Niederkrome v. CIR

• Decision Date: 23 March 1959
• Docket Number: No. 15724.,15724.
• Parties: Fred C. NIEDERKROME, E. Royce, Dora F. Royce, Ezra Royce, B. Royce, Estate of Isabelle H. Royce, Deceased, B. Royce, Executor, Robert T. Jacob, Agnes C. Jacob, Albert L. Schneider and Bertha Schneider, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

266 F.2d 238 (1958)

Fred C. NIEDERKROME, E. Royce, Dora F. Royce, Ezra Royce, B. Royce, Estate of Isabelle H. Royce, Deceased, B. Royce, Executor, Robert T. Jacob, Agnes C. Jacob, Albert L. Schneider and Bertha Schneider, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15724.

United States Court of Appeals Ninth Circuit.

November 10, 1958.

Certiorari Denied March 23, 1959.

Louis Eisenstein, Washington, D. C., Randall S. Jones, Portland, Or., Eberhard P. Deutsch, New Orleans, La., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Helen A. Buckley, Melva M. Graney, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before HEALY, FEE and HAMLEY, Circuit Judges.

Certiorari Denied March 23, 1959. See 79 S.Ct. 725.

JAMES ALGER FEE, Circuit Judge.

This action for review of the determination of tax deficiencies involves several problems:

1. Did the distribution of earnings by a corporation in payment of a note and the simultaneous redemption of 350 shares of stock purchased with the proceeds of the note constitute a distribution equivalent to dividends?

2. Did the payment or disbursement of incidental expenses to the company making the loan furnish any evidence of the intention?

3. Did the Tax Court err in admitting the minutes of the corporation making the loan?

4. Was a $20,000.00 disbursement by a different corporation to its stockholder a loan or a dividend and taxable?

5. Was the finding that a wife was not a bona fide partner in two different partnerships correct?

6. Where a partner declared a trust for his minor daughter and appointed himself trustee for her, but treated the proceeds as if he were the owner did the "trust" prevent taxation of the whole as his interest?

Oregon Motor Stages

Oregon Motor Stages was a corporation operating an intrastate bus line as a common carrier. The outstanding capital of this corporation consisted of 750 shares, which the stockholders at that time insisted should be purchased as a unit. E. Royce, B. Royce, Robert T. Jacob and Albert L. Schneider were advised all the stock was thus for sale and signified their willingness to purchase 400 shares at $1,000.00 per share. After various attempts to find purchasers for the balance, 350 shares, L. R. Bentson received the certificates for these shares. Before June 20, 1945, E. Royce made an application to American Business Credit Corporation, an Oregon corporation, for a loan of $350,000.00, which corporation transmitted this application to its parent company, American Business Credit Corporation of Delaware. The minutes of an executive committee meeting of the latter corporation regarding this matter were admitted by the court. The 750 shares were sold and purchased July 2, 1945. The persons first mentioned took 400 shares and Bentson the balance.

On the same day, ABC issued its check to L. R. Bentson and E. Royce for $350,000.00, and these persons gave a note for the amount due on or before ninety days from date. Oregon ABC billed Oregon Motors for $4,315.07, servicing fee for financing the loan. The invoice was approved by E. Royce and was paid by Oregon Motors on July 19, 1945, and charged to its expense account. All certificates were turned over to Oregon ABC to secure the loan of $350,000.00. Bentson gave receipt for the stock of each of the other shareholders reciting "such stock being loaned to me to be pledged to American Business Credit Corporation as collateral to loan this day made to me for the purchase of Three Hundred Fifty (350) shares of the common capital stock of said company." On August 31, 1945, Bentson offered to Oregon Motors his 350 shares. Oregon Motors purchased this stock by check to Bentson for $350,000.00, which was endorsed to Oregon ABC in payment of the original loan. Oregon Motors debited surplus with $315,000.00 and capital stock with $350,000.00, and paid interest on the loan to Oregon ABC and the payment to expense.

The question is whether the stockholders other than Bentson received a dividend by this transaction.

The decision by the Tax Court of the issues upon this phase of the matter was effected by two errors of approach. First, that court held that the determination of the Commissioner was evidence to be weighed against that produced by taxpayers. This is fundamental error. We have consistently held that determination by the Commissioner raises a presumption of correctness which disappears once evidence which would support a contrary finding has been adduced in the trial of a contested issue.¹ Second, the Tax Court admitted in evidence the purported minutes of a meeting of ABC Delaware executive committee and considered these binding upon taxpayers. There was no testimony that these were the minutes of that body. There was an affidavit dated April 25, 1955, stating that affiant, Stuart A. Wixson, is treasurer and assistant secretary of Crown Finance Company, Inc., formerly ABC Delaware and that three attached pages comprise a copy of the minutes of a meeting held June 20, 1945, by the executive committee of ABC Delaware. The Tax Court hears and decides cases under rules of evidence which apply in the District of Columbia.² It is obvious such an affidavit was not in itself admissible under these rules. Even if this document were admissible, it laid no foundation for the introduction of the minutes of an executive committee of ABC Delaware as against taxpayers who were not present, even according to the purported minutes.³ The whole recorded transaction was one between the parent corporation and its Oregon subsidiary. There was no proof that the record was made in the regular course of business.⁴ No witness testified as to the authenticity.⁵

The purported minutes do refer to a loan of $350,000.00 which was eventually made by the subsidiary ABC Oregon, but the transaction had not been consummated when this supposed meeting was held and was only in the negotiation stage. It was never carried out in the form here outlined, since there was another party to the note, as the event proved.

The ultimate ground of claimed admissibility is 28 U.S.C.A. § 1732.⁶ But this entry does not come within terms of the statute. There is here no "memorandum or record of any act, transaction, occurrence or event." This writing purports to be nothing but the record of a transaction between parent and subsidiary corporations. At best, it is an interoffice memorandum.⁷ It was not the intention of the statute to permit the sewing circle chatter of secretaries about an office party, recorded in the regular course of business of the corporation itself, to bind outside parties as if the latter had made admissions. In any event, the taxpayers who are sought here to be charged were neither parties to the transaction purportedly recorded nor to the conversation set down. All prior negotiations to a written contract are merged therein, even between the parties. The exhibit was therefore entirely inadmissible from any viewpoint.

On account of these errors, the cause must be reversed and remanded to the Tax Court for reconsideration. There are questions of fact involved which that tribunal should determine without placing extra burdens on taxpayers. The supposed necessity of meeting and overcoming a presumption of correctness of the determination of the Commissioner was heavy. And it is difficult to explain how the taxpayers could avoid prejudice in attempting to overcome the contents of the purported minutes, which were pure hearsay as to all parties in this case. Judicial officers required to winnow the wheat of pertinent evidence from the chaff of extraneous circumstance should have attached no weight or importance to this exhibit.

But these errors seem to have deflected the Tax Court from the real question in the case. It seems to have been the rationale of that body that, if it were proved that Bentson was acting on the suggestion of the other stockholders and not as an independent investor, taxpayers are liable.

However, the questions which should be tried arise from the face of the statute and the regulations. This Court will not attempt to decide such questions, but will simply outline certain considerations which may have a bearing. The former stockholders of this corporation acquired all the financial benefit of this transaction. By the sale, they received the cash for which they could have been taxed if they had withdrawn the surplus in the form of a pro rata distribution. But, although these persons have received such profits, there is no method of taxing them under the statute.

Taxpayers were unwilling to purchase more than 400 shares of stock, and attempted to find purchasers for the remaining 350 shares. Taxpayers decided to have the corporation acquire these remaining shares. The selling group were willing to proceed in this way, as they still received the full financial benefit of the transaction. An agreement to carry this plan into effect had been drafted when Bentson decided to purchase. It is problematical as to who, if anyone, would have been liable for tax if this agreement had been carried out as planned.

If a single stockholder of the selling group had owned these 350 shares, he might have retained the block or sold it to a third person. There need be no speculation as to whether either the one who retained the stock or the purchaser from him would be liable for tax if the shares were thereafter retired by the corporation.

"A cancellation or redemption by a corporation of all the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation, does not effect the distribution of a taxable dividend."⁸ On its face, such was the transaction here. Oregon Motors redeemed the 350 shares of stock owned by Bentson. Undoubtedly, if he had had no connection with the purchasing group, there would have been no tax upon anyone.

The Tax Court addressed itself, on account of the erroneous...