Anderson v. Comm'r of Internal Revenue, Docket Nos. 2386
| Decision Date | 18 July 1945 |
| Docket Number | 2387.,Docket Nos. 2386 |
| Parties | RALPH R. ANDERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HERBERT R. ANDERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners transferred stock in family corporation to members of both their families shortly before the declaration of substantial dividends in each of the years 1937, 1938, and 1939. Immediately upon payment of the dividends, each petitioner borrowed the entire amount thereof from the stock transferees who were members of his family, executing promissory notes therefor. Neither the stock certificates nor the notes were delivered into the possession of the transferees or payees, but were kept in the corporate office. In 1940 petitioners reacquired, and their wives acquired, the stock which stood in the names of the children, and promissory notes were executed, but not delivered, to the children, subject to an understanding as to the manner of their payment in future years. Petitioners managed the corporate affairs after the transfer of the stock the same as before, and no stockholders' meetings were held until 1940, when the stock was reacquired. Held, there were no bona fide gifts of stock by petitioners in 1937, 1938, or 1939, and respondent did not err in taxing the dividends on the stock in question to the petitioners. John O. Snook, Esq., and Bruce S. Parkhill, Esq., for the petitioners.
Edward C. Adams, Esq., for the respondent.
The Commissioner determined a deficiency in the income tax of Ralph R. Anderson for the calendar years 1939 and 1940 in the respective amounts of $2,096.97 and $6,978.96, and in the income tax of Herbert R. Anderson for the calendar years 1939 and 1940 in the respective amounts of $1,927.50 and $7,898.60.
The cases were consolidated for hearing. They involve questions concerning the validity of certain alleged gifts of petitioners to members of their own and each other's families.
Petitioners filed their separate income tax returns for the calendar years 1939 and 1940 with the collector for the first district of Illinois, at Chicago. They are brothers, engaged in the contracting and construction business in Chicago, Illinois.
The Robert R. Anderson Co. was established by petitioner's father in 1907, and incorporated in 1914. Petitioners Herbert and Ralph Anderson first acquired stock therein in 1914 by cash purchases. They were then, respectively, aged 13 years and 9 years. About 10 years later their father first gave to each of petitioners and their sister gifts consisting of 12 shares of stock in the company. At various times, until 1931, petitioners' parents gave them additional gifts, they purchased their sister's holdings in 1928, and received stock dividends, with the result that by 1937 Herbert Anderson owned 388 shares and Ralph Anderson owned 360 shares, totaling 748 of the 750 shares outstanding. Petitioners' father retired from the business about 1921.
Faye Anderson is the wife of Herbert R. Anderson, and Herbert R. Anderson, Jr., is their son, who was born May 3, 1923.
Florence Anderson has been the wife of Ralph R. Anderson since 1939. Ralph had three children by his first wife; Mary, who became of age September 28, 1943; Robert, born July 27, 1929; and Ralph, Jr., born October 13, 1930.
Robert R. Anderson Co. was engaged in heavy construction projects, such as paving streets, building bridges and retaining walls, and, in recent years, the construction of two sections of the Chicago subway. It requires the use of such heavy equipment as concrete mixers, steam shovels, cranes, compressors, and pile drivers. It employed, during the tax years from 100 to 500 people, according to the season and volume of work. Its does business with governmental units and private industry.
In 1928 another corporation, called the Suburban Paving & Improvement Co., was organized. Its stock was owned by Robert R. Anderson Co., which, in 1933, distributed it to petitioners, its stockholders, who still hold it.
It was petitioners' plan to increase the volume of Suburban's contracts and to decrease those taken by Robert R. Anderson Co., and to have the latter corporation hold title to all the equipment used by Suburban, so as to exempt it from liability on contracts and bonds. Accordingly, petitioners turned in to Robert R. Anderson Co. the assets of the A. D. Construction Co., another corporation whose stock was held by petitioners and which owned the equipment used by both Robert R. Anderson Co. and Suburban. The gross receipts from contracts of Suburban increased from $74,273.23 for the year ended April 30, 1938, to $145,860.08 for the year ended April 30, 1939, and $411,137.96 for the year ended April 30, 1940.
On December 1, 1937, Herbert Anderson, Sr., caused to be transferred on the corporate records the following 68 shares of stock in Robert R. Anderson Co.:
+----------------------+
¦Transferee ¦Shares ¦
+-------------+--------¦
¦Faye ¦17 ¦
+-------------+--------¦
¦Herbert, Jr ¦17 ¦
+-------------+--------¦
¦Ralph, Jr ¦12 ¦
+-------------+--------¦
¦Robert ¦11 ¦
+-------------+--------¦
¦Mary ¦11 ¦
+----------------------+
On the same date, Ralph Anderson, Sr., caused to be transferred on the corporate records the following 85 shares in the same corporation:
+----------------------+
¦Transferee ¦Shares ¦
+-------------+--------¦
¦Faye ¦17 ¦
+-------------+--------¦
¦Herbert, Jr ¦17 ¦
+-------------+--------¦
¦Ralph, Jr ¦17 ¦
+-------------+--------¦
¦Mary ¦17 ¦
+-------------+--------¦
¦Robert ¦17 ¦
+----------------------+
The new certificates were placed in a safe of the company, in the care of the secretary of the corporation, Frank Christiansen, who was an employee. Instructions with regard to these certificates and the other certificates and notes hereinafter mentioned were given to Christiansen by petitioners. The custody of these certificates and notes by Christiansen was with the knowledge and consent of the alleged donees of the certificates in question, who were fully apprised of the transfers. The stock and notes later issued were placed by Christiansen in envelopes bearing the names of the alleged donees.
On December 10, 1937, dividends were declared on the stock so transferred in these amounts:
+-----------------------------------------------------+
¦ ¦Shares¦Dividend¦ ¦Shares¦Dividend¦
+---------+------+--------+-----------+------+--------¦
¦Ralph, Jr¦29 ¦$725 ¦Herbert, Jr¦34 ¦$850 ¦
+---------+------+--------+-----------+------+--------¦
¦Robert ¦28 ¦700 ¦Faye ¦34 ¦850 ¦
+---------+------+--------+-----------+------+--------¦
¦Mary ¦28 ¦700 ¦ ¦ ¦ ¦
+-----------------------------------------------------+
On the same day, Herbert, Sr., borrowed from Faye and Herbert, Jr., the proceeds of their dividend checks on their 68 shares in the amount of $850 each and executed to each a promissory note, payable on demand, calling for 6 percent interest, which note was also kept in the office.
On the same day Ralph, Sr., borrowed from Ralph, Jr., Robert, and Mary the proceeds of their dividend checks on their 85 shares in the respective amounts of $725, $700, and $700. He executed to each his promissory note, payable on demand, and calling for 6 percent interest on those amounts. These notes were also kept in the safe at the office, in Christiansen's care.
On April 1, 1938, Herbert, Sr., caused to be transferred and placed with the others a total of 72 shares as follows:
+----------------------+
¦Transferee ¦Shares ¦
+-------------+--------¦
¦Faye ¦18 ¦
+-------------+--------¦
¦Herbert, Jr ¦18 ¦
+-------------+--------¦
¦Ralph, Jr ¦12 ¦
+-------------+--------¦
¦Robert ¦12 ¦
+-------------+--------¦
¦Mary ¦12 ¦
+----------------------+
On the same day, Ralph, Sr., caused to be transferred and the new certificates placed with the others a total of 90 shares as follows:
+----------------------+
¦Transferee ¦Shares ¦
+-------------+--------¦
¦Faye ¦18 ¦
+-------------+--------¦
¦Herbert, Jr ¦18 ¦
+-------------+--------¦
¦Ralph, Jr ¦18 ¦
+-------------+--------¦
¦Robert ¦18 ¦
+-------------+--------¦
¦Mary ¦18 ¦
+----------------------+
On April 4, 1938, a 25 percent dividend was declared, payable April 20 to stockholders of record April 10. Dividends were duly paid on the stock transferred as set forth above, as follows:
+-----------------------------------------------------+
¦ ¦Shares¦Dividend¦ ¦Shares¦Dividend¦
+---------+------+--------+-----------+------+--------¦
¦Ralph, Jr¦59 ¦$1,475 ¦Herbert, Jr¦70 ¦$1,750 ¦
+---------+------+--------+-----------+------+--------¦
¦Robert ¦58 ¦1,450 ¦Faye ¦70 ¦1,750 ¦
+---------+------+--------+-----------+------+--------¦
¦Mary ¦58 ¦1,450 ¦ ¦ ¦ ¦
+-----------------------------------------------------+
On the day following the issuance of the dividend checks, Herbert, Sr., borrowed from Faye and Herbert, Jr., the proceeds of their dividends on their total of 140 shares in the amounts of $1,750 each, and executed to each a promissory note in that amount, payable on demand and calling for 6 percent interest. These notes were likewise placed in the company safe.
On the same day Ralph, Sr., borrowed from Ralph, Jr., Robert, and Mary the proceeds of their dividends on their total holdings of 175 shares, in the respective amounts of $1,475, $1,450, and $1,450. He executed three promissory notes in those amounts, payable on demand and calling for 6 percent interest, and caused the notes to be placed in the company safe with the others.
On April 15, 1939, Herbert, Sr., caused to be transferred...
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