Carter v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 86558.
| Decision Date | 11 November 1937 |
| Docket Number | Docket No. 86558. |
| Citation | 36 BTA 853 |
| Parties | W. T. CARTER, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
G. K. Munson, Esq., and Palmer Hutcheson, Esq., for the petitioner.
James H. Yeatman, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $3,554.61. The sole issue submitted for decision is whether or not respondent erred in holding that profits realized from the sale in the taxable year of certain stock, and stock issued thereon as stock dividends, standing in the name of petitioner, constituted separate property of petitioner instead of community property of petitioner and his wife.
FINDINGS OF FACT.
Petitioner is a citizen of the State of Texas. He was married to Lillie N. Carter in Houston on November 29, 1910, and the marital status has continued since that time in Texas. Petitioner's income tax return for the year 1931 was filed with the collector of internal revenue for the first district of Texas, at Austin.
The W. T. Carter Lumber & Building Co. was incorporated in 1910 with an authorized capital stock of $250,000. Of this stock petitioner acquired 694 shares as follows:
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Date | How acquired | Certificate | Shares
| | No. |
--------------------------|--------------------------------------|--------------|---------
May 5, 1910 _____________ | By gift from father ________________ | 9 | 100
May 5, 1910 _____________ | ____do______________________________ | 10 | 100
May 5, 1910 _____________ | ____do______________________________ | 11 | 100
May 5, 1910 _____________ | ____do______________________________ | 12 | 100
Nov. 6, 1918 ____________ | ____do______________________________ | 33 | 250
Dec. 31, 1918 ___________ | By purchase ________________________ | 45 | 44
| | ------------ | ________
Total _____________ | ____________________________________ | ____________ | 694
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On January 11, 1921, the capital of the company was increased to $1,000,000 and a stock dividend of 160 percent (1.6 shares for each old share) was declared on the basis of earned surplus and undivided profits. This entitled petitioner to receive 1110.4 shares as a stock dividend. At the same time he purchased 639 6/10 shares. He then turned into the corporation the certificates, Nos. 9, 10, 11, 12, 33, and 45, covering the 694 shares previously acquired and received the following new certificates: January 14, 1921, certificate No. 3, for 2,000 shares; January 14, 1921, certificate No. 4, for 444 shares; made up as follows:
Old shares ______________________________________ 694
Dividend shares _________________________________ 1,110.4
New shares purchased ____________________________ 639.6
_________
Total _____________________________________ 2,444.0
On April 22, 1924, petitioner purchased three shares of the company's stock from T. H. Ball and acquired 28 shares by gift from his mother, and as of January 13, 1925, a total of 2,475 shares had been issued to petitioner and stood in his name.
On January 13, 1925, the capital of the company was increased to $2,000,000, and a stock dividend of 80 percent was declared, on the basis of earned surplus and undivided profits. This entitled petitioner to receive 1,980 shares as a stock dividend on the 2,475 shares held by him at the time. He also at the same time purchased 25 additional shares. He then turned in to the corporation the certificates covering the 2,475 shares and received the following new certificates:
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Date | Certificate No. | Shares
---------------------------------------------|-----------------|---------
Jan. 13, 1925 ______________________________ | 3 | 1,000
Do ____________________________________ | 4 | 1,000
Do ____________________________________ | 5 | 1,000
Do ____________________________________ | 6 | 1,000
Do ____________________________________ | 7 | 480
| _______________ | ________
Total ________________________________ | _______________ | 4,480
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made up as follows:
Shares owned (1/13/25) ___________________________________ 2,475
Stock dividend ___________________________________________ 1,980
Stock purchased __________________________________________ 25
______
Total _____________________________________________ 4,480
At no time has the corporation had any paid-in surplus.
Subsequent to January 13, 1925, petitioner acquired the following additional shares of the company's stock:
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Date | How acquired | Certificate | Shares
| | No. |
--------------------------------|---------------------------|-------------|--------
Oct. 10, 1927 _________________ | By purchase _____________ | 27 | 27
Jan. 1, 1928 __________________ | ____ do _________________ | 29 | 70
Aug. 15, 1929 _________________ | ____ do _________________ | 31 | 50
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All stock of the company acquired by petitioner by purchase or otherwise was issued and held in his name until sold.
In 1930 petitioner sold 500 shares of the company's stock, and in 1931 sold 500 additional shares thereof, these sales being made out of certificates 7, 31, and 6.
In 1926 petitioner opened a set of books for the purpose of establishing a record of his separate property and the community property of himself and wife. This record showed 678 shares of the stock involved herein listed as petitioner's separate property, and the remainder of 3,802 shares as community property, the latter including all shares of stock bought after marriage and the shares received as stock dividends during marriage.
Petitioner never considered or treated the stock dividends as other than community property, as reflected by his records. He classified alike the purchases after marriage and the stock dividends issued after marriage. All stock purchased after marriage was purchased with community funds. It was petitioner's intention, regardless of the legal effect of the stock dividends, that the stock so issued should be owned by himself and his wife as community property. Profits derived from prior sales of such stock were reported for tax purposes as community income. Petitioner devoted the major portion of his time to the conduct of the operations of the corporation referred to above.
Petitioner and his wife since the date of their marriage in 1910 and at all times have been residents of the State of Texas. Prior to his marriage petitioner acquired by gift from his father 650 shares of stock of the W. T. Carter Lumber & Building Co., a Texas corporation. Subsequently (but prior to 1930) petitioner acquired additional shares of stock of the same company (1) by purchase with community funds, (2) by way of stock dividends, and (3) by gift from his mother. In 1930 petitioner sold 500 shares of the stock, and in the taxable year 1931 sold at a profit 500 additional shares.
The separate acquisitions of stock by petitioner having been merged and commingled in the certificates later issued for larger numbers of shares, including the stock dividends, apparently respondent, applying the first in, first out rule, treated the sale of 500 shares in 1930 as having been made out of the 650 shares first acquired by petitioner by gifts from his father, and the 500 shares sold in the taxable year as consisting of the remaining 150 shares of the original gifts, and 350 shares issued as stock dividends. Respondent further held that the stock dividends constituted separate property of petitioner, and so taxed the profit derived from the sale in 1931 as separate income...
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