Taylor v. CIR, 8289.

• Decision Date: 04 January 1962
• Docket Number: No. 8289.,8289.
• Citation: 298 F.2d 198
• Parties: John C. TAYLOR and Evelene B. Taylor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

298 F.2d 198 (1962)

John C. TAYLOR and Evelene B. Taylor, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 8289.

United States Court of Appeals Fourth Circuit.

Argued April 14, 1961.

Decided January 4, 1962.

J. Alex Neely, Jr., Anderson, S. C., for petitioners.

Karl Schmeidler, Atty., Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., and Lee A. Jackson and Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., on brief), for respondent.

Before SOPER, HAYNSWORTH, and BOREMAN, Circuit Judges.

HAYNSWORTH, Circuit Judge.

The taxpayers contest the Commissioner's recomputation of certain capital gains realized by them. In this court, they undertake to relitigate issues, largely factual, resolved against them by the Tax Court. Since the findings of the Tax Court are supported by substantial evidence and are not clearly erroneous, we necessarily affirm.

The taxpayers, husband and wife, filed a joint return in 1951. The return disclosed ordinary income, which was more than offset by allowable deductions, including a substantial loss in the operation of a farm. On this return, they also reported net gain of $314,196, realized by the husband upon the sale, during the year, of his stock interest in the Independent Publishing Company of Anderson, South Carolina. The Commissioner increased the gross sales price of this stock from $420,000 to $432,112.30, by reason of a cancellation by the Publishing Company of a receivable due from the husband of $12,112.30. The Commissioner also reduced the claimed cost basis from the taxpayer's appraisal of the worth of his stock when acquired to the amount of his original investment in the newspaper venture in 1925. Thereafter, the taxpayer sought to allocate a portion of the sales price of the stock to the settlement of his claim to a proprietary interest in a radio station which had undistributed net profits, so that he might report a portion of the sales price as ordinary income from which he could deduct South Carolina income taxes paid. Alternatively, he contended that he should be allowed to deduct the South Carolina income taxes attributable to the gain on the sale as an expense of the sale.

The Tax Court, making detailed findings of fact, resolved all of the issues in favor of the Commissioner.

Cost Basis of the Stock

In February 1925, Mr. Wilton Hall was the owner and publisher of a newspaper, the Anderson Independent, which he had founded a year earlier, and which had a paid circulation of about three thousand. There was a competing newspaper in Anderson known as the Tribune, the publisher of which had died some years earlier, and since then it had been operated by his estate. In February 1925, the Tribune had a paid circulation of some eleven hundred, but it had an exclusive franchise in Anderson, South Carolina, for the Associated Press wire services.

Hall and one Morris entered into negotiations looking toward an acquisition of the Tribune, from which they learned that the Tribune could be acquired for $20,000.

The taxpayer, John C. Taylor, was then the Clerk of the Court of Common Pleas for Anderson County, and a friend of Hall's. On previous occasions, Taylor had advanced money to Hall. The taxpayer paid over $12,500 for the purpose, according to the taxpayer, of having Hall, as the taxpayer's agent, purchase the Tribune. According to Hall, however, his purpose, and that of the taxpayer, at the time was to acquire the Tribune in the name of a new corporation, to which Hall would also transfer his newspaper, the Independent, so that the two might be combined. In any event, in February 1925, Hall and Morris obtained a South Carolina charter for a new corporation known as the Independent Publishing Company and having an authorized capital of $30,000. The charter of the Independent Publishing Company was not recorded in the office of the Clerk of the Court of Common Pleas for Anderson County until November 3, 1925, after Mr. Taylor, the Clerk and the taxpayer here, in correspondence with the Secretary of State of South Carolina had succeeded in effecting certain changes in the corporate charter, particularly the elimination of a reference to Morris as a stockholder. None of the stock of Independent Publishing Company was actually issued until 1927, when 145 shares were issued to Taylor and 30 shares were issued to Hall. Later, additional shares were issued, so that Taylor became the owner of 150 shares and Hall the owner of a like number.

Meanwhile, in February 1925, a petition had been filed in the Probate Court for Anderson County, having supervision over the administration of the estate which owned the Tribune, in which the Administratrix sought permission to sell the Tribune to the Independent Publishing Company for $20,000, of which $12,500 would be payable in cash and the remainder would be represented by notes secured by a chattel mortgage. The court approved the sale. The Publishing Company issued its notes for the $7500 and executed and delivered a chattel mortgage to secure their payment. This mortgage was recorded in the office of which Taylor was the Clerk, and, in August 1927, the notes having been then paid in full, he endorsed the satisfaction upon the record of the mortgage in his office in his own handwriting.

In 1925, the Anderson Independent and the Anderson Tribune were combined into a single newspaper.

The taxpayer contends that the Tribune had been purchased for him by Hall as his agent, and that he remained the individual owner of the Tribune, notwithstanding the fact that it had been combined with the Independent, until stock of the Independent Publishing Company was issued to him in 1927, or, at least, until the fall of 1925 when he undertook to effect certain changes in the corporate charter of the Independent Publishing Company. His purpose is to establish a taxable transaction in the fall of 1925, or in 1927, upon which he could found a claim to a stepped-up basis for his stock. He says that, after he put up the $12,500, it was understood that Hall would pay the notes aggregating $7500, and, then, when he had done so, each of the two would own a half interest in the combined newspaper. He asserts a valuation of a half interest in the combined newspaper in the fall of 1925, or in 1927, substantially greater than the actual cost of the Tribune in 1925.

Under these circumstances, we think the finding of the Tax Court that the Tribune was purchased by the Independent Publishing Company, and that the $12,500 paid by the taxpayer to Hall was a payment upon the subscription price of his stock in the Independent Publishing Company¹ is adequately supported. Hall testified that he transferred the Independent to the Publishing Company about the time of the acquisition of the Tribune, and he was principally interested in the acquisition of the Tribune because of the Associated Press franchise, and that the agreement was that, upon Taylor's paying in $12,500, the two would become equal owners of the shares of the Publishing Company. His testimony is supported by Taylor's concern over the provisions of the charter of the Publishing Company and the elimination of a recital indicating that Morris was a stockholder. Indeed, when writing to the Secretary of State in 1925, Taylor said, "Immediately after the charter was issued I became connected with the paper as a stockholder * * *." He explained he wanted the reference to Morris as a stockholder eliminated to avoid any question as to ownership of the stock. Hall's testimony is confirmed by the fact that the Publishing Company gave its notes for the deferred portion of the purchase price of the Tribune and secured them by a chattel mortgage upon assets which theretofore had belonged to the Tribune. Mr. Taylor, as Clerk of the Court, in whose office the mortgage was recorded, must have been aware of it, and he personally endorsed the record of its cancellation upon its face in 1927. There is no evidence that he then made any contention that he, individually, rather than the Publishing Company, was the owner of the assets covered by the chattel mortgage.

Against all of this, the taxpayer points to the fact that minutes of meetings of the directors of the Publishing Company, prior to 1927, recited that Hall and Morris were the sole stockholders and the only directors, though this is inconsistent with Taylor's own declaration in the letter he wrote to the Secretary of State in 1925. In 1927, the minutes indicate that Morris resigned as a director and as secretary, and that an employee of the Publishing Company was elected to both offices in his stead.

There is no evidence that Morris ever paid anything into the Publishing Company. No stock was ever issued in his name. He was one of its corporators, and, with Hall, was originally elected to its board of directors. The fact that he did not resign until 1927, two years after the acquisition of the two newspapers, and the fact that, in the meanwhile, minutes of the directors' meetings referred to him as a stockholder and made no mention of Mr. Taylor, are not necessarily conclusive. It was clear that Taylor left the operation of the newspaper entirely to Hall. Taylor testified that he thought he had been a member of the Board of Directors of the Publishing Company from the time of his acquisition of fifty per cent of the stock, either in 1925 or 1927, until sometime shortly prior to 1951, but he never attended a meeting of the directors or of the stockholders during all of that time. That he did not do so in the two-year period, 1925-1927, is entirely consistent with his subsequent conduct. The references prior to 1927 to Morris as a stockholder, and the absence of any reference in formal minutes to Taylor as a stockholder during that period, did not require the Tax Court to reject all of the substantial evidence that the ...