Beazley v. Allen

• Decision Date: 16 August 1945
• Docket Number: No. 308.,308.
• Citation: 61 F. Supp. 929
• Parties: BEAZLEY v. ALLEN, Collector of Internal Revenue.
• Court: U.S. District Court — Middle District of Georgia

61 F. Supp. 929

BEAZLEY v. ALLEN, Collector of Internal Revenue.

No. 308.

District Court, M. D. Georgia, Macon Division.

August 16, 1945.

John A. Sibley, of Atlanta, Ga., and James Mann, of Norfolk, Va., for plaintiff.

John P. Cowart, U. S. Atty., and Chas. W. Walker, Asst. U. S. Atty., both of Macon, Ga., Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and Mills Kitchin, Sp. Assts. to Atty. Gen., for defendant.

LOVETT, District Judge.

F. W. Beazley, the plaintiff, having paid additional income taxes assessed against him for the year 1941, and having unsuccessfully sought a refund, brings this suit against the Collector to recover the taxes and interest, alleging the tax was illegally exacted.

The plaintiff, his wife and son filed separate federal income tax returns for the calendar year 1941 and each paid the taxes reported therein respectively to be due. A subsequent investigation and audit of plaintiff's return by the Commissioner of Internal Revenue resulted in the assessment and collection of the additional tax, the Commissioner being of opinion income returned by the wife and son in reality was either his or under his control, and was beneficially enjoyed by him.

The issues are submitted to the court for determination, a jury having been waived.

The question presented is whether plaintiff was taxable on the interest on certain securities purchased and pledged to secure a loan in his own name, or whether this income was taxable equally to him, his wife and his son. The answer to the question is controlled by whether he singly or they jointly owned certain bonds, stocks and note of the Southern Ice Company, Inc., of Dallas, Texas, and of certain stocks of affiliated ice companies. Plaintiff claims they were bought and pledged pursuant to the terms of a family arrangement made in 1939 in which the plaintiff was authorized in writing to purchase the securities for the three in equal shares and to finance the acquisition through a pledge thereof, in his own name alone, which arrangement was undisclosed until 1941 for reasons which will be discussed.

The facts are practically without dispute. They may be summarized, as I find them, in this way.

Facts.

Plaintiff at the time of the purchase was and still is a well known and successful executive in the ice manufacturing business. Since 1930 he has been successively president and chairman of the board of directors of the Atlantic Company which owns and operates ice factories, cold storage plants and refrigerating units in seven southern states. In 1939 he was receiving an annual salary of $40,000 for his services in that capacity. At the time, however, due principally to certain reverses in real estate speculation, plaintiff was insolvent and owed $90,000 in excess of the then value of his assets. The separate estate of his wife, at that time, consisted of her home in Atlanta, Georgia, which he had given her and which had a value of approximately $30,000. The estate of his son consisted of an equity in his home in Atlanta worth approximately $6,000.

In 1936 the Associated Utilities Corporation and allied companies, holders of the securities having voting control of the Southern Ice Company, Inc., had sought to interest the plaintiff in the purchase of these securities at a substantial discount, but he had advised them that he was not interested although he did visit some of the operating properties and consulted with the representatives of the owners of the securities relative to the management. In 1938, being importuned by his wife and son to establish the son in business, and to that end to purchase an interest in some company of which he was not a managing executive (his son having found his advancement retarded in the Atlantic Company because of being his father's son), he agreed to again communicate with the owners of the securities of Southern Ice Company and ascertain whether they were still anxious to sell. His inquiry resulted in negotiations for the purchase of the properties, and in 1939 it was virtually agreed between plaintiff and the owners of the securities that they would sell, the purchase price for all of the stock and underlying securities to be $1,000,000, payable $750,000 in cash with the balance to be paid in three years, the payment of which was to be secured by a second mortgage on the securities acquired. Something in the nature of an option was given to the plaintiff on these terms. The necessity for selling was that the securities were owned by a Holding Company and under the Public Utility Holding Company Act of 1935 could not be retained. 49 Stat. 820, 15 U.S.C.A. § 79k.

An agreement was reached shortly thereafter between plaintiff and the First National Bank of Dallas, Texas, whereby the bank agreed to lend plaintiff the necessary $750,000 cash to be repaid in three annual payments of $250,000 each to become due respectively on October 30, 1939, 1940 and 1941. Notes, negotiable in form but not under seal, were later executed for the loan. This loan was to be secured by a first mortgage on all the purchased assets. This contract was in writing and is sometimes herein referred to as the tri-party contract. Similar notes were to be given to the seller of the securities for the balance of the price, secured by a second mortgage on the securities sold.

A few days after these agreements and arrangements were tentatively completed plaintiff sought the advice of his attorney in Atlanta, a member of the bar of high standing and capacity, respecting the legality and effect under the Internal Revenue Laws of a family partnership consisting of himself, his wife and his son. Pursuant to his attorney's assurance of the legality of such an arrangement if entered into in good faith, though his attorney at the same time informed him that the Treasury Department looked with disfavor on reduction of tax liability in this manner and would scrutinize with great care any contract that might be entered into, a family partnership contract for the purchase and ownership of the Southern Ice securities was drafted, and later, on April 21, 1939, was executed by the parties, under seal. They were fully informed as to its meaning and effect and the exposure each was making of his individual assets to liability if the purchase turned out to be unprofitable.

The contract provided, in part, that the plaintiff, his wife and his son each agreed to buy the securities of the Southern Ice Company and affiliates in accordance with the terms of the agreement already tentatively reached between the plaintiff and the owners of the securities and the Dallas bank, with each partner to have one-third interest in the property purchased and with each to become liable for one-third of the purchase obligation. As a matter of practical convenience all negotiations and dealings with the owners of the securities and with the lending bank were to be conducted in the name of the plaintiff alone, he being constituted their attorney-in-fact for those purposes. The securities were to be purchased in plaintiff's name, the bank loan likewise to be in his name, and notes to the bank and sellers of the securities to be in his name. No disclosure of the interest of the wife and son was to be made until such time as the bank or the sellers of the securities might exhaust the collateral put up to secure payment, and a deficiency resulted which plaintiff would be called upon to satisfy. Upon the happening of either contingency the joint liability of the wife and son was to be revealed. While acting as their agent under the contract plaintiff was to be held to a strict accountability, and he was to be reimbursed proportionately by each of them for all sums he should be called upon to pay out of his individual resources and for all expenses incurred by him in connection with the purchase of the securities and the operation of the enterprise. The purchase and financing were consummated in accordance with these agreements, slightly but not materially modified.

It was further agreed that all the income from the Southern Ice Company bonds or the other securities would go to liquidate the loans and would be credited on plaintiff's notes.

Between this contract on the one hand and the tri-party purchase and the loan contract, agreed upon in Dallas a few days before the execution of the family partnership contract but not executed until April 24, 1939, on the other, there were certain inconsistencies. The tri-party purchase contract, for example, provided:

"Purchaser hereby covenants with and warrants unto Bank that Purchaser is the legal and equitable owner of the securities.

* * * * * *

"Purchaser agrees that he will not, without the written consent of the Bank, so long as any of the indebtedness to the Bank shall remain unpaid, nor without the written consent of General Finance (the seller) so long as any of the indebtedness to General Finance shall remain unpaid, sell, transfer, assign, or otherwise dispose of the Securities or any part thereof."

The plaintiff gave as two of the reasons why the purchase and financing were carried through in his name instead of in the name of his wife, his son and himself (the son and wife being under no disability to contract for themselves), first, that it was simpler and more convenient to do it that way, and, secondly, that when prior to the purchase he informed the Dallas bank's attorney that the three were the purchasers, he was told because of the community property laws of Texas he, the bank's attorney, wanted to know nothing about a joint ownership, and he, the plaintiff, thought a word to the wise was sufficient. He mentioned it no more.

However, there was no concealment of the facts from the taxing authorities. Taxpayer's wife and son showed in their income tax returns large income for 1939, 1940 and 1941 from interest on bonds; books of account were promptly opened and contemporaneously kept showing the joint purchase,...