Lincoln Nat. Bank v. Burnet, 5586.

• Decision Date: 09 January 1933
• Docket Number: No. 5586.,5586.
• Citation: 63 F.2d 131
• Parties: LINCOLN NAT. BANK v. BURNET, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

63 F.2d 131 (1933)

LINCOLN NAT. BANK v. BURNET, Commissioner of Internal Revenue.

No. 5586.

Court of Appeals of the District of Columbia.

Argued November 10, 1932.

Decided January 9, 1933.

F. W. McReynolds and W. W. Millan, both of Washington, D. C., for appellant.

C. M. Charest and Willis R. Lansford, both of Washington, D. C., G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, and J. P. Jackson, both of Washington, D. C., for appellee.

Before MARTIN, Chief Justice, and ROBB, VAN ORSDEL, HITZ, and GRONER, Associate Justices.

MARTIN, Chief Justice.

The question involved in this case is whether certain shares of stock which were distributed to the taxpayer in 1926 by a corporation of which he was a stockholder were received by him as a dividend or as a gift within the meaning of section 213 (b) (3) of the Revenue Act of 1926 (26 USCA § 954 (b) (3).

The taxpayer John W. Brawner, hereinafter called the decedent, departed this life in January, 1929, and the appellant corporation is the executor of his last will and testament. The decedent and John F. Waggaman were business associates for many years prior to August 1, 1909. On the latter date Waggaman retired from business, and by deed of trust transferred his entire estate to his elder son, Henry Elliott Waggaman, and decedent, as cotrustees for the equal benefit of his three sons, Henry Elliott Waggaman, Floyd P. Waggaman, and Ennalls Waggaman. The trust was to terminate 10 years after the death of John F. Waggaman. Upon the death of Henry Elliott Waggaman on August 25, 1909, his widow, Viola R. Waggaman, by the terms of the trust instrument, succeeded to his beneficial interest. Decedent then became the sole trustee of the estate, and continued to act as such for a long period after the death of Waggaman, which occurred in May, 1918.

The decedent and Floyd P. Waggaman had been engaged in the real estate business as partners since 1906, and in January, 1920, the business was incorporated under the name of Waggaman & Brawner, Inc. The decedent acted as president of the corporation from the time of its organization until his death, and regularly received a salary as such. In 1924 the decedent, as surviving trustee of the John F. Waggaman estate, transferred all of the assets of that estate then in his hands to Waggaman & Brawner, Inc., in exchange for 8,000 shares of its corporate stock. In 1925 Waggaman & Brawner, Inc., received as a stock dividend about 7,500 shares of the preferred stock of the Emerson Drug Company. In 1925 the corporation distributed part of these shares to its stockholders, and on January 4, 1926, the board of directors of the corporation authorized the distribution of the remaining 5,020 shares as follows: To John W. Brawner, 1,507 shares; to F. P. Waggaman, 1,507 shares; to Ennalls Waggaman, 1,506 shares; and to W. E. Burnside, 500 shares. The 1,507 shares when thus received by decedent possessed a market value of $37,675.

When the decedent prepared his income tax return for the year 1926, he omitted the value of these shares therefrom, upon the claim that he had received them as a nontaxable gift. The Commissioner of Internal Revenue, however, held that the stock had been received by decedent, not as a gift, but as a dividend, and accordingly was subject to surtax. This ruling was sustained by the Board of Tax Appeals, and the decision of the Board is here for review.

The Revenue Act of 1926, c. 27, § 213 (a), (b) (3), and section 201 (a, b), 44 Stat. 9, 10, 23 (26 USCA § 954 (a), (b), (3) and section 932 (a, b) reads in part as follows:

Section 213: "For the purposes of this chapter, except as otherwise provided in section 985 233 —

"(a) The term `gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, * * * also from * * * dividends * * * or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

"(b) The term `gross income' does not include the following items, which shall be exempt from taxation under this title: * * *

"(3) The value of property acquired by gift, bequest, devise, or inheritance. * * *"

Section 201: "(a) The term `dividend' when used in this chapter (except in paragraph (9) of subdivision (a) of section 986 234 and paragraph (4) of subdivision (a) of section 1004 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.

"(b) For the purposes of this chapter every distribution is made out of...