CIR v. Marshman

• Citation: 279 F.2d 27
• Decision Date: 31 May 1960
• Docket Number: No. 13944-13946.,13944-13946.
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Homer H. and Ina Mae MARSHMAN, Respondents. COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Gordon A. STOUFFER, Deceased, Mark A. Loofbourrow, Executor, Respondent. ESTATE of Gordon A. STOUFFER, Deceased, Mark A. Loofbourrow, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

279 F.2d 27 (1960)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Homer H. and Ina Mae MARSHMAN, Respondents.

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE of Gordon A. STOUFFER, Deceased, Mark A. Loofbourrow, Executor, Respondent.

ESTATE of Gordon A. STOUFFER, Deceased, Mark A. Loofbourrow, Executor, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 13944-13946.

United States Court of Appeals Sixth Circuit.

May 31, 1960.

Carolyn R. Just, Washington, D. C. (Charles K. Rice, Lee A. Jackson, Helen A. Buckley, I. Henry Kutz, Sharon L. King, Washington, D. C., on the brief), for Commissioner of Internal Revenue.

William F. Snyder, of Marshman, Hollington & Steadman, Cleveland, Ohio, for Homer H. and Ina Mae Marshman.

Warren E. Hacker (James C. Davis, of Squire, Sanders & Dempsey, Cleveland, Ohio, on the brief), for Estate of Gordon A. Stouffer, etc.

Before MILLER, WEICK and O'SULLIVAN,^* Circuit Judges.

SHACKELFORD MILLER, Jr., Circuit Judge.

This litigation involves the respective tax liabilities of Gordon A. Stouffer and his divorced wife Ina Mae Marshman arising out of the divorce and the property settlement therein, which was granted to the wife on June 27, 1951. Ina Mae Stouffer thereafter married Homer H. Marshman. The cases were tried on a single record in the Tax Court and the three reviews of the two decisions of the Tax Court have been consolidated on this appeal.

Gordon A. Stouffer, hereinafter called Gordon, and Ina Mae Stouffer, hereinafter called Ina Mae, were married on February 22, 1930. This marriage was dissolved by an absolute divorce decree on May 24, 1934. Thereafter, Gordon asked Ina Mae to remarry him, which Ina Mae agreed to do provided Gordon would provide her with some financial security. On March 6, 1937, as part of this reconciliation, Gordon transferred to Ina Mae 2,000 shares of the Class B stock of The Stouffer Corporation, of which he was Vice-President and General Manager, which had an adjusted basis in his hands of $5.00 per share and which were then of the fair market value of $20.00 per share, or an aggregate value of $40,000.00. As part of the transaction Ina Mae executed to Gordon the following option:

"In Consideration of One Dollar ($1.00), receipt of which is hereby acknowledged, I hereby give and grant to Gordon A. Stouffer the right and option to purchase from me at any time prior to the first day of January, 1967, two thousand (2000) shares of the Class B Common Stock of The Stouffer Corporation at Twenty Dollars ($20.00) per share, payable in cash. Should any stock dividends be paid on said stock the price herein stipulated shall include such stock dividends. All cash dividends shall belong to the undersigned unless and until said option shall have been exercised."

Ina Mae also agreed to execute an irrevocable proxy in favor of Gordon to vote the stock. The next day, March 7, 1937, Gordon and Ina Mae were remarried.

During the years after 1937 and up until 1951 the Stouffer Company engaged in several transactions amounting to capital reorganizations involving stock dividends, stock splits and changes in description and denomination of exchanged stock. In these transactions the 2,000 Class B shares in the name of Ina Mae in 1937 became 20,000 shares of $2.50 par value common stock which Ina Mae held in 1951.

Thereafter, Gordon and Ina Mae again experienced marital difficulties and each retained counsel in anticipation of Ina Mae's instituting suit for divorce. During the latter part of 1950 and early part of 1951 counsel for Gordon and counsel for Ina Mae entered into negotiations for an agreement to be submitted to the court for approval in the event of such a divorce, which agreement was executed by the parties on May 10, 1951. On May 11, 1951, Ina Mae filed petition for absolute divorce in Court of Common Pleas of Cuyahoga County, Ohio, and on June 27, 1951, the said court entered a decree of divorce. The decree incorporated the agreement of May 10, 1951. Gordon died June 6, 1956.

The following paragraph of the May 10, 1951, agreement gives rise to the issues involved in this litigation:

"4. Gordon agrees that, upon the entry of such decree of divorce, any interest which he, or any other person, might, but for this agreement, have in any shares of stock of The Stouffer Corporation now registered in the name of Ina Mae, shall forthwith terminate, and Ina Mae shall continue to own, hold and vote such stock free of any claim by Gordon or anyone claiming by, through, or under him."

The fair market value of the 20,000 shares of the $2.50 par value common stock in the Stouffer Company held by Ina Mae on June 27, 1951, was $20.00 a share.

With respect to the income tax of Gordon for the year 1951, the Commissioner determined a deficiency in the amount of $90,077.75 on the ground that Gordon realized a taxable gain in the amount of $359,999.00 upon the surrender of the option in the divorce settlemen and decree. This was based upon the ground that Gordon's option to repurchase for $40,000.00 the 20,000 shares of stock held by Ina Mae, which had a fair market value of $400,000.00, was worth the difference between those two amounts, namely, $360,000.00, less the consideration of $1.00 which Gordon paid at the time the option was executed. The deficiency was based upon the treatment of such taxable gain as a long-term capital gain. Later, however, the Commissioner took the position that the $359,999.00 gain constituted a gain attributable to the failure to exercise an option to buy property which, under Section 117(g) (2) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 117(g) (2), constituted a short-term capital gain rather than a long-term capital gain. Treating the gain as a short-term capital gain, the Commissioner asserted an additional deficiency of $233,418.48.

The Tax Court sustained the Commissioner's ruling that Gordon realized taxable gain in the amount of $359,999.00, but held that this gain was a long-term capital gain and not, as contended by the Commissioner, a short-term capital gain. The Tax Court accordingly held that there was a deficiency in Gordon's income tax for the taxable year 1951 in the amount of $90,020.75, rather than in the larger amount. In appeal No. 13,945 the Commissioner seeks a review of the refusal of the Tax Court to sustain the additional deficiency of $233,418.48 which would result from a treatment of the gain as a short-term capital gain. In appeal No. 13,946 Gordon's estate seeks a review of the Tax Court's decision determining the deficiency in the amount of $90,020.75 or in any amount.

Appeal No. 13,944 involves the income tax liability of Ina Mae for the years 1952 and 1953 based upon the following additional facts. In 1952 Ina Mae sold 100 shares of the Stouffer stock, which was part of the 20,000 shares referred to above. In 1953 she sold 4,750 shares of this stock. The issue in this phase of the litigation is the correct basis of this stock in the hands of Ina Mae for the purpose of determining gain by her upon these sales. Based upon the Tax Court's ruling in the case of Gordon's estate that Gordon had realized a taxable gain of $359,999.00 in surrendering the option, Ina Mae's basis in the 20,000 shares includes the amount of $359,999.00. The deficiencies held by the Tax Court to exist in Ina Mae's tax for the years 1952 and 1953 were based upon this ruling. The Commissioner takes the position that the decision of the Tax Court on this phase of the case is correct but, realizing that should this Court decide against the government on the taxpayer's appeal in appeal No. 13,946, then Ina Mae's basis in the stock sold by her would in such event be accordingly decreased and the deficiencies would be larger. Accordingly, in order to protect the revenue in the event of a reversal in appeal No. 13,946, being the review sought by Stouffer's estate, the Commissioner has sought a review on this phase of the case by appeal No. 13,944.

The following sections of the Internal Revenue Code of 1939 are applicable. Section 22(a), 26 U.S.C.A. § 22(a), provides that gross income includes gains, profits, and income from sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property. Section 22(f) provides, "In the case of a sale or other disposition of property, the gain or loss shall be computed as provided in section 111." Section 111 (a), 26 U.S.C.A. § 11(a), provides, "The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113(b) for determining gain, * * *." Section 111(b) provides, "The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received."

The exact question presented has not heretofore been considered by this Court. A closely analogous question has had the consideration of the Board of Tax Appeals and the Courts of Appeals for the Second and Third Circuits.

In L. W. Mesta, 42 B.T.A. 933, the taxpayer, while a divorce action by his wife was pending against him, entered into a written agreement with his wife providing for a property settlement. Pursuant to the terms of the agreement the taxpayer transferred to his wife certain securities having a value in excess of their cost to him and she surrendered all of her rights to support and maintenance and to share in his property at his death. The Board held that the rights received by the taxpayer under the agreement had no fair market value, and the taxpayer realized no taxable income as a result of the transaction. The Board pointed out that since the taxpayer received no money in exchange for the securities, the taxable gain under Section 111, Internal Revenue Code, resulting from the transaction would depend upon "the fair market value of the property (other than...