Manning v. Gagne, 3507.

• Decision Date: 29 December 1939
• Docket Number: No. 3507.,3507.
• Citation: 108 F.2d 718
• Parties: MANNING et al. v. GAGNE, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — First Circuit

108 F.2d 718 (1939)

MANNING et al. v. GAGNE, Collector of Internal Revenue.

No. 3507.

Circuit Court of Appeals, First Circuit.

December 29, 1939.

John R. McLane, of Manchester, N. H. (McLane, Davis & Carleton, of Manchester, N. H., on the brief), for appellants.

Lee A. Jackson, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Joseph M. Jones, Sp. Assts. to Atty. Gen., on the brief), for appellee.

Before WILSON and MAGRUDER, Circuit Judges, and McLELLAN, District Judge.

McLELLAN, District Judge.

This appeal of the plaintiffs from a judgment for the defendant comes here with the District Judge's findings of fact, rulings of law and a transcript of the evidence. The crucial question is whether the finding that two transfers of stock by a taxpayer to his son, while in form sales, were in fact gifts, should stand. If sales, the taxpayer was entitled to a tax deduction. If gifts, no such deduction was allowable, and the action can not be maintained. The trial was without jury, and in such cases, the "substantial evidence" rule no longer applies. By virtue of the Federal Rules of Civil Procedure, 28 U. S.C.A. following section 723c, the applicable test is whether having due regard to the opportunity of the trial court to judge of the credibility of witnesses, the finding was "clearly erroneous". Rule 52(a).

There are some facts which are not disputed or which are so amply supported by the reported evidence that they may be regarded as established. These we state at the outset.

The original plaintiff, Frank P. Carpenter, hereafter called the taxpayer, died after suit was brought and the appellants, executors of his estate, became plaintiffs. The defendant is the Collector of Internal Revenue in New Hampshire by whom the taxes here involved were collected from the taxpayer. Mr. Carpenter's income taxes for the years 1932 and 1933 are here involved.

Prior to the December 1932 transaction about to be described, the taxpayer had owned for many years 4,000 shares of the 6 per cent preferred capital stock of the Brown Company. He and his family and the Brown family owned practically all the corporate stock, the Carpenters holding the preferred and the Browns the common stock. The two families had maintained very close family relations for many years. The market value of the Brown Company stock here involved was $3 a share in December, 1932, and $7 a share in 1933. The taxpayer had paid much more than $7 a share for the stock and he wanted to establish losses for tax purposes. To quote findings by the District Judge, the correctness of which is clear and with which the plaintiffs find no fault, 27 F.Supp. 286, 287:

"The stock had deteriorated in value and he wished to take a loss on account of 2,000 shares of the stock in his income tax return for the year 1932. On December 13, 1932, he consulted a lawyer as to a possible method of procedure. He was advised that R. L. Day Company, a reliable brokerage firm in Boston, held weekly auction sales of stock and that a sale might be made through this company. In accordance with the suggestion of counsel arrangements were made to place 2,000 shares of the Brown Company stock on sale. Frank P. Carpenter and his son Aretas B. Carpenter went to Boston and made arrangements for the sale and Aretas B. Carpenter left an order for the purchase of this stock at the market price. The transaction herein referred to as a sale was carried out according to the arrangements. The auction was held December 21, 1932, and the stock was struck off to Aretas B. Carpenter for $3 per share. R. L. Day & Company made return of the sale to Frank P. Carpenter crediting him with $6,000 proceeds of the sale and charging him $100 commission and revenue stamps amounting to $120, sending him a check for the balance. At the same time Aretas B. Carpenter was notified of the purchase of 2,000 shares of Brown Company 6 per cent preferred stock for $6,000 plus a charge of $100 commission. Aretas B. Carpenter sent his check for $6,100 in the morning of December 22, 1932.

"Later in the same day he told his father that he had mailed his check for the stock and thereupon Frank P. Carpenter wrote his check for the same amount, $6,100, and laid it on his son's desk. In discussing the matter with the field agent, at the time of the audit of his return, Frank P. Carpenter stated that he wanted Aretas to have the stock. This check Aretas B. Carpenter cashed for his own account. Frank P. Carpenter took a loss on the sale of stock in his 1932 tax return of the difference between the stock at par (100) and $3 per share amounting to $194,221. He should have computed it on the difference between the cost price 95½ and $3.00.

"In 1933 the same procedure was followed. Frank P. Carpenter placed 2,000 shares of Brown Company stock with R. L. Day & Company for sale at its auction held on October 4, 1933. An order to buy at the market price was left by Aretas B. Carpenter. The arrangements were made by Frank P. Carpenter, Aretas B. Carpenter was not present. The stock sold for $7 per share. Return was made accompanied by a check to Frank P. Carpenter, a bill was sent to Aretas B. Carpenter, who sent his check to R. L. Day & Company for $14,100. Frank P. Carpenter reimbursed his son for the same amount. He took a loss on his income tax return of $186,221 computing the same on the basis of par as was done in 1932."

As to the statement that "Frank P. Carpenter reimbursed his son", a word may here be added. The evidence indisputably shows that strictly speaking it was not a reimbursement. The father paid the son before the latter's check to the brokers in the ordinary course of the mails had reached the payees. Thus it appears that there was no time during the 1932 or the 1933 transaction when the son was out of pocket. When the foregoing transactions took place, Aretas B. Carpenter was abundantly able to pay for the stock without assistance from anybody and without selling or encumbering any of his property.

In his income tax return for the year 1932 Mr. Carpenter, the taxpayer, claimed a deduction of $194,221 as a capital loss resulting from the transfer in December, 1932 (which was called a "sale") of the stock heretofore mentioned. In his return for 1933 the taxpayer claimed a deduction of $186,221 as a capital...