Court Opinion

ID: 4633144
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:13:20.748909+00
Date Added: 2024-06-11T07:58:01.208137
License: Public Domain

SIDNEY F. TYLER, WILLIAM M. ELKINS, GEORGE D. WIDENER AND THE REAL ESTATE-LAND TITLE AND TRUST COMPANY, SURVIVING AND SUCCEEDING TRUSTEES UNDER THE LAST WILL AND TESTAMENT OF WILLIAM L. ELKINS, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Tyler v. CommissionerDocket No. 56449.United States Board of Tax Appeals28 B.T.A. 367; 1933 BTA LEXIS 1138; June 13, 1933, Promulgated *1138 Held, that the petitioners are not taxable on the income in controversy under the doctrine of constructive receipt.  William R. Spofford, Esq., for the petitioners.  Paul E. Waring, Esq., for the respondent.  TRAMMELL *367  This is a proceeding for the redetermination of a deficiency in income tax for the year 1927 in the amount of $9,160.71.  The petitioners have assigned as error the action of the respondent in including in gross income for the taxable year 1927 (1) a profit of $59,400 realized on the sale of 66 shares of stock of the Delaware Co., and (2) a profit of $500 realized on the retirement of bonds of the Westmoreland Water Co., the petitioners contending that such profits were not received by them until the year 1928.  The respondent now concedes the issue on the second point.  FINDINGS OF FACT.  The parties stipulated the facts, which stipulation is by reference adopted as our findings of fact, but only those portions deemed material are here set forth, as follows: *368  Petitioners are the duly qualified and acting Trustees of the Estate of William L. Elkins, Deceased, with offices at 1233 Land Title Building, Philadelphia, *1139 Pennsylvania.  In their capacity, as trustees, the petitioners held 66 shares of the capital stock of The Delaware Company which had been acquired prior to March 1, 1913, at a cost of $100.00 per share.  On March 1, 1913 the said shares of capital stock of The Delaware Company had a value of $100.00 each.  The Delaware Company owned a controlling stock interest in the Westmoreland Water Company, a Pennsylvania corporation and in The Dennison Water Supply Company, on Ohio corporation.  The Community Water Service Company, a corporation organized under the laws of Delaware, became desirous in 1927 of obtaining control of The Delaware Company, the Westmoreland Company and The Dennison Water Supply Company.  On November 10, 1927 certain shareholders of The Delaware Company owning less than 80% of the capital stock of that corporation, entered into a contract for the sale of their stock to the Community Water Service Company at $1,032.00 per share and the Community Water Service Company agreed to buy at that price provided at least 80% of the stock of The Delaware Company would be delivered.  The said contract is the "tentative contract" referred to in the notice sent out to the*1140  stockholders and referred to in the next paragraph.  Petitioners were not parties to the contract of November 10, 1927.  The stockholders who were parties to the said contract left the matter of carrying out its provisions to one of their number, Mr. Huff.  Mr. Huff was also the president of the Safe Deposit and Trust Company of Greensburg, Pennsylvania.  * * * The Safe Deposit and Trust Company of Greensburg, Pennsylvania, accepted the duties set forth in the contract and agreed to act as depositary.  On November 14, 1927 the Safe Deposit and Trust Company of Greensburg, Pennsylvania, sent, and shortly thereafter the petitioner received the following notice.  SAFE DEPOSIT AND TRUST COMPANY Greensburg, Pennsylvania.  November 14, 1927.TO THE STOCKHOLDERS OF THE DELAWARE COMPANY: After extended negotiations a definite offer has finally been made to certain of the stockholders of your company collectively owning a majority of the shares for the purchase of their stock.  A tentative contract has been made.  The controlling stockholders of your company feel that it is only fair that the minority interest be given an opportunity to sell their shares of stock upon*1141  the same basis if they so desire.  Accordingly this company has agreed to act as the depositary of the shares pending the consummation of the sale.  The terms of sale are $1032.00 for each share of the capital stock of The Delaware Company from which there will be appropriated the sum of $32.00 per share and applied to the payment of the legal incidental expenses of the sale and compensation to certain of the executive officers of your company who have devoted a great deal of time to the transaction and who have been largely, if not altogether, responsible for what they consider such an advantageous price being offered for the shares of stock of the company.  This means that each stockholder will receive when and as the sale is consummated $1000.00 net for each share of stock of which he or she is the owner.  If you wish to sell *369  your shares upon the terms herein stated you should execute in blank the printed assignment appearing upon the back of your certificates, have your signature guaranteed by a bank in your community having a New York correspondent and mail the certificates thus assigned so that they are received by this company on or prior to November 25, 1927. *1142  This company will promptly upon the receipt of your certificates send you its receipt and in the event the sale is consummated shortly after January 1, 1928, remit by its cashier's check to your address the proceeds of the sale in accordance with the terms of this letter, otherwise your certificates will be returned.  The receipt of the certificates for your shares by this company shall be deemed and taken as your authority to dispose of your shares in accordance with the terms of this letter.  SAFE DEPOSIT AND TRUST COMPANY, (Signed) W. A. HUFF, President.On or before November 25, 1927, the petitioners transmitted the said 66 shares of capital stock of The Delaware Company to the Safe Deposit and Trust Company of Greensburg, Pennsylvania, with the printed assignment thereon executed in blank.  On or before December 1, 1927, more than 80% of the outstanding stock of The Delaware Company had been deposited with the Safe Deposit and Trust Company of Greensburg, and on or before December 17, 1927 the deposited certificates of The Delaware Company were delivered by the Safe Deposit and Trust Company of Greensburg, to the Community Water Service Company and the purchase price*1143  thereof, $1,032.00 per share, was deposited to the credit of the depositary, the Safe Deposit and Trust Company of Greensburg, Pennsylvania.  Pursuant to the terms of the notice of November 14, 1927, the Safe Deposit and Trust Company on January 5, 1928, mailed to the petitioner a check for $66,000.00, which check was received on January 6, 1928.  The said sum represented $1,000 per share for 66 shares.  The sum of $32.00 per share was applied to the payment of the expenses and compensation described in the notice of November 14, 1927.  The petitioners computed a profit on the sale of $49,500.00 and reported the same as taxable income for the year 1928 on the income tax return filed by them as trustees for that year.  Respondent computed a profit of $59,400.00 on this sale and held that the same constituted taxable income for the year 1927 * * *.  Petitioners do not dispute the amount of the profit as redetermined by the respondent, but they contend that said profit is taxable in 1928 instead of in 1927, as redetermined by the respondent.  Petitioners were the owners of Westmoreland Water Company 5% bonds of a face value of $10,000.00, which bonds had been acquired by petitioners*1144  for $9,500.00.  Said bonds were called for redemption January 1, 1928.  * * * Pursuant to said notice * * * petitioners surrendered their bonds and received the face value thereof, $10,000, at maturity in 1928.  Petitioners reported a profit from this transaction of $500.00 on the 1928 income tax return filed by them as trustees.  The respondent determined a profit from this transaction of $500.00 and included the same as taxable income for the year 1927 * * *.  At all times material to this proceeding petitioners kept their books and filed their income tax returns on the cash receipts and disbursements basis.  *370  OPINION.  TRAMMELL: The respondent determined the deficiency in controversy by including in the gross income of the petitioners for the taxable year 1927 a profit of $59,400 derived from the sale of 66 shares of stock of the Delaware Co., and a profit of $500 realized on the retirement of bonds of the Westmoreland Water Co.  The petitioners make no objections to the amount of the profit computed by the respondent in either instance, but contend that both items were received by them in 1928, and that hence neither is taxable as a part of the gross income*1145  for 1927.  In his brief the respondent concedes that the profit resulting from the retirement of the water company bonds "represented taxable income to the petitioners in 1928 and not in 1927." The issue remaining for consideration, therefore, is whether or not the petitioners received the profit from the sale of the stock of the Delaware Co. in 1927.  This is purely an issue of law, all material facts having been stipulated by the parties.  On or before November 25, 1927, the petitioners transmitted their 66 shares of the Delaware Co.'s stock to the Safe Deposit & Trust Co., the depositary, with the printed assignment executed in blank.  On or before December 1, 1927, more than 80 percent of the stock of the Delaware Co. had been so deposited and on or before December 17, 1927, the purchaser turned over the purchase price thereof to the depositary.  The depositary mailed its check to the petitioners for their stock on January 5, 1928, which check was received by the petitioners on the following day.  The respondent argues that the depositary was the agent of the petitioners, and that receipt of the proceeds of sale by their agent on December 17, 1927, constituted constructive*1146  receipt by them.  In support of his contention the respondent cites our decisions in ; ; ; , and others, in which we held that receipt by an agent was receipt by the principal; but in all of the cases cited the agent was acting in such capacity exclusively for the taxpayer, and immediately upon receipt by the agent the fund was subject to the unqualified demand of the taxpayer.  In the instant case a wholly different situation is presented.  The depositary was not the exclusive agent of the petitioners, and upon receipt of the proceeds of sale by the depositary the amount due petitioners was not immediately available to them.  The depositary acted for the petitioners and the other stockholders only incidentally.  It was bound under the agreement to hold the stock certificates until 80 percent or more of the stock was received by it for transfer to *371  the purchaser, and in the event the required percentage of stock was not obtained, to return the initial payment to the purchaser and*1147  the certificates to the respective owners.  The depositary also had the duty of disbursing the amount of $32 per share for expenses and as compensation to the officers of the Delaware Co. for services rendered in negotiating the deal.  Furthermore, the depositary agreed to represent these petitioners and the other minority stockholders in the transaction upon certain specifically stated conditions, namely, (1) that it would promptly send its receipt for all stock certificates received; (2) that in the event the sale was consummated, it would remit the net proceeds of sale by cashier's check shortly after January 1, 1928; and (3) that in the event the sale was not consummated, the certificates would be returned.  The foregoing facts, in our opinion, indicate that the depositary was acting in a fiduciary capacity under the terms of the contract, with the duty, which it voluntarily assumed, of safeguarding the interests of all parties concerned, rather than acting as an agent of any of them.  However, we think it is not material to determine the precise relationship of the depositary to these petitioners, for the reason that it clearly appears that the petitioners had no right*1148  to demand proceeds of the sale of their stock prior to January 1, 1928.  By sending in their stock certificates, with the printed assignment thereon executed in blank pursuant to the letter from the depositary dated November 14, 1927, they evidenced their acceptance of the conditions recited therein in accordance with the express provisions of that letter, one of which was that remittance of proceeds of sale would not be made until subsequent to January 1, 1928.  In , we said: This doctrine (of constructive receipt), as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable.  When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his bona fide selection of this method by "construing" that to be received of which in truth he has not had the use and enjoyment.  Constructive receipt is an artificial concept which must be sparingly applied, lest it become a means for taxing something other than income and thus violate the Constitution itself. *1149 To the same effect see . The present case, in our opinion, does not justify invoking the doctrine of constructive receipt, and respondent's action is reversed.  Since the deficiency results solely from the inclusion in gross income of the two items hereinabove mentioned, neither of which was received during the taxable year, Judgment will be entered for the petitioners.