Dickey v. Burnet, 8963.

• Citation: 56 F.2d 917
• Decision Date: 22 April 1932
• Docket Number: No. 8963.,8963.
• Parties: DICKEY et al. v. BURNET, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

56 F.2d 917 (1932)

DICKEY et al. v. BURNET, Commissioner of Internal Revenue.

No. 8963.

Circuit Court of Appeals, Eighth Circuit.

March 2, 1932.

Rehearing Denied April 22, 1932.

Maurice H. Winger and Alton Gumbiner, both of Kansas City, Mo. (Winger, Reeder, Barker, Gumbiner & Hazard, of Kansas City, Mo., on the brief), for petitioners.

John G. Remey, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Dean P. Kimball, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before STONE and VAN VALKENBURGH, Circuit Judges, and SANBORN, District Judge (since appointed Circuit Judge).

SANBORN, Circuit Judge.

The executors of the last will and testament of Walter S. Dickey, deceased, petition for a review of an order of the Board of Tax Appeals determining deficiencies in the individual income taxes of Mr. Dickey for the years 1920 and 1921 of $167,285.10 and $97,669.27, respectively.

In 1917, Mr. Dickey, who resided in Kansas City, Mo., was a man of large means and varied business interests. He was engaged, among other things, in the manufacture of clay products, and owned many plants and factories in various parts of the United States which produced such products, and the clay lands from which the necessary raw material was obtained. Among the corporations the stock of which was owned by him was the Ontario Realty Company, a Missouri corporation. This company, prior to January 10, 1917, owned valuable real estate, and its entire capital stock belonged to Mr. Dickey, with the exception of two shares, one of which stood in the name of Fred L. Dickey, a brother, and the other in the name of George H. Davis, the secretary of the company. The board of directors consisted of Mr. Dickey and these two other stockholders.

On January 10, 1917, a contract was entered into between Mr. Dickey and the Ontario Realty Company, by the terms of which Mr. Dickey sold to that company approximately 3,000 acres of clay land for a consideration of $335,507.28 and its agreement "to pay two-thirds of the gross income from said lands to Kate L. Dickey, Madeline A. Dickey, Catherine Dickey, and William Laurence Dickey in equal shares during their lifetime, and on the death of any one or more of said parties the share of such gross income payable to such deceased person or persons to be paid to W. S. Dickey, or on his order, such payments to continue until the clay deposits on said lands shall be exhausted." Kate L. Dickey was the wife of Walter S. Dickey, and the other individual beneficiaries of the sales contract were his children. The lands were those upon which fifteen of Mr. Dickey's clay plants were dependent for their raw material. The $335,507.28 specified in the sale contract was the March 1, 1913, value of the land, and that value was fixed in order to avoid any taxable profit.

Subsequent to January 10, 1917, an oral agreement was made between Mr. Dickey and the Ontario Realty Company whereby he was to pay $1 a ton burned weight for the clay taken by him from the lands. The Board of Tax Appeals found that this agreement be came effective as of January 1, 1917, and was to continue from year to year unless terminated by mutual agreement, and that the royalty to be paid was subject to change from time to time as conditions justified. Mr. Dickey removed the clay for his plants from the lands as he needed it, and bore the entire expense of such removal, and controlled the means by which the clay was removed. The $335,507.28 specified in the sale contract was not paid in cash, but a charge of that amount was entered against the Ontario Realty Company upon Mr. Dickey's books, and this amount was liquidated during the following three years out of credits entered upon his books to the realty company for clay taken from the lands by Mr. Dickey. Separate books of account were kept for the realty company. It had, however, no separate bank account. Mr. Dickey acted as its banker and as banker for members of his family. On his books were kept accurate accounts of all advances, disbursements, and collections made, for the realty company and also for each member of his family. His wife and children drew against his bank account, and their checks were charged to their own personal accounts upon his books.

Quarterly, the amounts due the realty company for clay taken by Mr. Dickey under his oral agreement were computed. The realty company received credit for one-third of such amounts, and the other two-thirds was credited to the beneficiaries of the sale contract pro-rata. Mrs. Dickey died September 13, 1920. Thereafter, what would have been her share of the gross profits of the realty company from the sale of clay was credited to Mr. Dickey. From 1917 to 1923, one-third of the gross profits credited to the realty company from the sale of clay was $727,324.08, and there was credited to the beneficiaries $1,454,649.68 for the same period. The credits to the beneficiaries for 1920 were $223,621.97; for 1921, $175,554.90; for 1922, $161,215.74; for 1923, $120,965.79; or a total for the four years of $681,358.40. The amounts thus credited to them were reported as income by them in their individual returns as "Royalties from Ontario Realty Co.," and they paid income taxes upon them. Mr. Dickey, in his returns for those years, deducted from his gross income all amounts credited to the Ontario Realty Company and to the beneficiaries on account of clay taken by him from these clay lands. Upon the audit of Mr. Dickey's income tax returns for those years, the Commissioner of Internal Revenue added to the net income reported by Mr. Dickey the amounts credited to the beneficiaries, upon the ground that they represented gifts of income by Mr. Dickey to them in those years. To adjust the matter of taxes which had been paid upon the same income by the beneficiaries, the Commissioner, so far as possible, issued certificates of overassessment.

From the determination by the Commissioner of a tax deficiency resulting from his adding to Mr. Dickey's income the amounts credited to the beneficiaries, Mr. Dickey appealed to the Board of Tax Appeals. The Board made its findings and reached the conclusion that Mr. Dickey was not entitled to deduct from his income the credits entered upon his books in favor of his wife and children and which had been reported by them as "Royalties from the Ontario Realty Co.," because they were not ordinary and necessary expenses deductible from gross income; this, apparently upon the theory that $1 a ton for clay was an excessive price. The petitioners complain of the reasons given by the Board as the basis of its decision, and also of its findings with respect to the reasonable value of clay. It is, however, of no importance what reasons the Board gives for its decision if the decision is correct. Hughes v. Commissioner (C. C. A.) 38 F.(2d) 755.

The petitioners assert that the contract whereby these clay lands were sold to the realty company was a closed transaction in 1917; that the title to the lands then passed, the cash consideration was paid, and the value of the unpaid part of the purchase price, being the two-thirds of the gross future income from the lands to be paid to the wife and children of Mr. Dickey, was capable of being definitely ascertained and reduced to a present cash value, and that, as a result of the transaction, a definite present interest was vested in the beneficiaries by the sale, and that whatever moneys they received thereafter resulted from a vested contract right and were not gifts of future income.

It is also urged by the petitioners that the oral agreement between Mr. Dickey and the realty company for the purchase of clay did not leave in Mr. Dickey any right to change the price or to terminate the agreement, and that he could have been compelled to take clay at $1 a ton until the clay deposits were exhausted.

The only testimony in the record with reference to this oral agreement is that of Mr. Michaelson, Mr. Dickey's general auditor, and of Mr. Dickey himself. Mr. Michaelson's testimony showed that at the time he testified, he was secretary and treasurer of the Ontario Realty Company, of which Mr. Dickey was then president; that in 1917 he was familiar with the records and transactions of that company, although he was not then secretary, but was assistant secretary. He did not say that he was present at the time the oral contract was made, but testified: "There was an agreement on the part of Mr. Dickey to pay to the Ontario Realty Company for all clay removed from these lands at the price of $1.00 per...