Owen v. United States
| Decision Date | 09 September 1955 |
| Docket Number | Civ. No. 60,61. |
| Parties | Edward F. OWEN and Dolores Owen, Plaintiffs, v. UNITED STATES of America, Defendant. Herman KNOP and Dorothy Owen Knop, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Nebraska |
Swarr, May, Royce, Smith & Story, Edson Smith. Omaha, Neb., for plaintiffs.
H. Brian Holland, Asst. Atty. Gen., Andrew D. Sharpe and Robert B. Ross, Attys., Dept. of Justice, Washington, D. C., and Donald R. Ross, U. S. Atty., and William C. Spire, Asst. U. S. Atty., Omaha, Neb., for defendant.
These actions were instituted by plaintiffs against the United States to recover certain taxes alleged to have been illegally assessed and collected. This court has jurisdiction, 28 U.S.C. (1952 Ed.) 1340, 1346; venue is properly laid in what was formerly the Omaha Division of this District, 28 U.S.C. (1952 Ed.) 1402(a); and all the required conditions precedent to institution of this action have been fulfilled, I.R.C.1954, § 7422(a), 26 U.S. C.A. The case was tried to the court, without a jury, and in keeping with Rule 52(a), Fed.Rules Civ.Proc. 28 U.S.C.A., the court makes the following special
Findings of Fact.
In 1948, Fred E. Owen, president and principal stockholder of Paxton & Vierling Iron Works, in Omaha, Nebraska, became desirous of turning over the active management of this company to his son Edward Owen who was also an employe and stockholder. Edward, who then owned 205 of 1,752 shares of Paxton & Vierling stock outstanding was interested in acquiring more stock since he was in the process of assuming more responsibility for the management of the corporation. At this time Edward Owen's sister, Dorothy Owen Knop, owned 145 shares of the corporation's stock; and Edward talked to his father, who was Dorothy's business adviser in all transactions material to this law suit, about purchasing the stock.
Fred Owen was apprehensive that a conflict might arise between his son and daughter of the sort he had seen between brother and sister stockholders before, where the brother actively managed the corporation and drew a salary while the sister received no dividends because the corporation failed to show a profit. Consequently, he thought it best that Dorothy sell her interest in Paxton & Vierling and invest her money in something else. Since Fred Owen was scheduled to undergo a very serious operation at the Mayo Clinic in November, 1948, he was anxious to settle the stock problem before that time. Consequently he suggested to Dorothy that she sell the stock to Edward at $300 a share. Both Edward and Dorothy were willing to effect a sale at that price but Edward wanted some time to decide how he would ultimately raise $43,500 to pay for the stock. He had stock, securities and real estate which he could mortgage or sell and he wanted until some time after the first of the year to decide which he would do. Under these circumstances Dorothy Knop and Edward Owen executed the following agreement:
Pursuant to the foregoing agreement, Edward Owen executed and delivered to Dorothy Knop the following note:
The 145 shares of stock owned by Dorothy Knop were transferred on the books of the corporation to Edward Owen and a new certificate for 145 shares was issued to him, and he gave possession of this certificate to Dorothy to hold as collateral security for his note. There was no agreement between Edward and Dorothy at, or before, the time the note was given relating to how it would be paid because Edward had not yet decided this. However, he was at all times solvent and the note, when given, had a fair market value equal to its face value. The court finds that Dorothy Knop's sale of the 145 shares of Paxton & Vierling stock to Edward Owen was a single, complete and bona fide transaction in every respect.
The historical background of the 145 shares of stock which Dorothy O. Knop sold to Edward F. Owen on October 15, 1948, is as follows:
In 1937, Fred Owen purchased 422½ shares of Paxton & Vierling stock for $62.50. In 1943, he purchased 302½ more shares for $127.766 a share with money which he borrowed from his wife, Lizette C. Owen. On August 31, 1943, Paxton & Vierling stock certificate No. 139 was issued to Fred E. Owen for the 725 shares of stock just referred to. On January 20, 1944, certificate No. 139 was cancelled and two new certificates were issued: No. 145 to Lizette C. Owen for 302½ shares, and No. 146 to Fred E. Owen for 422½ shares. Fred E. Owen had the 302½ shares issued to his wife to repay the loan. The fair market value of this stock at the time certificate No. 145 was issued was substantially $127.766 per share. Out of the 302½ shares of stock represented by certificate No. 145, Lizette C. Owen made the following gifts to Dorothy Owen Knop:
October 4, 1945 25 shares Certificate No. 153
February 18, 1946 20 shares Certificate No. 159
February 5, 1947 34 shares Certificate No. 161
Out of the 422½ shares represented by certificate No. 146, Fred E. Owen made a gift of 20 shares, represented by certificate No. 156 to Dorothy Owen Knop.
On August 31, 1943, certificate No. 132 for 300 shares of Paxton & Vierling stock was issued to A. J. Vierling, Trustee. Of this 300 shares, 75 shares had been purchased on August 31, 1943, from Molthop at $127.766 per share. Owen sold the 300 shares to A. J. Vierling, Trustee. The sale was made pursuant to a written agreement whereby the A. J. Vierling family accepted these 300 shares as payment of an outstanding note in the sum of $30,000 jointly executed by Fred Owen and D. T. Molthop. The A. J. Vierling family then sold the 300 shares to the Paxton & Vierling Iron Works and this company gave notes in the sum of $30,000 as payment. On August 31, 1943, certificate No. 132 was cancelled and certificates Nos. 133, 134, 135, 136, 137 and 138, each in the amount of 50 shares were issued in the name of Paxton & Vierling Iron Works — Treasury Stock. On October 4, 1945, in keeping with the beforementioned agreement, upon Fred E. Owen's payment of the notes which Paxton & Vierling Iron Works had executed to A. J. Vierling, Trustee, certificates Nos. 133 through 138, inclusive, were cancelled and the following certificates were issued to the persons indicated:
Certificate No. 149 25 shares Dorothy O. Knop
Certificate No. 150 25 shares Edward F. Owen
Certificate No. 151 250 shares Fred E. Owen
Certificate No. 149 represented a gift of 25 shares of Paxton & Vierling Iron Works stock to Dorothy O. Knop. Out of the 250 shares represented by certificate No. 151, Fred E. Owen made a gift of 21 shares, represented by certificate No. 163, to Dorothy Owen Knop on February 5, 1947.
On October 15, 1948, the Paxton & Vierling Iron Works stock had a fair market value of $300.00 per share.1 It had substantially the same fair market value on February 15, 1949.
On January 17, 1949, Dorothy Knop and her husband, Herman Knop, filed a joint federal income tax return for the calendar year 1948. Among other things the return disclosed:
Income (excluding capital gains and losses) $22,023.11
Net Long Term Capital Gain 48,092.85
Net Long Term Capital Loss 1,519.00
Adjusted Gross Income 44,550.54
Taxable Net Income 40,427.88
Tax 12,948.46
The return also disclosed the following information in regard to the sale of the 145 shares of Paxton & Vierling stock:
Purchased Sold Cost Sale Price Gain
1945-6-7 10-19-48 $18,526.07 $43,500.00 $24,973.93
By January 17, 1949, the Knops had paid the entire tax due, as shown on their 1948 return.
Neither in the 1948 return, nor in any subsequent return did Dorothy Knop and her husband report the interest income from Edward Owen's note.
During the last months of 1948, and early months of 1949, Edward Owen gave considerable thought to the manner in which he would satisfy the note held by his sister Dorothy Owen Knop. He was reluctant to sell anything and consequently thought seriously of borrowing the money and putting up some of his property as collateral.
About February 1, 1949, Fred Owen returned from the Mayo Clinic and had some discussions with his son about taking care of the note. Fred did not want his son to get...
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