253 F.2d 855 (10th Cir. 1958), 5718, Sanders v. Fox

Docket Nº:5718-5720.
Citation:253 F.2d 855
Party Name:Robert V. SANDERS and Nancy Ritter Sanders, Appellants, v. Charles I. FOX, Director of Internal Revenue, Appellee. Kimball J. CRANNEY and Janice J. Cranney, Appellants, v. Charles I. FOX, Director of Internal Revenue, Appellee. N. V. SANDERS and Clover J. Sanders, Appellants, v. Charles I. FOX, Director of Internal Revenue, Appellees.
Case Date:March 20, 1958
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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Page 855

253 F.2d 855 (10th Cir. 1958)

Robert V. SANDERS and Nancy Ritter Sanders, Appellants,

v.

Charles I. FOX, Director of Internal Revenue, Appellee.

Kimball J. CRANNEY and Janice J. Cranney, Appellants,

v.

Charles I. FOX, Director of Internal Revenue, Appellee.

N. V. SANDERS and Clover J. Sanders, Appellants,

v.

Charles I. FOX, Director of Internal Revenue, Appellees.

Nos. 5718-5720.

United States Court of Appeals, Tenth Circuit.

March 20, 1958

Page 856

C. Preston Allen, Salt Lake City, Utah (Albert R. Bowen and Thornley K. Swan, Salt Lake City, Utah, were with him on the brief) for appellants.

James P. Turner, Washington, D.C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Harry Baum and David O. Walter, Attys., Dept. of Justice, Washington, D.C., and A. Pratt Kesler, U.S. Atty., Salt Lake City, Utah, were with him on the brief), for appellee.

Before MURRAH, LEWIS and BREITENSTEIN, Circuit Judges.

LEWIS, Circuit Judge.

Appellants, owners of all the issued stock of the Clover Club Foods Company, 1 have entered into an agreement with the corporation for the redemption of their stock under a plan funded by insurance carried upon the lives of the stockholders. The insurance premiums, paid by the corporation, have been assessed against appellants as constructive dividends constituting ordinary income. The validity of this assessment is the sole question here presented. The cases, consolidated as involving the same facts and identical issues of law, reach us upon appeal from the District Court for the District of Utah, the trial court having denied claim to refund upon taxes so assessed and paid for the years 1949, 1950 and 1951. The controversy arises from stipulated facts. See 149 F.Supp. 942.

Clover Club Foods Company, a Utah corporation manufacturing potato chips, at all pertinent times had four stockholders, present appellants: N. V. Sanders, his wife Clover J. Sanders, their son Robert V. Sanders and K. J. Cranney. N. V. Sanders was president of the corporation and his wife was vice president, secretary and treasurer. Robert V. Sanders was employed by the corporation as a general worker. Cranney was the sales manager. Each drew salary from the corporation and held stock interest which varied during the three years in question. In 1949, N. V. Sanders

Page 857

and his wife owned 43% each of the issued stock; in 1950, 40% each and in 1951, 37% each. Robert V. Sanders and Cranney each held 7% 1949, 10% in 1950 and 13% in 1951.

On March 23, 1949, the corporation and its four stockholders executed a 'Stock Purchase Agreement.' The agreement was funded by insurance taken out upon the lives of the stockholders through individual policies closely, although not exactly, proportionate in amount to the corporate interest of the stockholder. The policies were deposited with the corporation with all lifetime benefits reserved, by endorsement of the policies 2 and by contract provision, 3 to the corporation. Each shareholder deposited with the corporation his corporate stock, endorsed in blank but without surrender of the right to sell or vote the stock or receive dividends thereon. The shareholder had the exclusive right to name the beneficiary of the insurance proceeds payable at death.

Upon the death of a stockholder the corporation agreed to deliver the policy to the named beneficiary for collection. Thereupon the corporation would transfer to itself as much of the company stock standing in the name of the deceased as could be purchased at a predetermined price from the insurance proceeds. The fair market price of the stock was to be determined from time to time by unanimous vote of the stockholders (or by arbitration if necessary) and the redemption price was designated in the agreement:

'At the death of a Stockholder, the Adjusted price to be paid for his stock shall be the greater of the following: (1) the value thereof, (as set by the stockholders) plus a percentage of the cash surrender value, as of the day prior to his death, of the insurance policies (including those on his life) equal to the percentage of all the shares of stock of the Corporation which were then owned by him, or (2) the amount of said insurance proceeds payable under the terms of the said policy or policies on decedent's life.'

If the insurance payment was not sufficient to buy all of the deceased's stock at the adjusted price the corporation had a sixty-day option to do so from funds available in current earnings or surplus. Shares not so purchased remained the property of the record owner as reflected upon the company books subject to a secondary option to purchase upon the part of the surviving stockholders.

The corporation provisionally 4 agreed to pay the insurance premiums as they became due and has paid total premiums

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for the years designated in the following amounts: 1949, $4,072.08; 1950, $4,591.77; 1951, $5,279.20.

As the agreement required, these premiums were paid from current earnings and surplus 'so that rights of corporation creditors will not be prejudiced by use of corporate funds for payment of such premiums.' The premium payments have not been claimed by the corporation as a tax deduction but have been carried as an asset on the company balance sheet. No formal dividends have been declared or paid for the tax years in question although earned surplus in 1949 was $84,587.77, in 1950, $122,289.80 and In 1951, $140,853.33. The outstanding stock was valued at $225,148 in 1949 and 1950 and at $285,124 in 1951.

Other provisions in the 'Stock Purchase Agreement' determine the rights of the parties when a stock purchase is not consummated by the contingency of the death of a...

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