McInerney v. Commissioner of Internal Revenue, 6920.

• Decision Date: 09 March 1936
• Docket Number: No. 6920.,6920.
• Citation: 82 F.2d 665
• Parties: McINERNEY v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

82 F.2d 665 (1936)

McINERNEY v. COMMISSIONER OF INTERNAL REVENUE.

No. 6920.

Circuit Court of Appeals, Sixth Circuit.

March 9, 1936.

J. S. Y. Ivins, of Washington, D. C., for petitioner.

Helen R. Carloss, of Washington, D. C. (Frank J. Wideman, Sewall Key, and Lucius A. Buck, all of Washington, D. C., on the brief), for respondent.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

ALLEN, Circuit Judge.

This case arises on petition to review an order of the Board of Tax Appeals redetermining a deficiency in income tax for the calendar year 1928 in the amount of $20,407.24. 29 B. T. A. 1.

The petitioner, prior to July 11, 1927, was general manager of the National Spring & Wire Company of Grand Rapids, Michigan. The company was then placed in receivership, and William H. Baldwin, a creditor, bought the entire assets at the receiver's sale. Thereafter George Wiltshire was appointed trustee for Baldwin, and authorized to operate the properties, while petitioner continued in the employ of the company as president and general manager.

Wiltshire desired to sell the properties, and agreed with petitioner that in case he should arrange a sale, petitioner might retain all of the proceeds in excess of $225,000. Petitioner negotiated from the early part of 1928 with the National Marshall Spring Corporation, a subsidiary of the Nachman Spring Filled Corporation of Chicago, reaching an agreement for sale in November of that year. Wiltshire, as trustee for Baldwin, transferred the properties, real and personal, to the petitioner on November 8, 1928, the real estate being conveyed subject to three mortgages, one for $10,000, one for $30,000, and one for $60,000, which last mortgage was extinguished by merger. The consideration was $225,000 and the assumption by petitioner of liabilities of the corporation in the amount of $279,070.03 including the mortgages. These liabilities must have been incurred, if incurred at all, in the operation subsequent to the receiver's sale. Baldwin, as purchaser at the receiver's sale, acquired title free and clear of all obligations except liens of record. The corporation was operated after the sale for less than two years. The record does not itemize the liabilities, and petitioner nowhere states that he has paid any of them. He simply adds $279,070.03 to $225,000 and returns the price as $504,070.03 less the mortgages assumed, namely, $464,070.03.

The National Marshall Spring Corporation insisted that a corporation be formed through which it might secure title to the property. Accordingly on December 4, 1928, George B. Kingston organized the second National Spring & Wire Company for this purpose. Kingston was attorney for the petitioner, and also attorney for Wiltshire and the National Marshall Spring Corporation. The National Spring & Wire Company had a capital of $1,000 consisting of ten shares of stock of $100 par value, eight of which were held by Kingston, who was president and treasurer, one by Kingston's secretary, and the remaining share by petitioner's stenographer.

On December 16, 1928, petitioner executed a bill of sale of one-half of the personalty to his wife, Katherine McInerney. On December 17, 1928, petitioner executed a quit-claim deed to the real estate, in which his wife joined, in favor of Kingston's secretary, who on the same day executed a quit-claim deed to the same property in favor of petitioner and his wife. Also on the same day petitioner and his wife jointly offered to sell to the National Spring & Wire Company all of the real and personal property for a consideration of $572,700, the purchaser to assume the mortgages. The offer provided that "said sale, if consummated," should "be made as of November 24, 1928," and required $225,000 to be paid on the date of the acceptance, $150,000 to be paid on January 15, 1929, and the balance on January 15, 1930, with interest. The offer was accepted on December 18, 1928, and petitioner and his wife executed the necessary deed and bill of sale. On the same date the board of directors was authorized by the stockholders to sell all of the National Spring & Wire Company's assets to the National Marshall Spring Corporation, and the offer was duly made to sell and convey the property "as of November 24, 1928," subject to the mortgages, for the consideration of $515,700, payable $400,000 in cash and the balance in a promissory note. On the same day the corporation conveyed the real property to the National Marshall Spring Corporation, and on December 19, 1928, it executed a bill of sale of the personalty.

The National Marshall Spring Corporation, on December 22, 1928, paid the National Spring & Wire Company $374,224 in cash and gave its note for $115,700 with interest. $225,000 of the $374,224 was remitted to the partnership of which Baldwin was a member under written authority from petitioner and his wife.

On January 2, 1929, the treasurer reported to the stockholders the receipt of $25,000, which was approximately the balance of the cash payment due. On that day the National Spring & Wire Company had a cash balance of $174,224, exclusive of cash capital paid in, and the treasurer was authorized to pay one-half of this amount to the petitioner, and a like amount to his wife, which was done.

The National Spring & Wire Company did no business except that connected with the sale and transfer of the assets of the former corporation to the National Marshall Spring Company. It was dissolved in 1931.

The Board of Tax Appeals decided that the corporation was created for the sole purpose of passing title to the purchaser and of passing payment to the petitioner, and that as it was controlled by the attorney who acted for all the parties to the sale, the payment of $374,224 made to the corporation for the purchaser must be regarded as constructively received by the petitioner in 1928, so as to come within the provisions of Article 352 (2) of Treasury Regulations 74.¹ It also found that under the facts the vendor did not intend to make a present bona fide gift of one-half of the property to his wife, but had a continuing intention to effect the sale upon the terms previously arranged by him which the wife carried out, and that the entire profits received in 1928, namely, $115,405.46, were taxable to him.

It is conceded by the Commissioner that under Article 352 of Treasury Regulations 74,² the mortgages are to be included in the gross selling price, but the Commissioner contends that the initial payment was not confined to $225,000, that the taxpayer received more than forty per cent. of the selling price...