Hudspeth v. United States, 72-1106.

• Decision Date: 21 December 1972
• Docket Number: No. 72-1106.,72-1106.
• Citation: 471 F.2d 275
• Parties: Edwin W. HUDSPETH and Maxine G. Hudspeth, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

471 F.2d 275 (1972)

Edwin W. HUDSPETH and Maxine G. Hudspeth, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 72-1106.

United States Court of Appeals, Eighth Circuit.

Submitted October 18, 1972.

Decided December 21, 1972.

Carleton D. Powell, Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant.

Charles H. Shaffar, St. Ann, Mo., for plaintiffs-appellees.

Before LARAMORE, United States Court of Claims Senior Judge, and BRIGHT and ROSS, Circuit Judges.

LARAMORE, Senior Judge.

This appeal presents the question of whether the taxpayer was entitled to exclude from his gross income the liquidation dividends on stock which he donated to various tax-exempt organizations before actual payments of proceeds were received but after the shareholders had fully adopted a plan of complete liquidation and the corporation had sold its principal assets.

The taxpayer, Edwin W. Hudspeth,¹ owned 81.5 percent (815 of 1,000 shares outstanding) of Maginn-Martin-Salisbury, Inc. (hereinafter "MMS"), a Missouri corporation which operated a mortgage banking business in St. Louis, Missouri. Taxpayer's two sons owned the balance of the outstanding stock. The Board of Directors consisted of taxpayer, his wife and one of his sons, and the taxpayer was the principal corporate officer, occupying the positions of president and treasurer. Pursuant to resolutions adopted by the directors, and ratified by the stockholders at two special meetings on April 10, 1964, a plan of complete liquidation of MMS was adopted. With a view to conforming with section 337 of the Internal Revenue Code of 1954, the plan provided, inter alia, that MMS should "proceed to dissolve voluntarily and wind up its affairs and liquidate * * * as soon as practicable after adoption of this plan, but not later than March 31, 1965." In accordance with this plan, MMS entered into a contract on June 17, 1964, with General Mortgage Company of St. Louis (hereinafter "GM"), whereby MMS agreed to sell its mortgage servicing contracts to GM for the sum of $135,000.

On January 21, 1965, taxpayer donated 67 shares of MMS stock to nine tax-exempt charitable and educational organizations. The taxpayer's basis in these 67 shares was $884. Following these donations, taxpayer owned 74.8 percent of the outstanding MMS stock. Between February 10, 1965 and March 31, 1965 the net assets of MMS, having a value of $328,892.33, were distributed to the shareholders in exchange for their MMS stock. The 67 donated shares were redeemed on February 10, 1965 for $22,110. Pursuant to the requisite Missouri laws, MMS filed Articles of Dissolution and Liquidation with the state of Missouri on March 12 and March 29, 1965, respectively. On April 1, 1965, MMS's Certificate of Dissolution was issued by the Secretary of the State of Missouri.

On their 1965 income tax return, the taxpayer and his wife claimed a charitable deduction of $24,610 of which $22,110 was attributable to the 67 donated shares. The taxpayer did not report the gain resulting from the liquidating distributions on these shares inasmuch as he believed that the donation of the stock prior to the actual receipt of the consequential proceeds insulated him from the incidence of taxation thereon.

Upon examination of taxpayer's return the Commissioner of Internal Revenue did not question the deductions for charitable contributions, but he determined that the gain on the 67 donated shares should have been included in the taxpayer's 1965 income tax return, as the transfers constituted anticipatory assignments of the liquidation proceeds. Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930); Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940). Taxpayer paid the resulting deficiency and brought a timely suit for refund in the U. S. District Court for the Eastern District of Missouri. The District Court, Honorable H. Kenneth Wangelin presiding, sustained the taxpayer's claim in an opinion reported at 335 F.Supp. 1401 (1971). The Government brings this appeal for review of that judgment.

The District Court, relying in part on Jacobs v. United States, 280 F.Supp. 437 (S.D.Ohio 1966), aff'd per curiam, 390 F.2d 877 (6th Cir. 1968), found the crucial issue to be whether the taxpayer was "absolutely and indefeasibly entitled in the immediate future to the liquidating distributions on the stock donated by him." Hudspeth v. United States, 335 F.Supp. 1401, 1404. The court saw determination of this issue as being dependent on whether the plan of complete liquidation adopted on April 10, 1964, was irrevocable or irreversible under Missouri state law at the time of taxpayer's gifts on January 21, 1965. Based on interpretations of the applicable Missouri statutes, the court concluded that the dissolution proceedings of MMS did not become irreversible until the Articles of Dissolution were filed on March 12, 1965, and thus held that the taxpayer was not taxable on the resulting gain attributable to the 67 donated shares.

In viewing the applicable Missouri statutes we find the lower court's interpretations to be untenable as the dissolution proceedings were, in fact, "started" at the time of the shareholders' approval of the plan of complete liquidation. As a result, the liquidation would have been irreversible as of April 10, 1964, under the laws of Missouri in effect at the time of this dissolution, and on the basis of the test outlined by the District Court we would have to conclude that the taxpayers' gifts were anticipatory assignments of the inherent gains and thus taxable to him.

However, a review of the pertinent Federal law in this area convinces us that we must further reject the lower court's finding that the crucial question in this case is, in effect, a determination of whether it was technically possible under Missouri law for the taxpayer to abandon the impending dissolution between the time of his gift and the time of the actual liquidation distributions. While Jacobs suggests such a test, we cannot concur in its application herein. Instead, we must sustain appellant's contention that the realities and substance of the events must govern our determination, rather than formalities and remote hypothetical possibilities. Corliss v. Bowers, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916 (1930); Howard Cook, 5 T.C. 908 (1945).

As noted by the lower court, the taxpayer relies primarily on the case of Winton v. Kelm, 122 F.Supp. 649, 651-652 (D.C.Minn.1954) wherein the court stated:

* * * Where income is the product of property and taxpayer makes a complete and irrevocable transfer of such property, retaining no direct or collateral control over the receipt of its income, the incidence of tax shifts to the transferee as to income subsequently earned or realized upon such asset. Blair v. Commissioner. 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465 (1937); emphasis added.

We find taxpayer's reliance on the foregoing misplaced for it, in fact, serves to emphasize the two crucial points which distinguish his situation from the circumstance which would insulate him from taxation. That is, first, the fact that he still retained substantial direct control over the liquidation proceeds, which were the imminent concomitant of the stock, through his control of the corporation. Secondly, it raises the issue of whether the liquidation proceeds were "subsequently earned or realized" or whether they had, in fact, been "realized" prior to the transfer.

These two factors are a part of the more basic question presented here: What has the taxpayer given — stock or liquidation proceeds? Judicial attempts to determine what the taxpayer has transferred have centered around the question of whether there has been a realization of the gain prior to the transfer, as the courts have concluded that unless such severance has occurred the gift must, in fact be one of stock, rather than the liquidation proceeds. Howard Cook, supra; Apt v. Birmingham, 89 F. Supp. 361, 392-393 (N.D.Iowa 1950). In considering the question of what event is sufficient to constitute severance of the gain from the investment for Federal income tax purposes, the court in Winton v. Kelm, supra, 122 F. Supp. at 653, concluded that:

No doubt realization occurs upon the completion of dissolution. Since the substantial element in such dissolution is the stockholders\' vote, the formalities following thereafter in order to complete dissolution may be ignored. Citing Howard Cook, supra; Apt v. Birmingham, supra.

While dissolution was contemplated at the time of the stock gift in Kelm, the court held for the taxpayer because the shareholders' vote on the resolution to liquidate had not been completed until after the stock transfer. Thus, Kelm, like Cook and Apt, found the shareholders' affirmative vote to liquidate the corporation to be the requisite legal step necessary to effect a "realization" or severance of the gain from the investment such that a subsequent transfer of the stock would constitute a transfer of the liquidation proceeds rather than an interest in a viable corporation.

However, a new dimension was added to ...