Hellman v. Glenn
| Decision Date | 13 January 1941 |
| Docket Number | No. 2223.,2223. |
| Parties | HELLMAN v. GLENN, Collector of Internal Revenue. |
| Court | U.S. District Court — Western District of Kentucky |
Ben F. Washer, of Louisville, Ky., for plaintiff.
Eli H. Brown, III, U. S. Dist. Atty., of Louisville, Ky., and David C. Walls, Asst. U. S. Dist. Atty., of Hardinsburg, Ky., for defendant.
Sidney L. Hellman filed this action against the Collector of Internal Revenue to recover $2,565.31 with interest as additional income tax for the year 1935 assessed by the Commissioner of Internal Revenue and paid under protest. The action was timely filed after application for refund was denied. Hellman has died during the pendency of the action and it has been revived in the name of Clarence Hellman, executor of the estate of Sidney L. Hellman, deceased.
Sidney L. Hellman was a large stockholder and director in Schenley Distillers Corporation. Prior to May 18, 1935, the market price of the common stock of that corporation had suffered a decline and Hellman became of the opinion that its market price would materially increase during the coming months and the stock was accordingly a good purchase. On May 18, 1935 Hellman wrote the following letter to a firm of Louisville brokers:
The brokers executed this order on May 22, 1935, in the name of Sidney L. Hellman, trustee. The purchase price was $41,212.50. The stock was later sold at intervals between July 19, 1935, and September 9, 1935, at sale prices totalling $50,472.68. The net profit on the transaction after charges was $8,757.74. This was paid by the brokers direct to the following parties by checks to their respective orders:
C. E. Selvage .............. $2,919.25
Dr. Silas Starr ............ 875.78
Mildred Loveman ............ 875.78
Maude Starr ................ 875.78
Ray Hellman ................ 875.77
Clare Hellman .............. 875.77
Charles S. Nahm ............ 875.77
Clarence J. Hellman ........ 583.84
_________
Total .................... $8,757.74
Each of these eight parties included their respective amounts in their individual income tax returns for the year 1935 and paid the tax thereon. The account at the office of the broker was carried as a margin account in the name of Sidney L. Hellman, trustee, and was secured by 1,200 shares of Schenley stock owned by Sidney Hellman and pledged by him on the account, in addition to the pledge of the stock so purchased. C. E. Selvage was a close business associate of Sidney Hellman, and the other seven parties were relatives by blood or marriage of Sidney Hellman. The Commissioner of Internal Revenue contended that the entire profit realized from the transaction was income to Sidney Hellman in the year 1935 and the distribution to the parties above referred to in their respective amounts was by way of gift. The additional assessment was accordingly made and the resulting tax paid under protest.
The general principles of law applicable to this case are not in dispute. We agree with the general rules laid down by the authorities cited by the defendant holding that earned income is taxed to and must be paid by the one who earns it; that unearned income is taxed to the one who owns the property or right that produces it; that no device or arrangement however shrewdly and cunningly contrived can make future earnings taxable to any but the real owner thereof, nor make future income from property taxable to any but the owner of the right or title from which the income springs; that the assignment of future profits to be earned by the assignor does not divest the assignor of the tax liability due thereon; that profits from the sale of securities, which the taxpayer intended to give to others but did not accomplish because of retention of control over them, are taxable to the would be donor; that the income from a revocable trust is taxable to the creator of the trust instead of the beneficiary; and that a gift of income earned by a taxpayer, even though within the same taxable year in which the income was earned and received does not relieve the person earning the income and disposing of it by gift of the payment of the income tax thereon. Lucas, Commissioner, v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731; Weil v. Commissioner, 5 Cir., 82 F.2d 561; Noel, Collector, v. Parrott, 4 Cir., 15 F.2d 669; Saenger v. Commissioner, 5 Cir., 69 F.2d 631; Jackson v. Commissioner, 4 Cir., 64 F.2d 359; Carkhuff v. Commissioner, 6 Cir., 83 F.2d 626, 106 A.L.R. 796; Reinecke v. Smith, 289 U.S. 172, 53 S.Ct. 570, 77 L.Ed. 1109.
If the foregoing transaction is to be construed as an individual transaction on the part of Sidney Hellman and as an assignment of future profits by him to the eight designated parties, or as a gift by him of the proceeds after being realized to the eight designated parties, or as an incomplete gift of the securities purchased, or as a revocable trust, then the Commissioner's ruling is correct, and the assessment properly levied. The plaintiff, however, contends that it was not an individual transaction of Sidney Hellman, but was a joint enterprise by the eight parties named, acting upon the recommendation of Sidney Hellman in which Sidney Hellman merely acted as their agent, and that the profit realized was therefore properly a separate profit of the respective p...
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