Wall v. United States

• Decision Date: 10 November 1947
• Docket Number: No. 5634.,5634.
• Citation: 164 F.2d 462
• Parties: WALL v. UNITED STATES.
• Court: U.S. Court of Appeals — Fourth Circuit

164 F.2d 462 (1947)

WALL v. UNITED STATES.

No. 5634.

Circuit Court of Appeals, Fourth Circuit.

November 10, 1947.

H. M. Woodward, of Norfolk, Va., for appellant.

Robert R. Reynolds, Jr., Sp. Asst. to Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., Helen R. Carloss and Robert N. Anderson, Sp. Asst. to Atty. Gen., and Harry H. Holt, Jr., U. S. Atty., and Walkley E. Johnson, Asst. U. S. Atty., both of Norfolk, Va., on the brief), for appellee.

Before PARKER, SOPER and DOBIE, Circuit Judges.

SOPER, Circuit Judge.

This is an action for the recovery of income tax paid by the plaintiff pursuant to a deficiency assessment for the year 1939. The District Court denied recovery and the plaintiff appeals.

Rosedale Dairy Company, Incorporated, herein called Rosedale, is a Virginia corporation with its principal office in Norton, Virginia. It was incorporated in 1922 with a minimum capital stock of $10,000 and a maximum capital stock of $25,000, composed of common stock of the par value of $100 per share. One hundred and twenty shares were issued and are still outstanding. Prior to 1933, the taxpayer, Wall, owned or controlled 60 shares and the remaining 60 shares were owned or controlled by one Moses, who died in 1933. The latter stock was then purchased by G. C. Coleman, who was the principal owner of the Britcherd Dairy Company, Rosedale's chief competitor. This situation continued for several years, but it was not satisfactory to Wall; and accordingly, he initiated negotiations which culminated in an agreement executed by Wall and Coleman August 28, 1937. By this agreement Coleman agreed to sell to Wall for the sum of $71,700: (1) his stock in Rosedale, (2) a claim for $10,000 which Moses had against Rosedale and which Coleman had purchased from his executor, and (3) a parcel of real estate valued at $4,700. Wall paid $6,700 cash and agreed to pay $5,000 annually for nine years, and $20,000 in the tenth year. To cover the deferred payments he executed and delivered to Coleman thirteen promissory notes each for $5,000. The price paid for the stock thus amounted to $57,000; and Wall transferred the stock to two trustees to be held by them as security for the notes. While title to the stock was in the trustees, Wall retained the right to vote the stock, subject to the limitation that he could not vote it so as to jeopardize its value as security either by authorizing the issuance of additional stock by Rosedale or by selling the assets of Rosedale.

Wall personally made the down payment of $6,700, and also paid the first note for $5,000 which matured September 1, 1938. However, on January 3, 1939, Wall entered into an agreement with Rosedale whereby the latter agreed to pay the remaining notes as they matured, and Wall, in turn, transferred to Rosedale his equity in the stock then held by the trustees, and thereupon Rosedale entered the stock on its books as treasury stock and charged itself with the assumed liability in the sum of $60,000. Rosedale paid Wall's second note for $5,000 when it matured in 1939 out of its surplus, and has continued to meet the notes as they matured thereafter. Coleman was not a party to the agreement between Wall and Rosedale, and Wall was not relieved of his personal liability on the notes by virtue of that agreement.

The Commissioner of Internal Revenue treated the payment by Rosedale of Wall's note for $5,000 in 1939 as income in that amount to Wall, and assessed a deficiency on that basis. The Commissioner relied on Section 115(g) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 115(g), which provides that if a corporation cancels or redeems its stock in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend to the stockholder, the amount so distributed shall be treated as a taxable dividend. The District Judge agreed with this view and entered judgment for the United States.

The controlling fact in this situation was that Wall was under an obligation to pay Coleman $5,000 in the tax year and that Rosedale paid this indebtedness for Wall out of its surplus. It cannot be questioned that the payment of a taxpayer's indebtedness by a third party pursuant to an agreement between them is income to the taxpayer. Douglas v. Willcuts, 296 U.S. 1, 9, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391; United States v. Boston & Maine R. Co., 279 U.S. 732, 49 S.Ct. 505, 73 L.Ed. 929; Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918. The transaction is regarded as the same as if the money had been paid to the taxpayer and transmitted by him to the creditor; and so if a corporation, instead of paying a dividend to a stockholder, pays a debt for him out of its surplus, it is the same for tax purposes as if the corporation pays a dividend to a stockholder, and the stockholder then utilizes it to pay his debt.

The taxpayer does not dispute this well-settled principle but contends that it is not applicable here for a number of reasons. He says, in the first place, that he received no taxable gain from his dealings with Coleman and the corporation since his resulting stock interest, although amounting to all the stock of the corporation, was of less value than the 50 per cent. stock interest which he owned before Coleman was bought out. This is true because the price paid Coleman for his 50 per cent. interest exceeded one-half the value of the company's assets. It is therefore argued that the taxpayer did not realize any taxable gain at the time, and that until he finally disposes of his holdings, it will not be known whether or not he will make a gain or loss on his deal. While this statement may be true, it is entirely beside the point. We are not now concerned with the broad question whether the business...