Court Opinion

ID: 4611711
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:49:32.376914+00
Date Added: 2024-06-11T07:59:58.606593
License: Public Domain

GEORGE R. MYERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Myers v. CommissionerDocket No. 94764.United States Board of Tax Appeals42 B.T.A. 640; 1940 BTA LEXIS 974; August 28, 1940, Promulgated 1940 BTA LEXIS 974">*974  In a property settlement agreement entered into in 1933 petitioner transferred to his wife certain shares of stock equaling her community interest in such shares.  By the same instrument petitioner agreed to buy, and his wife agreed to sell to him, the same shares for a stipulated amount payable monthly over a number of years.  Petitioner's wife endorsed the certificates in blank and delivered them to an escrow agent, who was to deliver them to the petitioner periodically upon receipt of the payments due on the purchase price.  In 1935 the corporation was liquidated and its assets distributed in kind to the stockholders, who transferred them to a new corporation in exchange for its shares of stock.  Pursuant to a further agreement between the petitioner and his wife, shares of new stock of record in the name of the wife were delivered to the escrow agent in substitution for the old shares.  Held, that the petitioner is not taxable upon any gain from the liquidating distributions on the wife's shares in 1935.  Albert Grossman, Esq., and Charles Goldring, C.P.A., for the petitioner.  Byron M. Coon, Esq., for the respondent.  SMITH 42 B.T.A. 640">*641 1940 BTA LEXIS 974">*975  This proceeding is for the redetermination of a deficiency of $4,355.74 in petitioner's income tax for 1935.  The only question in issue is whether the petitioner is taxable on any gain from the liquidating distributions made on certain shares of stock which were held in escrow under a purchase and sale agreement between the petitioner and his wife.  FINDINGS OF FACT.  The petitioner is a resident of Los Angeles, California.  On May 29, 1933, the petitioner and his wife, Rhoda A. Myers, who were then separated, entered into an agreement by which they undertook to make a final settlement of all their property rights both as to their community and their separate properties.  The agreement provided, among other things, that petitioner would transfer to his wife 145 1/4 shares of the stock of the Automotive Sales Co. and 15 1/2 shares of stock of Automotive Sales, Inc., the said shares being one-half of the community-owned stock in those corporations.  Together, petitioner and his wife owned a majority of the stock of the Automotive Sales Co., but less than a majority of that of Automotive Sales, Inc.  By the same instrument of May 29, 1933, petitioner's wife agreed to sell back all1940 BTA LEXIS 974">*976  of such stock to the petitioner under the following terms and conditions: 3.  Rhoda A. Myers agrees to sell to said George R. Myers her said 145 1/4 shares of Automotive Sales Co., and 15 1/2 shares of Automotive Sales, Inc., capital stock, and said George R. Myers agrees to purchase said shares of stock, for the total purchase price of $27,087.50, subject to the following terms and conditions, to-wit: (a) Forthwith after the execution and delivery of this agreement, said George R. Myers shall cause to be transferred into the name of Rhoda A. Myers, on the stock record books of said corporations, the number of shares of the capital stock of each, respectively, hereinabove mentioned as the subject of this sale and purchase, and when so transferred to cause the certificates evidencing the same to be thereupon delivered to said Rhoda A. Myers.  (b) When said Rhoda A. Myers shall have received said certificates, she will endorse them in blank and deliver them forthwith into an Escrow to be started for that purpose in the Trust Department of the Citizens National Trust and Savings Bank of Los Angeles, California, to be disposed of through such Escrow, as provided by the terms of this1940 BTA LEXIS 974">*977  agreement.  (c) So long as said George R. Myers shall not be in default for more than thirty (30) days under the terms of this agreement, said Rhoda A. Myers shall not attempt to sell, assign, transfer or hypothecate any of said stock.  She shall deliver into said Escrow, with said stock certificates a writing appropriate to constitute said George R. Myers her proxy to vote all the shares of said stock, without power of revocation so long as he shall be free from such default under the terms hereof, and to assign to said George R. Myers all dividends that may be thereafter declared and paid in connection with any of said shares so long as he shall be free from such default under the terms hereof.  42 B.T.A. 640">*642  (d) Said George R. Myers agrees that he will pay the purchase price of said stock, amounting to $27,087.50, and Rhoda A. Myers agrees that she will accept the same, in the amounts, at the times, and on the conditions following, viz: Not less than $200.00 thereof on June 15, 1933, and not less than $200.00 thereof on the 15th day of each calendar month thereafter so long as any part of the total purchase price shall remain unpaid.  The unpaid balance of the purchase price1940 BTA LEXIS 974">*978  shall bear interest at the rate of five (5%) percent, per annum, which shall be paid quarter-yearly beginning with the first such payment on September 15, 1933.  All payments of purchase price or interest thereon shall be by George R. Myers paid into said Escrow for the account of Rhoda A. Myers.  (e) Said George R. Myers shall endorse in blank and deposit into said Escrow, forthwith after it shall have been started, 60 shares of his own stock of Automotive Sales Co., to be held in pledge to secure the performance of his obligations under the terms of this agreement as to the payment of the sums herein described.  Provided, however, that when said George R. Myers shall have paid the sum of $9000.00 on account of said purchase price, said sixty (60) shares of his own stock shall be released and returned to him.  (f) When the sum of Nine Thousand ($9000.00) Dollars shall have been paid on account of said purchase price, ten (10) shares of the stock of Automotive Sales Co. comprising the subject matter of this sale agreement, shall be released from Escrow and delivered to George R. Myers for each and every $1500.00 that thereafter shall be paid by him upon the purchase price of1940 BTA LEXIS 974">*979  said stock.  (g) When the purchase price of said stock and the interest thereon shall have been fully paid, any certificates evidencing said stock and remaining in Escrow, shall forthwith be released and delivered to said George R. Myers.  (h) The parties agree that they will respectively execute and deliver into said Escrow, forthwith after the same shall have been started, instructions appropriate to effect the provisions of this agreement insofar as the same are required by the Escrow Holder.  Pursuant to the said agreement of May 29, 1933, the petitioner's wife, upon receipt of the certificates for the shares of stock in question, which had been registered in her name on the books of the corporation, endorsed them in blank and delivered them to the escrow agent, together with assignments of dividends thereon to the petitioner and powers of attorney authorizing the petitioner to vote the shares in her name at all stockholders' meetings.  No dividends were ever paid by the corporations subsequent to 1930.  During 1935 the Automotive Sales Co. and Automotive Sales, Inc., were dissolved and their assets were distributed in kind to the stockholders of record in accordance with1940 BTA LEXIS 974">*980  an agreement entered into by all of such stockholders under date of March 18, 1935.  At about the same time a new corporation was formed by the petitioner and some of the other stockholders of the old companies, under the name of Automotive Sales Co., Inc., to take over the assets which they had received or were to receive in the liquidation.  On May 3, 1935, petitioner and his wife entered into a supplemental agreement by which they agreed to substitute shares of stock of 42 B.T.A. 640">*643  the new corporation for the shares of the old corporation then held by the escrow agent.  The agreement recited that at that time there was a balance due from the petitioner to his wife under the settlement agreement of May 29, 1933, of $22,487.50, which was to be paid off at the rate of $200 per month, as under the original agreement.  Subsequent to 1935 the petitioner defaulted on his monthly payments to the escrow agent.  In substitution for the old shares there were deposited with the escrow agent certificates of the new corporation, 270 shares in the name of Rhoda A. Myers and 90 shares in the name of the petitioner, George R. Myers.  In his income tax return for 1935 the petitioner reported1940 BTA LEXIS 974">*981  a net income of $5,244.70.  The respondent in his deficiency notice increased petitioner's net income by the amount of $27,523.13 representing an alleged gain on the shares in the name of Rhoda A. Myers realized in 1935 from the liquidation of the Automotive Sales Co. and Automotive Sales, Inc.OPINION.  SMITH: In his petition to the Board the petitioner alleges, first, that the liquidation of the Automotive Sales Co. and Automotive Sales, Inc., in 1935 was a tax-free reorganization, and, second, that in any event the gain, if any, from the liquidation of the 145 1/4 shares of Automotive Sales Co. stock and 15 1/2 shares of Automotive Sales, Inc., stock which he transferred to his wife under the settlement agreement of May 29, 1933, is not taxable to him.  The first of these contentions was waived by the petitioner at the hearing before the Board, leaving for our determination only the question whether the gain on the liquidation of the 145 1/4 shares of Automotive Sales Co. stock and the 15 1/2 shares of Automotive Sales, Inc., stock is taxable to the petitioner.  The amount of the gain from the liquidating distribution on said shares has not been put in dispute in this proceeding. 1940 BTA LEXIS 974">*982  Petitioner's protest against the additional assessment is based entirely upon his contention that he was not the owner of the shares of stock in question at the time the liquidating distribution was made.  The respondent has taxed the gain on the distribution to the petitioner on the ground that the legal title to the stock in escrow was his at the time of the liquidation.  This conclusion rests in turn on the fact that certain important incidents of equitable ownership in the stock were then in the petitioner and on the respondent's interpretation of the written agreement of the parties.  We do not think the respondent can be sustained in his position.  The decision of the issue before us has been made by the courts to depend on ownership of the income-producing property at the time of the gain.  In each instance primary emphasis has been placed 42 B.T.A. 640">*644  on the varying circumstances of separate cases as they illumine questions of title to the property involved.  See ; 1940 BTA LEXIS 974">*983 ; . See also . For dominion over, or possession of, that property see ; . Cf. ; ; and as to the method of sale as it may affect the realization of the gain sought to be taxed, see ;. In the instant case it appears to us, contrary to respondent's position, that the title to the stock in escrow was in Rhoda A. Myers.  The determination of this question must be made largely to depend on the intention of the parties as evidence by their method of dealing and on the surrounding circumstances.  It is plain from the agreement of May 29, 1933, that the intent of the parties was that the petitioner should buy out Rhoda A. Myers' interest in the community at an agreed price.  It seems clear, moreover, that they were not satisfied1940 BTA LEXIS 974">*984  with the more direct method which might have been followed of the relinquishment by the wife of her interest in consideration of the agreed price, that interest to be pledged as security for the performance of the agreement.  Rather, the method adopted was first to place title to the stock in Rhoda A. Myers individually, to reflect this transfer on the corporate books, and to execute an agreement for their sale through a trustee.  The significant difference between these methods is that under the one utilized Rhoda A. Myers was enabled to reserve the power to repossess the securities in kind on petitioner's default, whereas under the alternative method she would hold only a power to levy on the stock and to derive therefrom sufficient funds to supply the balance owing.  Cf. ;. The incorporation in one instrument of these two transactions requires that they be construed together and from a careful study of the instrument we think it clear that it was the intention of the parties that title to the stock was to remain in Rhoda A. Myers until the completion of the contract.  Corroborative evidence1940 BTA LEXIS 974">*985  is found in the fact that the stock remained on the books of the corporation in the name of Rhoda A. Myers and that in the liquidation of the corporation she was treated as the owner.  The reservation in the agreement, even though it be by inference, of the power to "sell, assign, transfer or hypothecate" the stock on petitioner's default shackles the passage of title with a contingency and makes it evident that performance of the agreement was a condition precedent to assumption of title by the purchaser.  See . 42 B.T.A. 640">*645  Respondent argues, nevertheless, that the petitioner was invested with the significant powers to vote the stock while in escrow and to receive the dividends paid thereon.  These privileges, it is said, are the substance of possession and ownership and for our purposes must override drier considerations.  We think, however, that the execution of proxies to the petitioner is explained by the fact that the corporations were small concerns, of which the petitioner was the president, and the purpose of this provision was largely to facilitate the operation of the corporations.  The assignment of the dividends, in1940 BTA LEXIS 974">*986  view of the fact that the petitioner was to pay interest upon the debt, loses significance.  The intention of the parties must control or even override the terms of the contract if properly evidenced.  See ; affd., ; certiorari denied, . In the instant case some importance attaches to the fact that the terms of the instrument appear to bear out our conclusion that the parties contemplated no instant sale.  The contract provides that Rhoda A. Myers "agrees to sell" and petitioner "agrees to purchase" the stock, marking this agreement as a contract "to sell" and not a contract "of sale." Cf. , where actual assignment to the buyer of the stock in escrow was considered more significant of the parties' intention than the terms of the instrument. We think, in addition, that paragraph five of the agreement, by which it is provided that "all property heretofore or hereunder vested in Rhoda A. Myers * * * shall be vested in her as her sole and separate estate, free and clear of any community property or other interests or claim therein, 1940 BTA LEXIS 974">*987  upon the part of George R. Myers excepting only as to the rights and privileges herein granted to him by this Agreement and to the voting power of the certain stocks hereinbefore mentioned and set forth", has some significance.  (Italics supplied.) The instrument is described as granting to petitioner only "rights and privileges" and does not attempt to convey to him an "interest" which must characterize an actual passage of title or true equitable ownership.  It should be noted, moreover, that no course was followed which could be interpreted as entailing payment for the stock at the time of making the agreement.  No notes were executed as evidence of the payments to be made.  Cf. The situation here present differs from those wherein dealings under which a loss has been definitely incurred have not been carried through to a conclusion.  See ;  Cf. . 42 B.T.A. 640">*646  The present case likewise appears to us to differ from 1940 BTA LEXIS 974">*988 , where the payment of dividends during the taxable year reduced then the obligation of the taxpayer to pay principal and interest on the stock-purchase debt.  The taxpayer there realized a gain during the year in question.  From these varied considerations we have reached our conclusion that title to the stock in escrow was not in the petitioner during the taxable year, that the reservation of the right to dispose of the stock on petitioner's default placed a substantial contingency blocking the passage of that title, and that by the terms of the instrument itself it is apparent that the petitioner was not the owner of the stock.  In the light of these facts we hold that respondent's determination that the petitioner realized gain on the liquidating distribution was error.  Decision will be entered for the petitioner.