Idol v. CIR

• Citation: 319 F.2d 647
• Decision Date: 03 July 1963
• Docket Number: No. 17191.,17191.
• Parties: Edgar S. IDOL, Katherine G. Idol, and Speedway Transports, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

319 F.2d 647 (1963)

Edgar S. IDOL, Katherine G. Idol, and Speedway Transports, Inc., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 17191.

United States Court of Appeals Eighth Circuit.

July 3, 1963.

Henry C. Lowenhaupt and Owen T. Armstrong (of Lowenhaupt, Mattingly, Chasnoff, Freeman & Holland), St. Louis, Mo., for petitioners.

Norman H. Wolfe, Atty., Dept. of Justice, Washington, D. C., for respondent; Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Washington, D. C., on the brief.

Before SANBORN and BLACKMUN, Circuit Judges, and STEPHENSON, District Judge.

BLACKMUN, Circuit Judge.

The Tax Court has upheld deficiencies determined by the Commissioner in the 1956 and 1957 income taxes of Edgar S. Idol and his wife and in the 1955 and 1957 taxes of Speedway Transports, Inc. The court's opinion (not reviewed by the full court) is reported at 38 T.C. 444. The respective taxpayers have appealed.

The facts are complicated. Nearly all of them are stipulated. No basic fact is in issue. What is in dispute are the inferences and conclusions to be drawn from those facts. We are confronted with the questions (1) whether payments made by Speedway to Idol in 1956 and 1957 were upon a debt or, instead, are to be treated as dividends taxable to Idol; (2) whether a transfer of assets from Speedway to Cassens Transport Company in 1957 was in redemption of stock of Speedway or, instead, effected a sale with resulting long term capital gain to Speedway; and (3) whether that 1957 transaction also encompassed a dividend distribution from Speedway to Idol.

The facts are set forth in the Tax Court's lengthy and careful findings covering several pages of its report. It would serve no useful purpose to repeat those facts here in similar detail. It is enough if we emphasize only the following:

1. Speedway was a truck carrier transporting automobiles under rights granted by the Interstate Commerce Commission. In September 1953 H. F. Florman, through a nominee, owned all of Speedway's outstanding stock. This consisted of 90 capital shares.

2. That September Florman and Idol executed a "purchase contract" reciting that Florman sold all the Speedway stock to Idol for $10,000 plus an amount equal to the corporation's net worth as of September 30, and further reciting that Idol agreed to pay the purchase price in instalments through 1963 to be evidenced by an instalment note. Speedway's net worth on the date specified was later determined to be approximately $90,000. This contract was accompanied by an escrow agreement stating that Idol was depositing the certificates for the stock as a guaranty of his performance.

3. The 90 Speedway shares were registered in Idol's name on October 1, 1953, and the certificates were deposited with the escrow agent. The proposed promissory note, however, was never delivered to Florman. Idol served as president and as one of three directors of Speedway from October 1, 1953, to beyond May 1, 1957. Mrs. Idol was vice-president and director during the same period.

4. In January 1955 Speedway, with ICC approval, 60 M.C.C. 655, acquired a right to transport automobiles from Detroit to points in Missouri and Illinois. The parties called this the "Detroit franchise"; it was operated under contract with Chrysler Corporation. A year later Speedway also owned a right to transport automobiles from Kenosha, Wisconsin, to certain Illinois and Missouri points. This was the "Kenosha franchise"; it was operated under contract with American Motors Corporation.

5. By January 1956 Cassens, which was another interstate truck carrier of automobiles, indicated interest in acquiring the Detroit franchise.

6. In February 1956 the escrow agent received a letter signed by Florman, Idol and S. J. Cento (whose identity or interest is not otherwise revealed by the record) reciting that Idol had purchased all the Speedway stock "as of this date" for $112,500 ($1,250 per share) and directing the agent to deliver the escrowed shares to Idol upon receipt of his check for that amount within thirty days. At the same time Florman and Idol appended a statement to the 1953 contract reciting that "this agreement is cancelled by the purchase of the foregoing stock for $112,500.00".

7. A special meeting of Speedway directors was held February 23. The minutes recite that at this meeting

"(a) Idol stated that the 1953 contract was on terms not wholly satisfactory either to him or to Florman; that he had now agreed `to complete the deal by paying a flat price of $112,500\'; that in order to finance the transaction he had to find another buyer for a portion of the stock or the corporate assets; and that he had arrived at an agreement with Cassens to acquire the Detroit franchise and some equipment.

"(b) Idol also stated that consideration had been given to a complete liquidation of Speedway, his own purchase of the Kenosha franchise and equipment, and Cassens\' purchase of the Detroit franchise and equipment, but that this procedure was discarded because of expense and delay and Florman\'s unwillingness to bind himself to an agreement dependent upon ICC approval.

"(c) Idol proposed to purchase 42 shares of Speedway himself with the understanding that Speedway would borrow $60,000 and buy the remaining 48 shares as treasury stock, and with the further understanding that Speedway would exchange the Detroit franchise and equipment for 36 shares of its stock to be acquired by Cassens from Idol after ICC approval.

"(d) The company authorized the borrowing of $60,000 from Idol, the use of the borrowed funds to acquire the 48 shares as treasury stock, and the execution of an agreement with Cassens for the Detroit franchise and equipment."

8. On February 28 Security Credit Company, a corporation controlled by the shareholders of Cassens, loaned Idol $112,500 against his instalment note. He deposited this sum in his personal bank account and promptly transferred $60,000 of it to Speedway. Florman was then paid $52,500 by Idol and $60,000 by Speedway. This effected payment to Florman in full for the Speedway stock.

9. On February 28 Florman transferred 42 shares of the Speedway stock to Idol and 48 shares to Speedway. Idol deposited the 42 shares with Security Credit as collateral for its loan to him. On March 1 Speedway delivered to Idol its instalment note for $60,000.

10. On February 28 Cassens, Speedway and Idol executed a "purchase agreement" providing (a) for Cassens' purchase from Idol of 36 Speedway shares for $45,000 ($1,250 per share) in cash within 10 days of ICC approval; (b) for Idol's and Cassens' voting their respective Speedway holdings "in favor of a partial liquidation of Speedway under which the 36 shares will be exchanged for" the Detroit franchise and equipment; (c) for Cassens' not participating otherwise in Speedway's management; and (d) for Cassens' not being responsible for Speedway's prior obligations.

11. In March Speedway and Cassens filed an application with the ICC for approval of the transfer of the Detroit franchise. A year later, on March 21, 1957, that approval was forthcoming. The Commission, however, reduced the scope of the franchise somewhat and authorized the parties to adjust the price downward. The 1956 agreement was then modified by reducing the number of Speedway shares from 36 to 32 and the cash from $45,000 to $40,000. The Commission's report recited that the method of sale was "devised because of tax considerations and it is not intended that Cassens at any time will acquire control of Speedway as a result of the temporary stock ownership", that the Commission's "consideration herein is on that basis, and vendee should not purchase the 36 shares of vendor's stock from Idol unless it intends to immediately relinquish them to vendor in payment for the properties covered by the instant purchase".

12. Thirty-two Speedway shares were released by Security Credit and transferred from Idol to Cassens. Cassens paid $40,000 to Idol. Idol in turn paid this $40,000 to Security Credit to apply on his indebtedness to it. Speedway transferred the Detroit franchise and equipment to Cassens. Cassens transferred the 32 shares to Speedway which then held it as treasury stock. A bill of sale delivered by Speedway to Cassens recited the receipt of the 32 shares "in exchange for" the Detroit franchise and equipment. All this took place on May 1, 1957. Idol then owned only 10 shares of Speedway stock and these were on deposit with Security Credit; the remaining 80 shares were in the corporation's treasury.

13. In 1956 and 1957 Speedway made payments to or for Idol which it reflected on its books as payments of interest and principal on its note to him. Some of these were made direct to Idol; others were made to Security Credit on his behalf. Speedway at the time possessed earnings and profits sufficient to pay dividends in these amounts.

In its 1956 and 1957 returns Speedway claimed as deductions the amounts its books showed as interest paid to Idol or on his behalf. The Commissioner disallowed these deductions. He claimed that the payments were dividends to Idol from Speedway. He also claimed that Speedway realized capital gain on the transfer of the assets to Cassens in 1957 and that the $40,000 received by Idol from Cassens was a dividend to him from Speedway.

Judge Withey of the Tax Court agreed with the Commissioner. His analysis and reasoning are apparent from his opinion. That opinion speaks adequately for itself and need not be summarized here.

The taxpayers' position before us is that Judge Withey's conclusions were erroneous because of his fundamental misconception of the 1953 transaction between Florman and Idol. They argue that the 1953 agreement never became effective and that, as a consequence, it is wrong to conclude that there was no substance in the 1956 loan from Idol to Speedway or in the 1957 transactions.

On the issue...