructed that shares of common stock of a majority block of shares are, on a per-share basis, more valuable than shares owned as part of a minority block of shares of the same corporation. This is true because of the control factor which is inherent in the share of the same corporation. This is true because of the control factor which is inherent in the share of the majority block.
In this aspect the present case differs from Trotz v. Commissioner of Internal Revenue, supra. There, the taxpayer Trotz owned 79 per cent of the outstanding stock and the lesser shareholder owned 21 per cent. The Tenth Circuit remanded the case for a factual determination by the Tax Court of whether any difference between the values per share of the large and small blocks brought Trotz's holding above 80 per cent in value. In contrast, in the present case any extra value per share in Parker's stock will bring his holding above 80 per cent in value. No determination is needed of how much more per share Parker's stock is worth." (Emphasis in original.)
The Government, of course, would not be bound under the rule of estoppel by judgment or res judicata in litigation to which it was not a party