Court Opinion

ID: 7997231
Source: CourtListenerOpinion
Date Created: 2022-09-09 01:44:19.852214+00
Date Added: 2024-06-11T16:35:35.254960
License: Public Domain

Kyle, J.,
dissenting:
I am unable to concur in the majority opinion rendered by the Court. The record shows without any dispute that the appellee sold his 350 shares of stock in the Mississippi Publishers Corporation to the Hedermans during the summer of 1954 for the sum of $962,500; that $250,000 of that amount was paid in cash, and the remaining $712,500 of the purchase price was evidenced by ten promissory notes for the sum of $71,250 each, *226which, were to mature at the rate of one each year over a period of ten years, with a right reserved to the makers to pay said notes before the maturity dates thereof at any time after July 1, 1956. The notes bore interest from date until paid at the rate of five per cent per annum. The net income realized by the appellee from the sale of the stock amounted to 82.0758 per cent of the purchase price, and that amount was taxable as income under the State Income Tax Law' of 1952. Since the cash payment amounted to less than 30 per cent of the purchase price of the stock, the appellee was given the privilege by the terms of the statute to report the capital gain on the amounts received each year as the notes were paid.
The appellee reported the capital gain on the $250,-000 which was paid in cash at the time of the sale in his 1954 income tax return and paid the income tax due on that amount.
In December 1954 Hederman Brothers, who were the owners of the stock of the Mississippi Publishers Corporation, wrote the appellee a letter in which they offered to pay immediately the ten notes which represented the unpaid balance of the purchase price of the 350 shares of stock mentioned above, that offer to remain open for the appellee’s acceptance until January 10, 1955. The appellee made no reply to that offer. During the latter part of January the appellee organized the corporation known as Giles, Incorporated, with a capital stock of $100,000. The charter was approved by the Governor on January 17, 1955, and was filed for record in the office of the chancery court clerk on February 5, 1955. The appellee, on January 28, 1955, created a trust by paying over to his wife, as trustee, the sum of $48,000, to be invested by her and held in trust for the benefit of his two children. The money was invested in Giles, Incorporated, and 48 per cent of the stock was issued to the appellee’s wife as trustee. The remaining 52 per *227cent of the stock was issued to the appellee, who thus became the owner of a controlling interest in the family-owned corporation.
As the work progressed on the renovation or reconstruction of the store building which was to be occupied by Giles, Incorporated, it became necessary for the appellee to make available large sums of money to be used in paying the cost of construction of the new building and in paying for fixtures and a stock of merchandise. The only available resource which the appellee had to look to for raising such large sums of money, so far as the record shows, was the Mississippi Publishers Corporation notes, which the makers only a few weeks before had offered to pay in advance of their maturity. The appellee therefore assigned the notes to the family-owned corporation, of which he was president, and took the notes of the family-owned corporation for the same amounts in exchange, and after contacting the makers of the Mississippi Publishers Corporation notes, or their attorney, presented the notes for payment at the First National Bank of Jackson on April 15, 1955, and the notes were promptly paid in full.
In my opinion, the appellee’s receipt of the balance of the purchase price of the 350 shares of stock represented by the above mentioned purchase money notes, constituted a final realization of the capital gain arising out of the sale of the 350 shares of stock, and the appellee was obligated by the terms of the statute to report the same as capital gain for the year 1955; and the fact that the appellee had transferred the notes for the balance of the purchase price of the 350 shares of stock to the family-owned corporation before they were presented for payment and had accepted payment of the notes in his capacity as president of the family-owned corporation, rather than as an individual, had no effect upon the appellee’s personal liability for the payment of income tax on the remaining part of the capital gain *228realized by Mm from the sale of the 350 shares of stock.
The statute provides that “the net income realized may be included for taxation in that portion of any installment payment representing gain or profit in the year in which such payment is received.” Payment of the purchase money notes given for the 350 shares of Mississippi Publishers Corporation stock was received, according to the appellee’s own testimony, when he presented the notes for payment on April 15, 1955. The payment included the balance of the gain or profit realized from the sale of the 350 shares of stock, which had not been included in the appellee’s income tax return for 1954, the year in which the sale was made. The appellee had a right to transfer the Mississippi Publishers Corporation notes to the family-owned corporation, if he wished to do so, and to permit the family-owned corporation to receive the proceeds when the notes were paid. But, when the appellee exercised that right, he did not relieve himself from liability for the payment of the tax on the capital gain realized from the sale of the 350 shares of stock, or effect a postponement of that liability until Giles repaid to him the amounts received by Giles when the Mississippi Publishers Corporation notes were paid.
Whether the transfer of the Mississippi Publishers Corporation notes to Giles, Incorporated, represented a sale, as the appellee’s attorneys insist, or a mere device to obtain immediate payment of the notes from the makers without having the payment made directly to the appellee, who was liable for the payment of the income tax on the capital g’ain realized from the sale of the 350 shares of stock, the result, so far as the appellee’s tax liability is concerned, was in my opinion the same. When the notes were paid the appellee was under a duty, by the terms of the statute, to report the balance of the capital gain realized from the sale of the *229stock as income for the year in which the payment was received, and to pay the tax due thereon. If A makes a loan of $1,000 to B and takes B’s note therefor, and the loan is consummated by A assigning to B a rent note signed by C, which B presents for payment a few days later, and the note is paid. A cannot be heard to say that he is not required to include the amount of the rent note in his income tax return for the year in which the note was paid for the reason that the rent was not paid to him but to B, who had given him a note for the same amount which might never be paid.
In Helvering, Commissioner of Internal Revenue, v. Horst, 311 U. S. 112, 61 S. Ct. 144, 85 L. Ed. 75, the Supreme Court held that the dominant purpose of the income tax laws is the taxation of income to those who earn or otherwise create the right to receive it and who enjoy the benefit of it when paid; and that the tax laid by the 1934 Revenue Act upon income “derived from * * * wages, or compensation for personal service, of whatever kind and in whatever form paid * * *; also from interest * * * ’ ’, could not fairly be interpreted as not applying to income “derived from interest or compensation” when he who is entitled to receive it makes use of his power to dispose of it in procuring satisfactions which he would otherwise procure only by the use of the money when received.
The Court in its opinion in that case said:
“In the ordinary case the taxpayer who acquires the right to receive income is taxed when he receives it, regardless of the time when his right to receive payment accrued. But the rule that income is not taxable until realized has never been taken to mean that the taxpayer, even on the cash receipts basis, who has fully enjoyed the benefit of the economic gain represented by his right to receive income, can escape taxation because he has not himself received *230payment of it from Ms obligor. Tbe rule, founded on administrative convenience, is only one of postponement of tbe tax to tbe final event of enjoyment of tbe income, usually the receipt of it by tbe taxpayer, and not one of exemption from taxation where tbe enjoyment is consummated by some event other than tbe taxpayer’s personal receipt of money or property. Cf. Aluminum Castings Co. v. Routzahn, 282 U. S. 92, 98. This may occur when be has made such use or disposition of bis power to receive or control tbe income as to procure in its place other satisfactions which are of economic worth.”
Tbe principle, so clearly stated in Helvering v. Horst, supra, has been repeatedly recognized by tbe courts in federal income tax cases since tbe decision in that case was rendered. See especially Floyd v. Scofield, C.A. Texas 1952, 193 F. 2d 594; Stockstrom v. C.I.R., C.C.A. 8, 151 F. 2d 353; Johnson v. U. S., C.C.A. Cal. 1943, 135 F. 2d 125; Acer Realty Co. v. C.I.R., C.C.A. 1942, 132 F. 2d 512; Guaranty Trust Co. v. U. S., D. C. Wash. 1942, 44 F. Supp. 417, affirmed 139 F. 2d 69; Davis v. United States, C.C.A. 1955, 226 F. 2d 331; Sanders v. Fox (C.C.A. 1958) 253 F. 2d 855; Paster v. C.I.R. (C.C.A. 1957), 245 F. 2d 381, certiorari denied 78 S. Ct. 139, 355 U. S. 876, 2 L. Ed 2d 108; Finley v. Commissioner of Internal Revenue (C.C.A. 1958), 255 F. 2d 128. In Yiannias v. Commissioner of Internal Revenue (1950) 180 F. 2d 115, tbe Court said: ‘ ‘ Tbe purpose and intent of tbe income tax law is taxation to those who earn or otherwise create tbe right to receive income and a taxpayer may not avoid liability for income tax on bis income by assigning tbe right to receive it.” In Paster v. Commissioner of Internal Revenue (1958), 245 F. 2d 381, tbe Court said: “It is axiomatic that income is taxable to tbe one who is the source of tbe income and who has control over its disposition and it is of no consequence for taxation purposes that tbe one who creates or is responsible for tbe *231income does not receive it bnt channels it into the hands of another.”
The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 395-6; Jones v. Helvering, 63 App. D. C. 204, 71 F. 2d 214, 217; Gregory v. Helvering, 293 U. S. 463, 55 S. Ct. 266, 79 L. Ed. 596. But the question for determination here is whether what was done, apart from the tax motive, can be deemed to have relieved the appellee from liability for a deficiency assessment of income tax for the year 1955 on that portion of the $712,500 payment received during the year which represented capital gain — whether the appellee, who has fully enjoyed the benefit of the capital gain realized from the sale of the stock, can escape taxation on the unreported balance of the capital gain on the ground that he had transferred the notes to the family-owned corporation prior to the presentation of the notes for payment, and had taken the notes of the family-owned corporation for the same amount due over a period of one to ten years. The answer to that question, in my opinion, should be an emphatic “No”. “It is command of income and its benefits which marks the real owner of property.” Higgins v. Smith, 308 U. S. 473, 60 S. Ct. 355, 84 L. Ed. 406. As stated by the Court in Ingle Corporation v. United States (1955), 127 F. Supp. 573, “It is also well settled * * * that for the purpose of the proper administration of the taxing statutes, transactions between close or family corporations and its stockholders are subject to special scrutiny to determine their true purpose and effect; that transitory phases of an arrangement that add nothing of substance to the completed affair should be disregarded for tax purposes, * * *.”
In Lucas v. Earl, 281 U. S. 111, 50 S. Ct. 241, 74 L. Ed. 731, the Court held that, under the Revenue Act of *2321918, -which taxed the income of every individual, including “income derived from salaries, wages, or compensation for personal service # * * of whatever kind and in whatever form paid,” the income of a husband by way of salary and attorney’s fees was taxable to him notwithstanding that by a contract between him and his wife, assumed to be valid in California where they resided, all their earnings including salaries and fees, were to be received, held and owned by both as joint tenants.
In its opinion in that case the Court said:
“A very forcible argument is presented to the effect that the statute seeks to tax only income beneficially received, and that taking the question more technically the salary and fees became the joint property of Earl and his wife on the very first instant on which they were received. * * * But this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew. ’ ’
In Griffiths v. Commissioner of Internal Revenue, 308 U. S. 355, 60 S. Ct. 277, 84 L. Ed. 319, the Court held that a taxpayer could not escape or postpone the income tax on the profit derived from a sale of his stock by interposing as vendor in the transaction a corporation formed for the purpose and wholly controlled by himself, which, in form, received from him a conveyance of the shares, transferred them to the purchaser, received the *233purchaser’s money and agreed to pay it over to the taxpayer in annual instalments.
In its opinion in that case the Court said:
“We cannot too often reiterate that ‘taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid.’ Corliss v. Bowers, 281 U. S. 376, 378. And it makes no difference that such ‘command’ may be exercised through specific retention of legal title or the creation of a new equitable but controlled interest, or the maintenance of effective benefit through the interposition of a subservient agency. Cf. Gregory v. Helvering, 293 U. S. 465. * * * Legislative words are not inert, and derive vitality from the obvious purposes at which they are aimed, particularly in the provisions of a tax law like those governing installment sales in sec. 44 of the Revenue Act of 1932. Taxes cannot be escaped ‘by anticipatory arrangements and contracts however skillfully devised * * * by which the fruits are attributed to a different tree from that on which they grew. ’ Lucas v. Earl, 281 U. S. 111, 115.”
The appellee in this case, in my opinion, should not be heard to say, that it is true that the Mississippi Publishers Corporation notes were paid in full on April 15, 1955, but the $712,500 was not paid to me personally, it was paid to me as president of Giles, Incorporated, on my order; and the state must wait for its taxes until Giles, Incorporated, pays its notes to me. The appellee was neither relieved of liability for the payment of the tax on the capital gain realized from the sale of the 350 shares of stock when he transferred the notes to Giles, nor was his liability for the payment of the tax made conditional upon his receipt of payment of the Giles notes. There is, in my opinion, nothing in the statute *234which, lends color to the appellee’s claim that the state must wait for its taxes until Giles pays its notes to the appellee. Those notes may never- be paid.
But even if the Mississippi Publishers Corporation notes had not been paid during the year 1955, the appellee, in my opinion, would have been liable for a deficiency assessment of income tax for the year 1955 on the balance of the capital gain realized from the sale of the 350 shares of stock, for the reason that he had disposed of the notes during that year, and by doing so had terminated the installment payment privilege which he had elected to make use of when the sale of the stock was consummated. If the transfer of the notes to Giles, Incorporated, for the purpose of enabling Giles to obtain money and credit, constituted a sale of the notes to Giles, as the appellee contends, the transfer of the notes by the appellee individually to the family-owned corporation and the acceptance of new notes of the family-owned corporation marked the last step to be taken by which the appellee obtained the fruits of the capital gain which had accrued on the sale of the 350 shares of stock; and the appellee then became liable for the payment of the balance of the tax measured by the then value of the obligations. It is not claimed that the Giles notes, at the time they were accepted by the appellee, were worth less than their face value.
Special reference is made in the majority opinion to the fact that the chancellor found that the appellee had been guilty of no fraud, but had acted in good faith, when he transferred the Mississippi Publishers Corporation notes to the family-owned corporation. But the state is not required to prove fraud to justify an additional assessment of income tax, and good faith does not relieve a taxpayer from liability for the payment of a deficiency assessment. To sustain the additional assessment in this case, it was not necessary that the state prove that the transfer of the Mississippi Publishers *235Corporation notes to the family-owned corporation was accomplished for a frandnlent purpose; and it was not necessary that the state prove that the appellee acted in bad faith in failing to report the balance of the capital gain realized from the sale of the 350 shares of stock in his 1955 income tax return.
The chancellor in my opinion should have entered a decree approving the additional assessment of income tax made by the Chairman of the State Tax Commission.
Lee, J. concurs.