Apt v. Birmingham

• Decision Date: 25 March 1950
• Docket Number: Civ. No. 424.
• Citation: 89 F. Supp. 361
• Parties: APT v. BIRMINGHAM.
• Court: U.S. District Court — Northern District of Iowa

89 F. Supp. 361

APT v. BIRMINGHAM.

Civ. No. 424.

United States District Court N. D. Iowa, Central Division.

March 25, 1950.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Loyal E. Keir, Des Moines, Iowa, John H. Mitchell, Fort Dodge, Iowa, for plaintiff.

Tobias E. Diamond, U. S. Dist. Atty., Sioux City, Iowa, William B. Danforth, Asst. U. S. Atty., Sioux City, Iowa, George R. Parsons, Sp. Asst. to Atty. Gen., for defendant.

GRAVEN, District Judge.

An action by the plaintiff for the recovery of federal income taxes claimed to have been erroneously and illegally assessed and collected for the year 1944. Apt Motors, Inc., was an Iowa corporation which on September 23, 1944, was operating, and for some time prior thereto had operated, a Ford automobile agency in the city of Fort Dodge, Iowa. On September 23, 1944, there were 150 shares of the capital stock of that corporation outstanding. Prior to that date all of the capital stock of that corporation was owned by the plaintiff, Elmer E. Apt. On September 23, 1944, the plaintiff, Elmer E. Apt, transferred 73 shares of the stock in that corporation to his wife, Melva R. Apt. These 73 shares, together with two other shares transferred to her by him, gave her a total of 75 shares, or one-half of the stock in the corporation. Apt Motors, Inc., was dissolved on September 30, 1944, pursuant to action taken at a special meeting of the stockholders on September 29, 1944. Under date of September 30, 1944, the plaintiff, Elmer E. Apt, and his wife, Melva R. Apt, entered into articles of partnership for the operation of a Ford automobile agency in the city of Fort Dodge under the name of Apt Motors. Elmer E. Apt and Melva R. Apt filed separate income tax returns for the year 1944 in which each of them reported a capital gain of $5,851.12 from the dissolution of Apt Motors, Inc. The examining officer for the Bureau of Internal Revenue claimed that the entire capital gain from the dissolution of Apt Motors, Inc., was taxable to Elmer E. Apt and a deficiency assessment was made against him based on such claim. The claimed deficiency, after some adjustments not here in controversy, was in the sum of $1,273.11. On October 19, 1948, Elmer E. Apt paid the said sum of $1,273.11 together with interest thereon in the amount of $274.35, or a total of $1,547.46. On October 20, 1948, Elmer E. Apt filed a claim for refund upon which no action was taken during the ensuing six months' period. On April 27, 1949, Elmer E. Apt brought this action to recover the sum of $1,547.46, together with interest and costs as provided by law. The taxability of the income of the partnership known as Apt Motors, which operated the automobile agency following the dissolution of the corporation, is not involved in this case. The only question to be decided in this case is whether the entire capital gain upon the dissolution of Apt Motors, Inc., was or was not properly taxable to Elmer E. Apt. The defendant Collector makes two contentions: (1) that the transfer of shares of stock by Elmer E. Apt to Melva R. Apt on September 23, 1944, was not a valid gift; (2) that even if it were a valid gift the entire capital gain was nevertheless properly taxable to Elmer E. Apt. The plaintiff contends that the record in this case does not support either contention.

On September 23, 1944, Elmer E. Apt was approximately 44 years of age, and his wife was approximately 43 years of age. He and Melva R. Apt were married in 1935. He had been previously married, but that marriage had been terminated by a divorce in 1934. Two sons had been born of the previous marriage who in 1944 were still minors. There are no children of the second marriage. Melva R. Apt prior to her marriage to Elmer E. Apt had worked for the Piggly-Wiggly Company at Wichita, Kansas, for a period of two years and for the Railway Express Agency at Joplin, Missouri, for nine years. Her position with the Railway Express Agency was that of stenographer-clerk, and her average earnings were about $120 a month. She testified that her employment with the Railway Express Agency had given her considerable experience in regard to matters relating to personnel, collections and office administration.

Elmer E. Apt had been connected with the automobile business most of his adult life, but for some time prior to October, 1937, he had been engaged in employment not connected with that business. Melva R. Apt was of the view that he was best fitted for work connected with the automobile business and encouraged him to go back into that type of work. In October, 1937, an opportunity presented itself for him to become associated with Cutchall Motors, Inc., a corporation that operated Ford automobile agencies in Fort Dodge, Newton, and Grinnell, Iowa. On October 21, 1937, he and Melva R. Apt moved to Fort Dodge, Iowa, where he became associated with Cutchall Motors, Inc., as vice-president of the corporation and manager of the Fort Dodge agency. He replaced one Alan Bryant who was transferred to the Grinnell agency.

In October, 1937, Elmer E. Apt acquired one share of stock in Cutchall Motors, Inc., at a cost of $100. At that time the other shares of stock of Cutchall Motors, Inc., were held as follows: Alan Bryant, 10 shares; Dwight Stiles, 10 shares; Mrs. Olive Cutchall, 279 shares. Some time after January 1, 1938, Alan Bryant left the employ of Cutchall Motors, Inc., and Elmer E. Apt purchased the ten shares of stock owned by him for the sum of $950. Payment for the one share of stock and the ten shares of stock purchased by Elmer E. Apt was made by checks signed by him drawn on funds supplied by Melva R. Apt. In addition to a sum of about $1,000 which she had received in settlement for the loss of an eye in an earlier automobile accident, Melva R. Apt had saved some money from her employment prior to her marriage. In October, 1937, Elmer E. Apt had assets consisting of a 1937 Pontiac automobile and some shares of stock which were sold in 1939 for between $550 and $650.

In May, 1938, the plaintiff entered into a contract with Mrs. Olive Cutchall to purchase her 279 shares of stock for the sum of $24,116. For the purchase price of that stock Elmer E. Apt gave Mrs. Cutchall a note for approximately $6,000 and borrowed the balance from the Pioneer Finance Company of Fort Dodge, Iowa. The indebtedness to that company was evidenced by three notes. One of the three notes was in the sum of $10,000 and was secured by a pledge of 154 shares of Cutchall Motors, Inc., stock. The other two notes were unsecured. The note given by him to Mrs. Cutchall was secured by another block of Cutchall Motors, Inc., stock. The note of the plaintiff for $10,000, secured by the pledged stock, was repledged by the Pioneer Finance Company to the State Bank of Fort Dodge, Iowa, as security for its obligation or obligations to that bank. Early in 1939 that bank demanded, as a condition to the release of the $10,000 note, that Elmer E. Apt pay it the face value of the pledged stock. A compromise was reached between that bank and Elmer E. Apt whereby the pledged stock would be returned upon the payment of $11,000. In the meantime the Pioneer Finance Company had ceased operations, and its receivables were purchased from the State Bank of Fort Dodge by Securities Acceptance Corporation of Omaha, Nebraska. On July 6, 1939, Elmer E. Apt secured a loan of $17,765.34 from Securities Acceptance Corporation with which he paid off the State Bank of Fort Dodge and also paid Mrs. Cutchall the balance due on his note to her. The loan of $17,765.34 was secured by a pledge of 300 shares of stock of Cutchall Motors, Inc. The 300 shares so pledged constituted all the outstanding stock of Cutchall Motors, Inc., at that time. Starting August 15, 1939, Elmer E. Apt made payments of $250 a month on his loan to Securities Acceptance Corporation. Those payments were made out of his salary from Cutchall Motors, Inc. In March, 1942, Elmer E. Apt paid Securities Acceptance Corporation the balance due on his capital loan of $17,765.34 with funds borrowed by him from Cutchall Motors, Inc., which had in turn secured such funds by loans from Securities Acceptance Corporation, the loans being secured by used cars. By this transaction a corporate obligation was substituted for Elmer E. Apt's personal obligation, and the 300 shares of capital stock of Cutchall Motors, Inc., were released to Elmer E. Apt. Shortly thereafter he repaid Cutchall Motors, Inc., by retiring 150 shares of its stock at $100 per share. Thereafter the capital stock of Cutchall Motors, Inc., consisted of 150 shares.

In 1939 Elmer E. Apt transferred one share of stock in Cutchall Motors, Inc., to Melva R. Apt, and some time later he transferred one share of stock in the same company to one Cleve Foster, an employee. The articles of incorporation required that officers of the corporation also be stockholders therein, and these transfers were made so that the transferees might act as officers and directors of the corporation. Elmer E. Apt was at all times the real owner of those shares.

In March, 1942, Elmer E. Apt was inducted into the military service of the United States. He served in this country until November, 1942, when he was sent overseas. He returned to Fort Dodge following the completion of his military service in the forepart of September, 1944. His visits to Fort Dodge during his period of service in this country were brief. Prior to Elmer E. Apt's induction into the service the participation of Melva R. Apt in the business of the corporation had been limited to discussions with him as to receipts and expenditures, personnel, business policies and business problems. After the entry of Elmer E. Apt into the military service Melva R. Apt spent a part of nearly every day at the place of business of the corporation and continued to do so until Elmer E. Apt returned to Fort Dodge in September, 1944. Before he departed for overseas service ...