Sanborn v. Commissioner of Internal Revenue

• Decision Date: 17 February 1937
• Docket Number: No. 10745.,10745.
• Citation: 88 F.2d 134
• Parties: SANBORN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

88 F.2d 134 (1937)

SANBORN v. COMMISSIONER OF INTERNAL REVENUE.^*

No. 10745.

Circuit Court of Appeals, Eighth Circuit.

February 17, 1937.

Llewellyn A. Luce, of Washington, D. C. (John M. Cleary and Phil D. Morelock, both of Kansas City, Mo., on the brief), for petitioners.

Harry Marselli, Sp. Asst. to the Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before SANBORN, WOODROUGH, and BOOTH, Circuit Judges.

BOOTH, Circuit Judge.

This is a petition for review of a decision of the Board of Tax Appeals entered March 30, 1936, which determined that there was a deficiency of $22,295.50 in petitioners' federal income tax for the calendar year 1929.

It appears from the record that the petitioners were respectively executrix and executor of the estate of William E. Minor, deceased; that Dr. Minor died testate December 15, 1928; and that his estate was closed March 31, 1930.

The third paragraph of the will of Dr. Minor contained the following provisions:

"Third: I own and hold forty-eight (48) shares of the stock of the Midland Realty Company, a corporation, of Kansas City, Missouri, which is all of said stock except two shares. The title to much of the lands and personal property hereinafter in this paragraph described is vested in said corporation, but it is my intention and desire that the title to all of the property in this paragraph described, except said Midland Realty Company stock, shall ultimately be vested in my said daughter, Marie Minor Sanborn. Said lands and personalty are described as follows: Here follows a description of the properties. * * *

"As to all of the property in this paragraph described the title to which is now vested in me, except said Midland Realty Company stock, I hereby will, devise and bequeath the same to my said daughter.

"I also will, devise and bequeath to my said daughter a sum of money equal to the value of all the property in this paragraph described, both real and personal, the title to which is now vested in the Midland Realty Company, and this legacy shall constitute and be a charge upon my said forty-eight (48) shares of stock in said Midland Realty Company, and this legacy shall be in addition to all other legacies or devises herein made to my said daughter. This legacy, however, may, and it is my intention and desire that it shall, be paid in full in the following manner; that is to say, if the said Midland Realty Company shall convey the property in this paragraph described, the title to which now stands in the name of the said Midland Realty Company, to my said daughter, the same shall be accepted by her as a full and complete satisfaction and payment of the legacy in this paragraph bequeathed to her, to the extent of the property in this paragraph described, the title to which now stands in the name of said Midland Realty Company, and if accepted by her, or if such conveyance shall be tendered by said Midland Realty Company to her and declined by her, in either event, the said stock shall be released from the charge in this paragraph imposed upon it, and in the event my said daughter shall decline to accept such conveyance, the said forty-eight (48) shares of stock shall pass to and vest in, and I hereby bequeath the same in the following proportions to the following legatees and devisees, to-wit: To my said daughter, one-half (½) thereof, and to the legatees and devisees named in paragraph (9) hereof, the other one-half (½) to be divided among them equally; and to the end that the title to the property in this paragraph described, which is now held by said Midland Realty Company, may as promptly as possible be vested in my said daughter, I hereby empower and direct her as executrix of this will to vote all of my said forty-eight (48) shares of stock at any and all stockholders meetings of said company, in favor of a resolution directing said corporation to convey all of the property in this paragraph described, the title to which now stands in the name of the said Midland Realty Company, to my said daughter, and this power to vote the said stock shall be vested in my said daughter alone, but she may designate another as her proxy to vote the same, and both she and my said executor, hereafter named, shall by all proper means expedite and facilitate the conveyance to her of the property in this paragraph described, the title to which is now vested in the said Midland Realty Company, and my said daughter as executrix of this will shall also have exclusive power by herself, or her agent duly appointed by her, to vote the said forty-eight (48) shares of stock on all questions which may come before the stockholders meetings of said corporation.

"If for any reason the title to the property now standing in the name of the said Midland Realty Company, and in this paragraph described, shall not be conveyed to my said daughter within two years from the date this will shall be offered for probate, unless such conveyance shall be prevented, by legal proceedings, and if so prevented, then within six months after the termination of such proceedings, then the said forty-eight (48) shares of stock, or so much thereof as may be necessary for that purpose, shall be sold by my executrix and executor hereinafter appointed, and out of the proceeds of such sale they shall pay to my said daughter a sum of money equal to the then value of the property in this paragraph described, the title to which now stands in the name of the Midland Realty Company, and for that purpose shall have the said property duly appraised, and after the payment of an amount equal to the said appraised value the balance of any money received from the sale of said stock, if any, and the remainder of said stock, if any shall remain unsold, shall pass to, and I hereby bequeath the same to the legatees named in paragraph nine (9) hereof in equal parts."

The daughter, Marie Minor Sanborn, elected under said paragraph of the will to take the real estate, and she filed such an election with the probate court.

Meetings were held of the directors of the Realty Company and of the stockholders, and, in pursuance of the authority given at said meetings, the Realty Company, on February 13, 1929, deeded to Marie Minor Sanborn the parcels of real estate described as above. No question is raised as to the regularity of these proceedings.

The Midland Realty Company was organized in 1904 with an authorized capital of $5,000, all of which, except two qualification shares, was owned by Dr. Minor.

On the 13th of February, 1929, the earned surplus of the Realty Company undistributed and accumulated since February 28, 1913, was $212,200.79. The shares of stock owned by Dr. Minor in said Realty Company were included in the federal estate tax return at their fair market value at the date of his death at the figure of $710,000.

The Board of Tax Appeals held that the distribution of the real estate, that is, the conveyance by the Realty Company to Marie Minor Sanborn, constituted a dividend to the estate of William Eli Minor to the extent of the corporate earnings accumulated after February 28, 1913; and held, further, that the transfer of the real estate to the daughter was not a distribution of income within the meaning of section 162(c) of the Revenue Act of 1928 (26 U. S.C.A. § 162(c) and note); and, therefore, that the estate was not entitled to any deduction in determining its net income.

The petitioners contend on the present appeal that the transfer of the real estate direct to Marie Minor Sanborn was not a dividend received by the estate; and, second, if it was a dividend so received, it was immediately distributed; and under the provisions of section 162(c) of the Revenue Act of 1928 (26 U.S.C.A. § 162(c) and note), was an allowable deduction in determining net income.

The petitioners point out that Marie Minor Sanborn at the time of the distribution was not a shareholder in the Midland Realty Company, and they cite the case of Taplin v. Commissioner (C.C.A.) 41 F.(2d) 454, to the effect that dividends cannot be created by fiat alone.

They also point out that the real property involved was not actually or constructively received by the petitioners, and therefore could not be income to the estate.

They also contend that, if such real estate could be held a constructive dividend, a deduction was allowable under section 162(b) and (c) of the 1928 act (26 U.S.C.A. § 162(b, c) and note); and they point to such cases as Bowers v. Slocum (C.C.A.) 20 F.(2d) 350, and McCaughn v. Girard Trust Co. (C.C.A.) 19 F.(2d) 218. See, also, Helvering v. Butterworth, 290 U.S. 365, 54 S.Ct. 221, 78 L.Ed. 365.

And the petitioners finally contend that, if they are forced to pay an income tax on the value of the real estate transferred, they will be subject to a double tax on the same properties; first, an estate tax which has been paid on the stock based on the value of the properties; and, second, an income tax on the theory that the properties were income to the estate during the process of administration.

The respondent contends that the estate was the stockholder, and that the transfer of the real estate to Marie Minor Sanborn was for the...