Kinsey v. CIR
| Decision Date | 07 May 1973 |
| Docket Number | No. 644,Docket 72-2071.,644 |
| Citation | 477 F.2d 1058 |
| Parties | John P. KINSEY and Edith B. Kinsey, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
John S. Murtha, Hartford, Conn. (Murtha, Cullina, Richter & Pinney, and Peter G. Gillin, Hartford, Conn., on the brief), for petitioners-appellants.
William A. Friedlander, Atty., Tax Div., Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., and Meyer Rothwacks, Atty., Tax Div., Dept. of Justice, on the brief), for respondent-appellee.
Before FRIENDLY, Chief Judge, LUMBARD, Circuit Judge, and THOMSEN,* District Judge.
This appeal by taxpayers John P. Kinsey (Kinsey) and his wife presents the question whether they were entitled to exclude from gross income the liquidating dividends received by DePauw University on shares of stock of Container Properties, Inc. (Container), which Kinsey had given to DePauw after the directors and stockholders of Container had adopted a plan of liquidation under § 337 of the Internal Revenue Code, had already made distributions in liquidation of a major portion of its assets, and had taken steps to dispose of the rest.
The facts, which are not disputed, are set out in the opinion of the Tax Court, 58 T.C. 259 (May 10, 1972).
Container was a Connecticut corporation organized in 1948 to own and lease real property. On April 26, 1965,1 immediately before the transactions involved in this case, 572 shares of its stock were outstanding. Kinsey owned 425 shares (74.30%), his wife 40 shares (7.00%); Kunkel and Banta, who were employees and directors of Container, owned 63 shares (11.01%) and 42 shares (7.34%) respectively; the remaining 2 shares (.35%) were owned by Seeton.
Container owned all of the issued and outstanding shares of two other corporations (LaPorte and Carolina), both of which were engaged in the business of owning and leasing real property.
At a meeting of Container's board of directors on April 26, the directors unanimously recommended the liquidation of Container under § 337 of the Internal Revenue Code of 1954. On the same day, Container's shareholders unanimously approved the board's recommendation.
On April 30, Container's directors authorized, as the first step in the liquidation, the distribution by Container of all its LaPorte and Carolina stock to Container's shareholders of record as of April 30, 1965.2
At the time of the adoption of the liquidation plan there was in existence an agreement, made in 1963, under which Container was obligated to sell and Boise Cascade Corp. (Boise) was obliged to purchase all the real estate leased by Container and its subsidiaries to Boise and its predecessor in title.3 Container had the right to designate the date on which the sale would take place,4 upon giving 120 days notice. By letter to Boise dated May 14, Container designated September 15, 1965, as the closing date.
Kinsey is an alumnus of DePauw, and at a meeting in New York in May he agreed to make a gift to his alma mater. On July 7, in satisfaction of his commitment, Kinsey transferred to DePauw 325 shares of Container stock and similar proportional amounts of LaPorte and Carolina stock, which had been distributed to him by Container. On July 12, Robert E. Crouch, the secretary of alumni affairs for DePauw and a personal acquaintance of Kinsey for about 15 years, acknowledged receipt of the certificates representing the shares so transferred. No restrictions were placed upon the further transfer of those shares.
It was the normal policy of DePauw to sell any stock it received as a gift. The shares in question were not sold, because Kinsey had advised Crouch to hold the stock pending advice from Kinsey as to how it could be liquidated. No such advice was requested by DePauw or given by Kinsey before DePauw received Container's distribution in liquidation in October 1965.
The 325 shares transferred to DePauw represented a 56.80% interest. Under Connecticut law5 a vote of two-thirds of the shareholders is required for a corporation to adopt a resolution of liquidation or to terminate such a resolution previously adopted by the shareholders. After the transfer of shares to DePauw, the liquidation proceeded in accordance with the plan adopted on April 26. No action was ever taken by anyone to terminate the liquidation of Container, LaPorte or Carolina. On September 15, Container transferred all of its real property to Boise for $533,334.6
At special meetings of the respective boards of Container, LaPorte and Carolina on September 15, the directors of each corporation resolved to dissolve the corporation on October 31, 1965, to pay all claims owed to creditors and to distribute in complete liquidation all remaining properties of the corporations to their respective shareholders. From the date of adoption of the plan of liquidation in April until the completion of the sale of its assets in September, Container had continued to earn rental and interest income and to incur some operating expenses.
On October 22 and December 6 distribution of the remaining assets of all three corporations was made.7 Container mailed checks to DePauw totaling $237,499.66, representing distributions in liquidation with respect to and in exchange for the 325 shares of Container stock which had been transferred by Kinsey to DePauw. Container filed a certificate of dissolution with the Secretary of State of Connecticut on November 17.8
On their tax return for taxable year 1965, the Kinseys claimed a charitable deduction in the amount of $237,499.66 based upon the transfer of 325 Container shares to DePauw on July 7, 1965. As noted above, the question at issue in this case is whether Kinsey was entitled to exclude from his gross income the capital gain resulting from the distribution in liquidation of those shares.
Kinsey argued in the Tax Court and argues here that an outright gift of 325 Container shares was made to DePauw on July 7; that all incidents of ownership inherent in that block of stock vested in DePauw on that date; that the gift preceded the time when an enforceable right to the liquidation proceeds accrued; that the 325 shares represented a controlling interest in Container; that the amount of the liquidating distributions could not be determined at the time of the gift and could not be correctly ascertained until September 15, when the Container board passed the final resolution of dissolution; that the plan of liquidation was revocable, without Kinsey's concurrence, from the time of the gift until the final liquidation distributions were authorized.
The Commissioner argued and argues that the transfer of 325 shares to DePauw constituted an anticipatory assignment of income which, however devised, should not serve to insulate Kinsey from the incidence of taxation with respect to the liquidating distribution attributable to those shares. Referring to the corporate actions set out above, the Commissioner argued and argues that despite any remote, technical possibility of a rescission of the plan of liquidation, and the fact that a liquidating dividend had not yet been formally declared at the time of the gift, the taxpayer had for all practical purposes transferred nothing but a right to receive a liquidating dividend, and that this reality controls the tax consequences.
After discussing the facts and law, the Tax Court held that the liquidation had proceeded to a stage where the transfer of Container shares was in substance a transfer of the liquidation proceeds soon to come due on such shares, and concluded: "On the facts presented us here, petitioners cannot be allowed to insulate themselves from the incidence of taxation with respect to the liquidating distributions ascribable to the shares donated to DePauw." 58 T.C. at 266.
In Hudspeth v. United States, 471 F. 2d 275 (8 Cir. 1972), the leading authorities are carefully and accurately analyzed; that analysis need not be repeated here.
A close case on the facts is Jacobs v. United States, 280 F.Supp. 437 (S.D. Ohio, 1966), affirmed, 390 F.2d 877 (6 Cir. 1968). In Jacobs the taxpayers owned 1035 out of 1935 shares of outstanding stock of a Kentucky corporation. After its shareholders had adopted a plan of liquidation under § 337 of the Code and approved a sale of the corporation's assets, and after part of the sale...
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