McInerney v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 06 September 1933 |
| Docket Number | Docket No. 54676. |
| Parties | J. L. McINERNEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
H. A. Mihills, C.P.A., for the petitioner.
Prew Savoy, Esq., and J. A. Morawski, Esq., for the respondent.
A deficiency in income taxes for the calendar year 1928, in the amount of $21,157.24, is here in controversy. Petitioner alleges that respondent erred (a) in including in his gross income the entire profit on the sale of certain assets by petitioner to the National Spring & Wire Co., instead of one half of that profit; (b) in determining that the profit arising from the sale should be computed on the completed sale basis rather than the installment sale basis.
FINDINGS OF FACT.
Petitioner is a resident of Grand Rapids, Michigan, and, prior to July 11, 1927, when it was placed in receivership, was general manager of the National Spring & Wire Co. of Grand Rapids.
William H. Baldwin of New York, a creditor of the National Spring & Wire Co., bought in the entire assets of that company at a receiver's sale and thereafter George Wiltshire was appointed trustee for Baldwin and authorized to continue the operation of the properties. After the purchase of the properties by Baldwin and their transfer to Wiltshire as trustee, petitioner continued in the employ of the company, acting in the capacity of president and general manager, although he did not own any of the capital stock of the company.
Wiltshire wanted to negotiate a sale of the properties and agreed with petitioner that, should petitioner arrange a sale, he might retain all the proceeds in excess of $225,000. After various efforts, petitioner in November 1928, made an agreement which, however, was not in writing, to sell the properties to the National Marshall Spring Corporation, a subsidiary of the Nachman Spring Filled Corporation of Chicago.
Wiltshire, as trustee for Baldwin, transferred the properties, both real and personal, to petitioner on November 8, 1928, for a consideration of $225,000 and the assumption of liabilities of the corporation in the amount of $279,070.03. The real estate was conveyed subject to the following mortgages which were assumed by petitioner:
Mortgage dated July 1, 1919, to the Michigan Trust Co. as trustee, securing an issue of first mortgage 7% bonds in the now outstanding amount of $10,000, together with accrued interest thereon.
A mortgage dated March 15, 1926, to Chicago Title & Trust Co. and Abel Davis of Chicago, Illinois, as mortgagees, securing a now outstanding amount of $30,000, of second mortgage 6% notes, together with accrued interest thereon.
A mortgage dated November 11, 1926, to William H. Baldwin of New York, N.Y., securing an issue of third mortgage 6% notes, now outstanding in the amount of $60,000, together with accrued interest thereon.
George B. Kingston, petitioner's attorney, was also attorney for Wiltshire, and in the fall of 1928 became the attorney for the Nachman interests and represented the National Marshall Spring Corporation, the purchaser. The National Marshall Spring Corporation, being apprehensive that difficulties might arise under the bulk sales law of Michigan, insisted upon a corporation being formed through which title to the property might pass to it. Accordingly, Kingston organized the National Spring & Wire Co. on December 4, 1928, and furnished it capital of $1,000. Of its capital stock of ten shares of the par value of $100 each, eight shares were held by Kingston; one share by Esther C. Billburg, his secretary, and one share by M. L. Kelley, a stenographer in petitioner's office. These three individuals comprised its officers and directors. Kingston was president and treasurer and Esther C. Billburg was secretary. Neither petitioner nor his wife owned any stock in the corporation.
On December 16, 1928, petitioner executed a bill of sale of one half of the personalty to his wife, Katherine McInerney, while both were in Kingston's office. This instrument was left with Kingston. Petitioner had explained the matter to his wife in Kingston's office at the time and she understood what was being done. She later signed all documents transferring this property to others.
On December 17, 1928, petitioner executed a quitclaim deed to the real estate, in which his wife joined, in favor of Esther C. Billburg, who on the same day executed a quitclaim deed to the same property in favor of petitioner and his wife, which deeds were recorded December 22, 1928. On December 17, 1928, petitioner and his wife jointly made an offer to sell to the newly organized National Spring & Wire Co. all of the real and personal property here in question for a consideration of $572,700, the purchaser to assume the mortgage to the Michigan Trust Co. for $10,000 and the mortgage to the Chicago Title & Trust Co. for $30,000, with accrued interest. The offer provided that the "said sale, if consummated, be made as of November 24, 1928."
The terms of the sale set out in the offer were $225,000 on the date of the acceptance of the offer; $150,000, or more, on January 15, 1929, and balance on January 15, 1930, with interest at 5½ percent. This offer was accepted by the corporation on December 18, 1928. On the same date and at the same meeting of the stockholders of the corporation, a resolution was passed authorizing the board of directors to sell and dispose of all of its assets to the National Marshall Spring Corporation. By a joint letter dated December 18, 1928, petitioner and his wife authorized the National Spring & Wire Co. to remit the down payment of $225,000 to Woodward, Baldwin & Co. of New York and charge one half to each of them.
On December 18, 1928, petitioner and his wife jointly executed a bill of sale transferring the personal property and a deed conveying the real property to the National Spring & Wire Co. The deed recited that the purchaser assumed and agreed to pay mortgages as follows: Michigan Trust Co., $10,000; Chicago Title & Trust Co., $30,000; William H. Baldwin, $60,000. The deed was recorded December 22, 1928. Kingston, although president of the National Spring & Wire Co., had no part in the negotiations for the sale by petitioner and his wife to that company, but served as legal counsel for petitioner and his wife and also for the National Marshall Spring Corporation.
On December 18, 1928, the National Spring & Wire Co., by resolution of its board of directors, made an offer to sell and convey all of the property it had acquired from petitioner and his wife to the National Marshall Spring Corporation, "as of November 24, 1928, profits and losses since that date to be assumed by you", subject to the same three mortgages, aggregating $100,000, for the consideration of $515,700, payable $400,000 in cash, the balance evidenced by a promissory note due in one year with interest at 5½ percent.
On December 18, 1928, by deed recorded December 22, 1928, the National Spring & Wire Co. conveyed the real property to the National Marshall Spring Corporation, which assumed the same mortgages mentioned. On December 19, 1928, it executed a bill of sale of the personalty to the same corporation.
The minutes of the National Spring & Wire Co. of December 24, 1928, show that the National Marshall Spring Corporation on December 22, 1928, paid $374,224 in cash and gave its note for $115,700, with interest at 5½ percent to be paid from November 24, 1928. The minutes further show that pursuant to the request of petitioner and his wife, $225,000 had been remitted to Woodward, Baldwin & Co. of New York.
The minutes of January 2, 1929, show the receipt by the treasurer of $25,000, this sum being approximately the balance of the cash payment from the National Marshall Spring Corporation. These minutes further show that the National Spring & Wire Co. had a cash balance of $174,224, exclusive of cash capital paid in, and that the treasurer was authorized and directed to pay one half of this amount to petitioner and a like amount to his wife, which was done shortly thereafter.
The National Spring & Wire Co. had no operating functions except those connected with the sale and transfer of the assets of the former corporation to the National Marshall Spring Co. It was dissolved in 1931 after the final payment had been made on the notes and passed on to petitioner and his wife.
The National Spring & Wire Co. did not give petitioner any security for the purchase price. It was not evidenced by notes and petitioner retained no mortgage on the real estate or lien on the personal property. Petitioner did not consider the National Spring & Wire Co. from a credit standpoint. He assumed it was practically the Nachman Spring Filled Corporation, or its subsidiary, the National Marshall Spring. Corporation, and he only considered the Nachman Co. from a credit standpoint.
On December 19, 1928, Kingston, as president of the National Spring & Wire Co., executed an affidavit in connection with the sale of the assets to the National Marshall Spring Corporation, in compliance with the provisions of the Bulk Sales Law of Michigan, and therein listed indebtedness to petitioner and his wife on open account in the sum of $256,350 each, a total of $512,700. The gross selling price of the...
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