Ruben v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 06 October 1937 |
| Docket Number | Docket No. 65887. |
| Citation | 36 BTA 604 |
| Parties | ROSE G. RUBEN, AMOS S. DEINARD AND NORTHWESTERN NATIONAL BANK AND TRUST COMPANY OF MINNEAPOLIS, A CORPORATION, AS EXECUTORS OF THE ESTATE OF I. H. RUBEN, DECEASED, UNDER THE LAST WILL AND TESTAMENT OF I. H. RUBEN, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
George B. Leonard, Esq., and Benedict Deinard, Esq., for the petitioners.
Gerald W. Brooks, Esq., for the respondent.
This proceeding is for the redetermination of a deficiency in income tax for 1929 of $15,425.48. The petitioners admit liability for a deficiency of $1,836.44.
The question in issue before the Board is whether the petitioners' decedent derived any taxable income from the payment of $251,000 in 1929 by a corporation, of which he owned one-fourth of the capital stock, in settlement of an equity decree which included not only a money judgment for $351,542.81, but also a decree for rescission and cancellation of 25,716 shares of Miles Theatre Co. stock. The decree was against the petitioners' decedent, two other individuals, a trust estate, and a corporation. The petitioners contend that their decedent derived no taxable income from the payment made.
The facts in the case are contained in a written stipulation of facts signed by counsel.
Some years prior to 1918 M. L. Finkelstein and I. H. Ruben, the petitioners' decedent, were partners in theatrical properties in Minneapolis and St. Paul, operating a circuit of motion picture theatres. On April 29, 1918, William Hamm purchased a one-half interest in all of the theatre holdings of the partnership. This new partnership of Hamm, Finkelstein & Ruben operated until October 1, 1918, on which date the partnership assets were transferred to a common law trust, "Twin City Amusement Estate", which will hereinafter be referred to as "Twin City." Twin City owned and operated the theatre circuit until May 1, 1926. The beneficial interests in Twin City were as follows:
Percent
Theo. Hamm Brewing Co., through William Hamm, its trustee __ 50
M. L. Finkelstein __________________________________________ 25
I. H. Ruben ________________________________________________ 25
The trustees comprised seven persons, including among others, Hamm, Finkelstein, and Ruben. The declaration of trust specifically provided that any trustee or beneficiary should be indemnified out of the trust estate for any personal liability.
Twin City was determined and held to be a corporation for Federal tax purposes throughout its existence.
On May 1, 1926, Northwest Theatre Circuit, Inc., hereinafter referred to as "Northwest", was incorporated under the laws of Delaware and took over all the assets and business of Twin City and assumed all of Twin City's liabilities. The trustees of Twin City who held title to all of its assets transferred those assets to Northwest in exchange for all of the authorized stock. Hamm, Finkelstein, and Ruben became stockholders of Northwest in the following proportions:
Percent
Theo. Hamm Brewing Co _______________________________ 50
M. L. Finkelstein ___________________________________ 25
I. H. Ruben _________________________________________ 25
In December 1914 the partnership composed of Finkelstein and Ruben purchased a controlling interest in the Miles Theatre Co., which operated a theatre in Minneapolis. That partnership, the successor partnership, and the successor trust acquired additional shares of the Miles Theatre Co. from time to time. No dividends were paid by the Miles Theatre Co. to its stockholders from 1914 to 1920. Dividends of 10 percent were paid in April and October 1920 and April 1921, and a 20 percent dividend was paid in September 1921.
In January 1920 H. N. Backus and others who were stockholders, or former stockholders, of the Miles Theatre Co. commenced suit in the United States District Court, District of Minnesota, Fourth Division, against the trustees of Twin City, individually and as trustees, the Miles Theatre Co., New Palace Theatre Co., and others. The suit was a minority stockholders' suit brought in behalf of the Miles Theatre Co. to recover assets claimed to have been wrongfully diverted from the Miles Theatre Co. by the controlling stockholders. As incidental to the claim on behalf of the corporation for an accounting, a large number of persons who had at one time been stockholders in the Miles Theatre Co., but who had sold their stock to Twin City or its predecessor partnership, sought to rescind the sales of their stock and to be restored to their original status as stockholders.
The former stockholders made no claim for damages. They claimed that Twin City and its predecessor partnerships had purchased their stock at improperly inadequate prices.
The litigation continued until April 1929. In an opinion by the court dated November 19, 1929 ( ), it was held:
(d) The individual defendants Hamm, Finkelstein, and Ruben above named are all equally liable and the defendant Twin City Amusement Trust Estate, which is a holding agency for such individual defendants, is equally bound with them. The property of the corporation and that of the individual plaintiffs and interveners, and the gains therefrom, have been commingled and confused with property of the defendants. The sums found due should therefore be a charge and lien upon the property of the defendants held by the Twin City Amusement Trust Estate.
The decree was entered December 24, 1927, and was amended on February 14, 1928, and February 15, 1928. In the decree entered December 24, 1927, it was ordered in part:
2. That plaintiffs, interveners and said company are entitled to recover from defendants Finkelstein, Ruben, Hamm and the Twin City Amusement Trust Estate, and each of them, and said defendants are ordered forthwith to pay to said Trustee for the use and benefit of said company and all persons who may be entitled to share therein, the following sums of money, exclusive of costs and disbursements;
* * * * * * *
Defendants are ordered to make net payment to said Trustee (exclusive of costs and disbursements) in the aggregate sum of $351,542.81, as of December 1, 1927.
The amendment to the decree of February 15, 1928, made Northwest, which had become in 1926, and was then, the owner of all the theatrical properties formerly owned by Twin City (including all of the Miles Theatre Co. stock ever owned by any of the defendants), an additional party defendant as successor to Twin City and imposed the recovery as a lien against all the assets in the hands of Northwest.
The defendants took an appeal to the Circuit Court of Appeals for the Eighth Circuit from the decree as amended. On April 1, 1929, the litigation was disposed of by stipulation of settlement filed in the case. Under this settlement Northwest was to pay $250,000 cash out of its own funds. As a part consideration for this payment Northwest was to acquire the balance of the outstanding Miles Theatre Co. stock, stated in the decree to be 210 shares. The payment discharged Northwest's liability for the money judgment on behalf of the Miles Theatre Co. in the decree of December 24, 1927, and also discharged its liability to restore and cancel 25,716 shares of the Miles Theatre Co. stock; also, the lien imposed upon all of its property in the decree and in the amendment thereof of February 15, 1928. Northwest paid an additional $1,000 over the amount set in said stipulation. The final decree entered pursuant to the stipulation of settlement on April 13, 1929, provided in part:
All claims of every sort of all the plaintiffs, of all the interveners, of all the other persons who have filed claims herein, of all other stockholders and former stockholders of the Miles Theatre Company, of the Miles Theatre Company, and of H. E. Fryberger, Esq., against each and all of the defendants, existing on the 30th day of March, 1929, relating in any way to said Miles Theatre Company or to any of its stock, have been fully and finally compromised and settled, and are hereby fully and finally discharged and released, and all of the said persons are hereby barred, foreclosed and enjoined from any prosecution of any of...
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