Seaman v. United States

• Decision Date: 12 July 1946
• Docket Number: 8991,No. 8787,No. 8992.,8787,8992.
• Citation: 156 F.2d 719
• Parties: SEAMAN et al. v. UNITED STATES.
• Court: U.S. Court of Appeals — Seventh Circuit

156 F.2d 719 (1946)

SEAMAN et al. v. UNITED STATES.

Nos. 8787, 8991, No. 8992.

Circuit Court of Appeals, Seventh Circuit.

July 12, 1946.

Helen R. Carloss and T. Carroll Sizer, Sp. Assts. to the Atty. Gen., Sewall Key, Acting Asst. Atty. Gen., and L. W. Post, Department of Justice, of Washington, D. C., and Timothy T. Cronin and E. J. Koelzer, U. S. Atty., both of Milwaukee, Wis., for appellant.

Edmund B. Shea and Leo J. Federer, both of Milwaukee, Wis., for appellees.

Before KERNER and MINTON, Circuit Judges, and BRIGGLE, District Judge.

KERNER, Circuit Judge.

The defendant appeals from judgments in favor of the three plaintiffs who are brothers and sister. They brought these actions to recover for alleged illegal assessment and collection of additional income taxes for the year 1936.

In No. 8787, Lauretta A. Seaman, the sister, charged that the Commissioner of Internal Revenue in computing her income tax liability for 1936, erroneously added to her taxable income an item of $53,803.54 which the Commissioner erroneously assumed had been realized by plaintiff from the sale of 12,602 shares of Seaman Body Corporation preferred stock at $15 per share. The complaint alleged that the shares of stock had been acquired by Harold H. Seaman and Irving Seaman as legatees under the will of their mother, Kate D. Seaman, who died July 20, 1932; that said bequest obligated the legatees to pay to plaintiff all dividends received upon the shares of the said preferred stock during plaintiff's lifetime or until sale thereof; that in case of sale the legatees were to pay to plaintiff during the remainder of her life the equivalent of such dividends amounting to $1 per share or $12,602 per year; that said testatrix's bequest was made pursuant to written family agreements dated January 16, 1923, and February 16, 1931;¹ that the brothers carried out their obligations with respect to dividend payments until July 17, 1936, when they sold the stock to Nash Motors Company; that in order to discharge the $12,602 annual obligation to their sister, the brothers paid to her the sum of $3,150.50 and about August 1, 1936, Harold H. Seaman and Irving Seaman, by virtue of $179,284 paid to certain life insurance companies, procured annuity contracts obligating the insurance companies to pay to plaintiff for the rest of her life the sum of $12,606.88 per year, beginning August 1, 1936; that in consideration of the issuance of said annuity contracts and said payment of $3,150.50, plaintiff released her brothers of all further liability to her; and that by reason of the above facts the defendant owes plaintiff the sum of $19,069.89 with interest on account of income taxes overpaid for the year 1936.

In Nos. 8991 and 8992, the brothers' complaints recite the same general facts as in No. 8787, but the amount stated as due and owing from defendant to Harold was alleged to be $30,259.63 with interest and the amount alleged to be due and owing from defendant to Irving was $30,251.45 with interest. These amounts were predicated on the theory that the brothers sustained deductible losses on the transaction of sale of the preferred stock and the subsequent purchase of the annuity contracts to satisfy their sister's claim against them.

The plaintiffs when apprised with notice of their respective deficiency assessments filed claims for refund with the Commissioner. All three claims were disallowed in full on August 5, 1942. As a consequence, the present actions were commenced.

In No. 8787, defendant contends generally that the court erred in concluding that the sister did not enjoy a recognizable profit and that her economic position was not improved by the sale of the preferred stock by her brothers and their subsequent delivery to her of cash and the purchase of annuities for her. It was stated by defendant's counsel in oral argument, however, that the defendant will concede the adverse judgment in the sister's case if it is successful in its appeals in the cases of the brothers. In view of such a concession and aware of the further inducement that the facts in the three cases are identical, we shall first examine Nos. 8991 and 8992.

Fortunately, there is no disagreement as to the facts. The issue was drawn with the sale by the brothers of 12,602 shares of preferred stock. It appears that the sale of the preferred stock was a part of liquidation proceedings by the family with regard to their corporate assets in the Seaman Corporation to Nash Motors Company, for on the same day (July 17, 1936) that the preferred stock was sold by the brothers, Lauretta sold 3,500 preferred shares, or all the stock owned by her in the corporation. Also on the same day, the brothers sold 25,000 shares of common stock of the Seaman Corporation to Nash for $1,709,353. These sales represented disposal of plaintiffs' entire holdings in the corporation, and as a result Nash became sole owner of all outstanding preferred and common stock of the corporation. Dissolution of the Seaman Body Corporation became effective as of September 30, 1938.

With the sale of their preferred stock, the brothers created the liability toward their sister, and if they had not sold the preferred stock bequeathed to them by their mother they would have been under no obligation to their sister except to see that she received the dividends declared and paid on the preferred stock. This self-imposed liability on the part of the brothers was obviated within one month with the issuance to the sister of the six annuity policies, a payment of a sum of cash, and a release by Lauretta to her brothers from any further liability on her claim against her brothers under the mother's will and the family agreements.

The District Court made certain findings of fact from which it was able to reach its conclusions of law. The most important findings appear to be that the brothers did not intend to make a gift to their sister and no gift was thereby effected; that this transaction was entered into by the brothers for profit; that the preferred stock sold to Nash was owned exclusively by the brothers and the sister had no property interest in it; that the cost basis of this stock in the hands of the brothers was measured by its full value in the estate of the mother, namely $189,030; that since the brothers sold this stock to Nash for the same amount, they realized neither profit nor loss on the sale; that a loss was sustained by the brothers attributable solely to the cash and six annuity policies transferred to their sister and measured by the full amount of this consideration, namely $182,434.50; that, however, the deduction for loss to which the brothers are entitled is limited to $89,672.56, that being the deductible loss claimed in their claims for refund.

Our question turns ultimately upon whether this was a transaction entered into for profit which produced a loss and is therefore deductible, or whether, in the alternative, a deductible loss was sustained by the Seaman brothers, because under the circumstances of this case there was no gift.

Defendant contends that by authority of 26 U.S.C.A.Int.Rev.Code, § 1002, the brothers made a taxable gift to their sister, for as the statute provides: "Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter title, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year."

It is urged that based upon the usual mortality table,² the ascertainable value of a life interest in the preferred stock asset which had a total value of $189,030 held by a person aged 61 (Lauretta's age at her nearest birthday) was $68,789.15. Yet the brothers paid a consideration of $182,434.50 to satisfy their sister's interest which, in turn, they sold to Nash along with their own interest in the stock for a total consideration of $189,030. In other words, the brothers paid their sister $182,434.50 to acquire her interest in the 12,602 shares of preferred stock which was valued at $68,789.15.

In the answers filed on behalf of the government, counterclaims were made against Harold for the recovery of $3,017.50 with interest and against Irving for the recovery of $3,297.75 with interest, as tax and penalty due on gifts by these individuals in 1936. In holding for the brothers the District Court rejected the counterclaims advanced. We must do likewise, because no gift to Lauretta was effected. Defendant's argument is founded upon the fallacy that the sister had a life interest in the 12,602 shares which the brothers received from their mother's estate. It is conceded by defendant that by the terms of the mother's will the brothers were vested with full property interest in the stock, but it is contended that the peculiar provisions whereby Lauretta was entitled to all the dividends on this stock as well as the right to demand its deposit with her endorsed in blank emasculated the brothers' full property interest. Such an argument is mere verbiage when applied to the situation here, for the brothers had the unfettered right to sell the stock. They availed themselves of this property right, which is definite indicia of ownership. The plain meaning of the mother's bequest to the brothers is not denied, and there is no claim that Nash, the purchaser of the shares of stock, became obligated to Lauretta to the amount of the dividends paid. As pointed out in Scott, Trusts (1939) § 10.1, "Where property is devised charged with the payment of money to a third person, the devisee may become personally liable to pay the amount of the charge. Whether he becomes personally liable depends upon the language of the will." That the mother's will exacted a charge of a personal nature on the brothers is confirmed by the fact of sale with no equitable charge...