Breen v. CIR

• Decision Date: 26 February 1964
• Docket Number: No. 17308.,17308.
• Citation: 328 F.2d 58
• Parties: Maurice J. BREEN and Alyce J. Breen, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

328 F.2d 58 (1964)

Maurice J. BREEN and Alyce J. Breen, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17308.

United States Court of Appeals Eighth Circuit.

February 26, 1964.

Maurice J. Breen, Fort Dodge, Iowa, for petitioners.

Richard W. Perkins, Atty., Dept. of Justice, Washington, D. C., for respondent; Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson and Earl J. Silbert, Attys., Tax Div., Dept. of Justice, Washington, D. C., on the brief.

Before VAN OOSTERHOUT and BLACKMUN, Circuit Judges, and HANSON, District Judge.

BLACKMUN, Circuit Judge.

Maurice J. Breen, a cash basis taxpayer, and his wife, have petitioned for review of the Tax Court's determination of deficiencies in their federal income taxes for the calendar years 1955 and 1956. Four issues were presented to the Tax Court. Two were decided adversely to the taxpayer and are here before us. The other two were decided largely in the taxpayer's favor. Judge Mulroney's opinion, not reviewed by the entire court, is T. C. Memo 1962-230. The Commissioner filed a cross-petition for review but it has been dismissed by this court on stipulation of the parties. Commissioner v. Breen, 316 F.2d 735 (8 Cir. 1963).

The issues are:

1. Whether the taxpayer was entitled, with respect to a $4,200 fee received in 1955, to the benefit of the spreading provisions of § 1301 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 1301.

2. Whether gains the taxpayer realized in 1955 and 1956 on two trustee's certificates were ordinary income or were long term capital gain under § 1222(3), 26 U.S.C.A. § 1222(3).

The facts, most of them stipulated, are not in dispute: W. N. Merritt died in May 1928. Among his assets at his death were undivided interests in two tracts of real estate near Des Moines in Polk County, Iowa. These were heavily mortgaged. The taxpayer, a practicing lawyer, was named as executor and trustee in the decedent's will.

The assets of Merritt's estate were insufficient to meet the claims of creditors. In September 1930, a "Trust Agreement and Appointment of Attorney in Fact" was executed by the six major creditors, whose claims aggregated about $27,500, and the will beneficiaries and with a bank as trustee. This agreement provided that (a) the six creditors released their claims against the estate; (b) the trustee assumed the title to the decedent's interests in the Polk County real estate and to certain stock not significant here; (c) the release of the claims was the purchase price for that property; (d) the trustee was authorized to convey the real estate interests so received to Urbandale Coal and Acreage Company, a newly organized Iowa corporation, in exchange for half its stock; (e) the trustee was to hold that stock as trust property "and as security for notes evidencing the * * * indebtedness" to the creditors and to apply income of the trust in payment of interest and principal; (f) Urbandale was to receive, in exchange for the other half of its stock, equal undivided interests owned by attorney D. M. Kelleher in the same real estate; and (g) the trustee was to hold the trust property until the indebtedness to creditors and the interest thereon were "paid in full, and thereafter hold the same for distribution to * * * the beneficiaries under the will of said W. N. Merritt in the proportions they are entitled to share in the Estate of said Testator".¹

The trustee issued a certificate to each of the six creditors. This recited that the creditor was the owner of a stated percentage "of the equitable ownership and beneficial interest in" the stock, including preferred and common of Urbandale, held by the trustee "for the benefit of the holder or holders of this certificate and all similar certificates issued"; that "when said interest and principal have been paid in full through the disbursements of said trustee, then this certificate shall have no more value"; and that the certificate "may be assigned and transferred".

Almost 24 years later, in April 1954, the taxpayer purchased for $2,500 a trustee's certificate representing a 46.66% interest in the trust and an original creditor's claim of $12,923.92. A week later the taxpayer purchased for $150 a second certificate representing a 3.84% interest and a creditor's claim of $1,050.

Meanwhile, through a working mining company, Urbandale operated the coal mine on the Polk County land on a royalty basis until 1947. In December 1952 the Merritt estate beneficiaries gave Urbandale a quit-claim deed to the land.

During this entire period the taxpayer was president of Urbandale, Kelleher was vice-president, and Mrs. Kelleher was secretary-treasurer. These three also comprised the directorship of the corporation during its corporate life.

When the mining operations ceased, the taxpayer, as president of Urbandale, began to negotiate for the sale of the land. This pursuit proved successful and late in 1954 the land was sold. Urbandale then adopted a resolution to liquidate. In March 1955 Urbandale's shareholders approved payment of a $4,200 fee to the taxpayer and of a like fee to Mrs. Kelleher. The authorizing resolution stated that, throughout its corporate existence of more than 24 years, no compensation had ever been paid to any officer or director, and

"(1) That the said Maurice J. Breen and Mary S. Kelleher, each, be allowed the sum of $200.00 a year for their services as directors, and their services in attending board meetings and committee meetings, and other incidental work connected with the management of said corporation.

"(2) That said allowance extend over the first twenty-one years of the life of this corporation, as said twenty-one years covers the active operation of this corporation while it was engaged in the production of coal, and that said allowance to each of said named directors, to wit, Mary S. Kelleher and Maurice J. Breen, be in the sum of $4200.00 each."

The taxpayer's $4,200 fee was paid in 1955. Except for a $500 fee paid in December 1949 for legal services on a special matter, the taxpayer had received no other compensation from Urbandale.

The trustee, from 1931 through 1956, made payments to the certificate holders. These were distributions from the coal royalties and upon the liquidation. Breen received approximately $8,250 in 1955 and $13,350 in 1956 upon the two certificates he had purchased in 1954. He thereby realized gain.

1. The $4,200 payment. In his 1955 return the taxpayer claimed the benefit of § 1301 for this fee. The Commissioner ruled otherwise.

The taxpayer's argument here is that depression conditions prevailed after the inception of the Merritt estate; that the real estate, because of its location near Des Moines, had subdivision potential; that the coal royalties were intended to provide for the payment of interest, taxes, and mortgage requirements until the land could be sold advantageously; that sale of the land at a proper price was the desire of the taxpayer and Kelleher and the creditors; that the taxpayer acted as president, director, and liquidating agent of Urbandale but until 1954 had no ownership interest of any kind in that corporation; that his only purpose was to handle Urbandale so that the land could be liquidated for the certificate holders; that his duties were not those of a managing officer of a conventional corporation but were directed, instead, to working out the sale; that there are many cases under the 1939 Code which apply the statutory benefit to payments received for corporate management; and that § 1301 in this respect effected no change in the prior law.

This argument has some appeal but it is not sufficient. Furthermore, the record does not fully support it.

Those portions of § 1301 which are pertinent here are set forth in the margin.² The section's predecessor was § 107(a) of the 1939 Code, as amended.³ The statute originally appeared in § 220(a) of the Revenue Act of 1939; this was amended by § 139(a) of the 1942 Act. These pre-1954 forms of the statute all referred to compensation "for personal services" and were not embellished with the "an employment" and the "to effect a particular result" language of the 1954 version. It is said that the 1954 change was made to express more accurately the intended meaning and to eliminate tendencies to combine or to separate services as suited one's tax convenience. Senate Report No. 1622, 83d Cong., 2d Sess., pp. 445-46; House Report No. 1337, 83d Cong., 2d Sess., p. A289, U.S.Code Cong. and Adm. News 1954, p. 4025. Only in this narrow sense of clarifying "the intended meaning" is the taxpayer correct in saying that the 1954 Code did not change the earlier statute. See Wattley v. Commissioner, 275 F.2d 461, 464 (2 Cir. 1960), cert. denied 364 U.S. 864, 81 S.Ct. 107, 5 L.Ed.2d 86.

There is a suggestion in the taxpayer's brief that, because the fee was for services rendered in calendar years prior to 1954, it is the 1939 Code, rather than the 1954 Code, which applies. We cannot agree. The fee was paid in 1955 to this cash basis taxpayer. The 1954 Code, accordingly, controls. This result seems obvious from the very language of the Code and from its § 7851(a) (1) (A). See United States v. Whitney Land Co., 324 F.2d 33 (8 Cir. 1963) and McClure v. United States, 228 F.2d 322, 324 (4 Cir. 1955). We note that in at least one other case this conclusion has been taken for granted, even though part of the earnings period preceded the effective date of the 1954 Code. Frank Stephen Ranz, 31 T.C. 91 (1958), affirmed, Ranz v. Commissioner, 273 F.2d 810 (6 Cir. 1960).

The purpose of § 1301 and its predecessors was obviously to grant relief, apparently at the option of the taxpayer, United States v. Behle, 316 F.2d 134, 135 (10 Cir. 1963); Guy C. Myers, 12 T.C. 648 (1949), from tax hardship otherwise resulting upon the bunching of income received for personal services rendered over a long period of time. Chase v. Commissioner, 245 F.2d...