Ruben v. Commissioner of Internal Revenue

• Decision Date: 14 July 1938
• Docket Number: No. 11100.,11100.
• Parties: RUBEN et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

97 F.2d 926 (1938)

RUBEN et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11100.

Circuit Court of Appeals, Eighth Circuit.

July 14, 1938.

Benedict Deinard, of Minneapolis, Minn. (George B. Leonard, of Minneapolis, Minn., on the brief), for petitioners.

Joseph M. Jones, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before STONE, SANBORN, and WOODROUGH, Circuit Judges.

WOODROUGH, Circuit Judge.

This appeal is taken by the executors of the estate of I. H. Ruben, deceased, to review a decision of the Board of Tax Appeals (36 B.T.A. 604) sustaining income taxes found to have accrued against Mr. Ruben in his life-time for the year 1929.

Mr. Ruben did not actually receive the amount of money upon which the tax is based by way of gain or profit from any of his activities or investments in that year, but a compromise settlement was effected during the year whereby a corporation in which Mr. Ruben was a stockholder paid out a large sum of money, and Mr. Ruben was released from certain heavy claims that were being made against him and others. The position of the Commissioner is that the payment so made by the corporation, resulting in the release of claims against Mr. Ruben, should be deemed a distribution to Mr. Ruben made by the corporation within the definition of a dividend under Section 115(a) Revenue Act 1928, c. 852, 45 Stat. 791, 26 U.S.C.A. § 115(a), taxable as such under Section 22 (a) Revenue Act 1928, 45 Stat. 797, 26 U.S.C.A. § 22 (a). The executors deny that there was any taxable distribution of a dividend by the corporation to Mr. Ruben within the meaning of the act.

It appears that before 1929 Ruben and his associates, Hamm and Finkelstein, had during a course of years accomplished the acquisition of 34,792 out of a total of 35,000 shares of the capital stock of a corporation called the Miles Theater Company, and had caused the shares so acquired to be transferred at first to their copartnership, and then to a common law trust owned by them, and then to the Northwest Theatres Circuit, Inc., a corporation in which they owned all the stock. The acquisition of the majority of the stock of the Miles company had been accomplished by the year 1914, and Ruben and his associates had controlled the operation of its theatre in Minneapolis since that time.

Protracted litigation with the prior owners of the stock of the Miles Theatre Company resulted in a federal District Court decree (December 24, 1927, amended February 15, 1928) holding that much of the stock had been obtained from the owners by fraud and directing that rescission should be awarded as to 13,062 shares, and that 12,654 shares should be cancelled. It was further adjudged that improper charges against the Miles corporation and improper disbursements out of its assets had been made during the control of the corporate affairs by Ruben and his associates, and that the defendants in the decree, Hamm, Finkelstein, Ruben, their common law trust and the Northwest Theatres Circuit, Inc., had become liable to the corporation and its stockholders by reason of the mismanagement, and the decree adjudged that they pay to a trustee named by the court the sum of $351,542.81 for the benefit of the aggrieved stockholders.

The money judgment against Mr. Ruben was not included in the decree on any determination that Mr. Ruben had personally received or kept that amount of money or property for himself or any considerable or proportionate part of such amount. He and the others were held accountable in that sum for breaches of fiduciary duties under the rules of equity. The opinions of the District Court indicating the grounds of decision are reported: Backus v. Finkelstein, 23 F.2d 357; Id., 23 F.2d 531, q. v. An appeal from the decree was taken to the Circuit Court of Appeals, but in April, 1929, while the appeal was pending and before it was heard, a compromise settlement was brought about by the terms of which the Northwest Theatres Circuit, Inc., paid $251,000 in full settlement of all claims against it and its co-defendants in the decree, "relating in any way to the Miles Theatre Company or any of its stock." By the terms of the settlement the Northwest Company was also discharged of its liability to restore or cancel 25,716 shares of the Miles stock, and it acquired the outstanding stock of the Miles Theatre Company which it had not previously held, amounting to 210 shares. The settlement left the Northwest Company a clear title to all of the 35,000 shares of stock in the Miles Theatre Company.

The declaration of the common law trust had provided that the beneficiaries thereof, including Hamm, Finkelstein and Ruben, should be indemnified out of the trust estate for any personal liability, and the Northwest Company had received the assets of the trust charged with the same burden. But it is not shown that the Northwest Company was moved to make the compromise settlement to any extent because of its duty to indemnify Mr. Ruben and the others as beneficiaries of the common law trust. The decree ran against the company which had at all times assets sufficient to respond and make satisfaction. It compromised, so far as appears, in its own interest. The fact that the acts and omissions which had aggrieved the Miles company stockholders and which had led up to the decree were those of Mr. Ruben and his associates while they were making the acquisitions that went to the company did not alter its situation.

One fourth of the stock of the Northwest company was owned by Mr. Ruben and the rest by his associates, Hamm and Finkelstein. The position of the Commissioner was, and is, that Mr. Ruben had become jointly liable with his associates for their wrongs done the stockholders of the Miles Theatre Company; that the $251,000.00 payment by the Northwest Corporation was a discharge of their obligation, and that at least in the proportion of his stockholdings in the Northwest (¼ = $62,750.00) Mr. Ruben had received taxable dividend.

The Commissioner relies upon Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918; United States v. Boston & M. R. R., 279 U.S. 732, 49 S.Ct. 505, 73 L.Ed. 929; United States v. Mahoning Coal R. Co., 6 Cir., 51 F.2d 208, and other cases holding that where an item of income accrues to a taxpayer it is taxable to him, notwithstanding the fact that the same has remained in the hands of another, who pursuant to the taxpayer's contract or direction, applies it upon an obligation of the taxpayer instead of turning it directly to the taxpayer. And upon Clark v. Commissioner, 3 Cir., 84 F.2d 725; Lonsdale v. Commissioner, 8 Cir., 32 F.2d 537; Helvering v. Gordon, 8 Cir., 87 F.2d 663-666, which hold that where a corporation disburses its money at the instance of a stockholder in his interest, or to his creditor to discharge his obligation, the disbursement may be found to be a dividend distribution to the taxpayer taxable as such.

The executors deny that the principle of such cases is applicable. They also contend that there could be no obligation upon Ruben to pay the tax involved because the $251,000 compromise payment was in discharge of the Northwest Company's own primary liability; that the liability compromised was based upon unliquidated and unadjudicated claims; that the compromise included more than settlement of the money decree and secured affirmative benefits and acquisitions to the company, and that no specific part of the compromise payment ever was, or could be, apportioned as an obligation of Ruben's.

We are satisfied that Mr. Ruben can not be held to have received taxable income in 1929 on account of the settlement made by the Northwest Company, either to the extent of one-fourth of the payment it made in its settlement with the Miles Theatre Company stockholders or to any extent. Taxation remains a practical matter, dealing with realities, Helvering v. Gordon, 8 Cir., 87 F.2d 663, and it is apparent on the facts that instead of being a harvest time of gains or profits for Mr. Ruben, the year 1929, on the showing in this case, was just the opposite. Costly and unsuccessful litigation against him and his associates, and their trust and their corporation, had extended over years, and was finally brought to compromise settlement through heavy disbursement made by the company of whose stock he was the one-fourth owner. Whatever loss to the company was included in the $251,000 payment he shared in indirectly as a stockholder. But to say that anything moved to Mr. Ruben by way of gains, profits, or income, is simply paradoxical. Rationally considered, what happened to him was that he escaped being individually subjected in his person or his separate estate to the claims and demands of the stockholders of the Miles Theatre Company. He was personally spared, but he did not get anything for himself except his release, which was the evidence of his escape. He was not enriched by having any income accrue to him or by receiving any income.

None of the cited cases holds that merely to escape from a contested money claim by the force of circumstances or the action of others, as Mr. Ruben did, makes a man subject to tax as though he had gotten an income.

In the principal case relied on by the Commissioner, it appeared that an employee entered upon his duties under the express agreement that his income taxes would be paid by his employer. The income taxes having been levied against the employee were paid by the employer pursuant to the contract of employment and in consideration of the services rendered. Under such circumstances, it was held that the payment constituted income to the employee. Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 49 S.Ct. 499, 73 L.Ed. 918. In United States v. Boston & M. R. R., 279 U.S. 732, 49 S.Ct. 505, 73 L.Ed. 929, a substantially analogous situation was presented where the lessee of...