Chisholm v. Commissioner of Internal Revenue

• Decision Date: 08 July 1935
• Docket Number: No. 417.,417.
• Citation: 79 F.2d 14
• Parties: CHISHOLM v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

79 F.2d 14 (1935)

CHISHOLM v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 417.

Circuit Court of Appeals, Second Circuit.

July 8, 1935.

Joseph H. Morey, of Buffalo, N. Y. (Morey & Schlenker, of Buffalo, N. Y., of counsel), for appellant.

Frank J. Wideman, Asst. Atty. Gen., and James W. Morris, John Mac C. Hudson, Lucius A. Buck, and J. P. Jackson, Sp. Assts. to Atty. Gen., for appellee.

Before L. HAND, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

L. HAND, Circuit Judge.

Chisholm, the petitioner, with four others, owned all the shares of stock in the Houde Engineering Corporation. On September 26, 1928, all five gave a thirty days' option upon these shares to Krauss & Co., which that company on October 11th agreed to take up; the option could only be "exercised by the payment of cash before its expiration." The record does not show whether Chisholm and his brother owned any other property than 300 shares each of Houde stock, but for some six or eight months before October, 1928, they had been discussing the formation of a partnership to manage their property in common, whatever it was; the brother wished to travel and disliked business; this proposal had nothing to do with taxation. The Houde shares had gone up very much in value and their attorney had told them that by forming a partnership they might postpone, and perhaps altogether escape, the taxes which would otherwise become due upon the sale, and for this reason they chose this time to form a partnership and did so on October 22d. To it they on the same day transferred the shares, its only capital, giving Krauss & Co. notice that this firm, not themselves, would perform the contract. Krauss & Co.'s assignee took up the option on the 24th, and the firm received the money. The firm was not then dissolved, nor has it been since; the brothers have continued to hold its assets in common as partners; they have bought and sold securities with the capital; they have not distributed any principal; whether they have distributed any earnings does not appear. The commissioner assessed a deficiency against each partner on the theory that he had realized a gain upon his holdings of Houde shares and the Board affirmed the ruling. Chisholm appealed.

The commissioner first argues that the sale was made when Krauss & Co. notified the five sellers that it would take up the option. Clearly this was not the case; the option was an offer to sell, not to contract to sell; it required payment, not a promise to pay; and the notice, not corresponding with the offer, was legally a nullity. The sellers became bound only on the 24th when Krauss & Co.'s assignees paid the price. At that time the firm had already been formed and the shares had been transferred to it. We held in Helvering, Com'r, v. Walbridge, 70 F.(2d) 683, that when partners transfer property to the firm which in turn sells it, the taxation of any appreciation in its value before the transfer must await dissolution. That case would be concededly on all fours, were it not that the firm was formed confessedly to escape taxation. The Board thought that for this reason the transaction was not "bona fide," and that the business of the firm was not business properly speaking at all. The commissioner believes that the situation falls within Gregory v. Helvering, 293 U. S. 465, 55 S. Ct. 266, 79 L. Ed. 596. It is important to observe just what the Supreme Court held in that case. It was solicitous to reaffirm the doctrine that a man's motive to avoid taxation will not establish his liability if the transaction does not do so without it. It is true that that court has at times shown itself indisposed to assist such efforts, Mitchell v. Board of Commissioners of Leavenworth County, 91 U. S. 206, 23 L. Ed. 302, and has spoken of them disparagingly, Shotwell v. Moore, 129 U. S. 590, 9 S. Ct. 362, 32 L. Ed. 827; but it has never, so far as we can find, made that purpose the basis of liability; and it has often said that it could not be such. The question always is whether the transaction under scrutiny is in fact what it appears to be in form; a marriage may be a joke; a contract may be intended only to deceive others; an agreement may have a collateral defeasance. In such cases the transaction as a whole is different from its appearance. True, it is always the intent that controls; and we need not for this occasion press the difference between intent and purpose. We may assume that purpose may be the touchstone, but the purpose which counts is one which defeats or contradicts the apparent transaction, not the purpose to escape taxation which the apparent, but not the whole, transaction would realize. In Gregory v. Helvering, supra, 293 U. S. 465, 55 S. Ct. 266, 79 L. Ed. 596, the incorporators adopted the usual form for creating business corporations; but their intent, or purpose, was merely to draught the papers, in fact not to create corporations as the court understood that word. That was the purpose which defeated their exemption, not the accompanying purpose to escape taxation; that purpose was...