Court Opinion

ID: 4633730
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:14:33.176728+00
Date Added: 2024-06-11T07:58:06.647548
License: Public Domain

SCOTT P. MYERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Myers v. CommissionerDocket No. 54747.United States Board of Tax Appeals30 B.T.A. 44; 1934 BTA LEXIS 1384; March 8, 1934, Promulgated 1934 BTA LEXIS 1384">*1384  Petitioner claimed title to certain corporate stock and in 1928 sold the stock as his own.  The consideration was paid to a trustee.  A portion of the purchase price was delivered to petitioner by the trustee.  The remainder was held by the trustee to protect the buyer against defects in petitioner's title.  Held to constitute receipt by petitioner of entire amount of consideration in 1928.  Claude W. Dudley, Esq., for the petitioner.  Harold Allen, Esq., for the respondent.  ADAMS 30 B.T.A. 44">*44  This proceeding involves a proposed deficiency in income taxes for the year 1928 in the amount of $24,957.57.  It is alleged that the respondent erred in including in petitioner's gross income the sum of $200,000, which was a part of the consideration for the sale of certain stock.  FINDINGS OF FACT.  The petitioner is an individual, residing at 928 North Warter Street, Uhrichsville, Ohio.  He acquired by purchase 303 1/2 shares of the preferred and common capital stock of the Uhrichsville Clay Co. at a cost of $40,000 in 1919, and 400 shares of the common capital stock of the United Clay Product Co. at a cost of $45,525 in 1922.  Both companies are Ohio1934 BTA LEXIS 1384">*1385  corporations.  Prior to 1928 he attempted to 30 B.T.A. 44">*45  have transferred 139 shares of the stock of the Uhrichsville Clay Co. and 195 shares of the stock of the United Clay Product Co. to each of his then infant daughters, Margaret Jean Myers and Ruth Alice Myers.  Margaret Jean Myers was born on September 12, 1911, and Ruth Alice Myers on May 4, 1914.  During negotiations in 1928 between the petitioner and representatives of the Universal Sewer Pipe Corporation, an Ohio corporation, for the sale and purchase of the stock of the Uhrichsville Clay Co. and the United Clay Product Co., the prospective purchasers raised the question as to whether the petitioner could legally dispose of the stock of these companies outstanding in the names of the infant daughters.  In order to satisfy the prospective purchasers, the petitioner brought an action in the Probate Court of Tuscarawas County, Ohio, entitled "Scott P. Myers, Plaintiff, versus Margaret Jean Myers and Ruth Alice Myers, Defendants," in which action the court in its order, upon consideration of the pleadings and evidence, found that the stock had been issued in the names of petitioner's infant daughters, but that petitioner had1934 BTA LEXIS 1384">*1386  never completed a gift of the stock to them, and that the stock actually was the property of the petitioner.  A copy of the court's order is in evidence and is included herein by reference.  The prospective purchasers of the stock were still not satisfied that the court order fully protected them in the purchase and acquisition of the stock and were unwilling to purchase the stock and pay the petitioner the purchase price thereof without an agreement on the part of the petitioner that a substantial part of the purchase price should be placed in trust for the benefit and protection of the purchasers until petitioner's daughters should become of age and duly and legally waive all rights and claims to any interest in the stock.  Under date of July 2, 1928, the petitioner entered into an option contract with one Charles E. Weir, representing and acting as agent for the Universal Sewer Pipe Corporation for the purchase of the stock of the Uhrichsville Clay Co. and the United Clay Product Co. for $300,182.52.  A copy of this option contract is in evidence and is included herein by reference.  It recites, by way of inducement, that petitioner "is the owner and holder" of 400 shares1934 BTA LEXIS 1384">*1387  of the common capital stock of the United Clay Product Co. and of 303 1/2 shares of the preferred and common capital stock of the Uhrichsville Clay Co., and, since a question may arise as to any rights or claims of his minor daughters in and to the stock, which rights and claims have been disposed of heretofore and adjudicated through proceedings in the Probate Court of Tuscarawas County, Ohio, he "is willing to assure and warrant absolutely 30 B.T.A. 44">*46  his full and complete title and right in and to" the stock and is willing to save harmless the purchasers thereof against any possible claims of his daughters.  The option further provides that in case it is exercised petitioner shall deposit the stock, endorsed in blank, in a depositary selected by the purchaser, with instructions to deliver the stock to the purchaser upon payment of $100,182.52 for the account of petitioner and $200,000, to be paid by the depositary to a bank or trust company, designated by petitioner, to hold as trustee for the protection of the purchaser or his assigns against any claims of petitioner's minor daughters to the stock.  This option was exercised on July 24, 1928, and the petitioner deposited the stock1934 BTA LEXIS 1384">*1388  of the Uhrichsville Clay Co. and the United Clay Product Co. with the Cleveland Trust Co. of Cleveland, Ohio, as depositary in accordance with the terms thereof.  On August 9, 1928, the depositary paid $100,182.52 to the petitioner and the balance of $200,000 to the Citizens National Bank of New Philadelphia, Ohio, in trust, pursuant to the terms of the option agreement.  A written trust agreement was simultaneously entered into by and between the petitioner and the Citizens National Bank.  A photostat copy of the check by which the $200,000 payment was made to the trustee appears as Exhibit D attached to the stipulation of facts filed at the hearing, and is included herein by reference.  A copy of the trust agreement is in evidence and is included herein by reference.  Under its terms the parties agree that the trustee shall hold the said sum of $200,000 for the protection of the purchaser or his assigns until Ruth and Jean Myers, minor daughters of petitioner, shall attain their majority and lawfully release, discharge, and quitclaim any and all claims they may have or may have had against the stock, and in case they fail or refuse to give such release, then the trust shall continue1934 BTA LEXIS 1384">*1389  for 10 years after the younger daughter attains her majority.  It is further agreed that the $200,000 shall be invested by the trustee, "upon the order and under the direction" of the petitioner, in proper interest-bearing securities, and the interest or other income arising therefrom paid over to the petitioner, and that all reasonable expenses and charges of the trustee for services shall be paid by petitioner.  In case of a vacancy of the trusteeship, its successor shall be appointed by petitioner.  Upon termination of the trust the $200,000 is to be paid to petitioner or his nominees.  The fund of $200,000 has been invested by the Citizens National Bank as trustee in interest-bearing securities since on or about August 9, 1928, to the present time.  The trustee has regularly paid to the petitioner the income from the fund, less the expenses of administration thereof, and the petitioner has reported the income in his income tax returns.  30 B.T.A. 44">*47  The petitioner paid commissions and attorneys' fees in the amount of $5,366.10 in connection with the disposition of the stock of the Uhrichsville Clay Co. and the United Clay Product Co.  In his income tax return filed for the1934 BTA LEXIS 1384">*1390  taxable year 1928, petitioner reported as capital gain the sum of $9,291.42 on the sale of the stock as aforesaid, representing the difference between the sum of $100,182.52 paid to him and the cost to him of the stock, being the sum of $85,525, less commissions and expenses paid amounting to $5,366.10.  In computing the net income in the deficiency letter the respondent increased the capital gain reported by petitioner by $200,000, being the amount paid to the Citizens National Bank as aforesaid.  OPINION.  ADAMS: Under the facts as found, the sole question presented for determination is: Was the $200,000, a part of the consideration for the stock in question, income to the petitioner for the year 1928?  The respondent contends that title to the securities passed from the petitioner to the purchaser; that delivery was made and the agreed consideration was paid in full; that the transaction was closed as between the seller and purchaser, and the entire amount of the consideration must be considered in determining the profit or loss arising from the sale.  Petitioner argues in his brief that he did not actually or constructively receive the $200,000 during the year 1928 and1934 BTA LEXIS 1384">*1391  cites us to authorities which discuss the doctrine of constructive receipt.  In the view we take of the case these authorities are not controlling and it is unnecessary to discuss them.  Petitioner relies upon the case of , and other cases to like effect, where the Board held that a portion of the compensation withheld by a city under the terms of a paving contract providing for such withholding as a guarantee of maintenance was not income of the petitioner for the year in which the work was completed and did not accrue as income until received.  We do not believe that these authorities are applicable to the situation presented to us here.  In those cases the petitioner was not entitled to receive that part of the compensation withheld until he had fully performed and it was uncertain whether he would ever be entitled to receive it.  The cases of ; ; and , are, in our judgment, readily distinguishable from the case under consideration.  1934 BTA LEXIS 1384">*1392 30 B.T.A. 44">*48  Here the purchaser paid the full purchase price for petitioner's stock and petitioner voluntarily agreed that a part of the price so paid would be placed by the depositary with a trustee, during a limited period of time, for the purpose of protecting the purchaser against any loss which might accrue to it by reason of any defect in petitioner's title.  While so held petitioner had the right to require the trustee to invest and reinvest the fund according to his direction and the income derived from the amounts so invested accrued to him.  As between the purchaser and the seller it was a closed transaction; title to the stock passed to the purchaser and the purchaser parted with the consideration.  It retained no right or title to any part of the guarantee fund and could acquire none except upon the happening of a condition subsequent.  In the meantime the trustee, in a practical sense, acted merely as a custodian of the fund which it held; all the economic benefits of the fund belonged to the petitioner.  The respondent contends that this case is controlled by the holding of the Board in 1934 BTA LEXIS 1384">*1393 , in which proceeding, we said: "The fact that one who sells property guarantees the purchaser against some contingency arising in some future year and makes a deposit as security for the guarantee does not lessen by the amount of the guarantee or the amount of the deposit the profit which he had made on the sale.  If in such case the happening guaranteed against takes place in the following year and a portion of the deposit is in consequence lost, the result is one affecting income for that year to the extent of the loss." The petitioner undertakes to distinguish the Federal Development Co. case from the case under consideration, among other things, saying that this case is distinguished from the Federal Development Co. case in that in that case the asset sold was the undisputed property of the taxpayer.  In the reply brief of the petitioner, his counsel argues that the interest of the minors in the 668 shares is real and cannot be ignored; that the petitioner did make a gift of the 668 shares in question to the said minors and by virtue thereof they have a vested right therein.  Further, petitioner's counsel argues1934 BTA LEXIS 1384">*1394  that Myers had no right to sell the 668 shares and, therefore, no right in the $200,000 fund set aside, and, consequently, should have no liability for taxes in connection therewith.  The petitioner in his dealing with this stock treated it as his own.  He asserted in the Probate Court that it was his own.  He represented, in the option contract and the sales contract which followed it, that it was his property and that he had a right to sell and dispose of it.  We are unable to agree to the conclusion reached by the petitioner in his brief.  We recognize that this case is distinguishable from 30 B.T.A. 44">*49  the Federal Development Co. case in that in the Federal Development Co. case the consideration was paid directly to the seller and then a part of the purchase price was deposited as a guarantee against possible contingencies; while in this case the consideration was paid to a designated depositary and a part thereof deposited by it with a trustee selected by petitioner.  Outside of this, we are unable to perceive any distinction between the two situations, and we do not regard this distinction as material.  Cf. 1934 BTA LEXIS 1384">*1395 ; ; . In the view we take of this case, the respondent's determination must be affirmed.  Decision will be entered for the respondent.