Van Keppel v. United States, KC-1288.
Decision Date | 20 June 1962 |
Docket Number | No. KC-1288.,KC-1288. |
Parties | Gerald W. VAN KEPPEL and Elizabeth Van Keppel, Plaintiffs, v. UNITED STATES of America, Defendant. |
Court | U.S. District Court — District of Kansas |
Joseph H. McDowell, Stanley & McDowell, Kansas City, Kan., John B. Gage, Gage, Hodges, Moore, Park & Kreamer, Albert F. Hillix, Richard H. Brown and Hillix, Hall, Hasburgh, Brown & Hoffhaus, Kansas City, Mo., for plaintiffs.
Newell A. George, U. S. Atty., Topeka, Kan., Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D. C., and Edward S. Smith and George Elias, Jr., Attys., Department of Justice, Washington, D. C., for defendant.
This is an action by Gerald and Elizabeth Van Keppel, taxpayers, to recover an alleged overpayment of $32.38 plus interest on their 1956 joint income tax return. The Government has counterclaimed to collect an alleged deficiency of $183,850.40 plus interest. The case is presently under advisement for decision on its merits.
The plaintiffs' return, filed February 18, 1956 (Exhibit 1), claimed a deduction of $30.50 for safe deposit box rentals and a depletion allowance of $4,523.44 for the "Jordan `B' Oil Lease." An amended return (Exhibit 3) was filed on October 15, 1958, claiming an additional box rental deduction of $8.00 and an additional depletion allowance of $46.88. The evidence, which is uncontroverted, is that these additional amounts were properly deducted. (See Exhibits 21 and 21-A).
The more serious problem in this case arises from the counterclaim. In 1945, Mrs. Van Keppel purchased 375 shares of stock in the G. W. Van Keppel Company, hereinafter called the Company, at $10.00 per share. Mr. Van Keppel at that time owned all but one of the remaining outstanding shares.
The Company, in 1956, redeemed all of the shares held by Mrs. Van Keppel at $900.00 per share. The proceeds from the redemption were reported as long term capital gain on the return filed February 18, 1957. In July of 1958, the return was audited. It was discovered that Mrs. Van Keppel had failed to file an agreement to notify the District Director of Internal Revenue in the event she reacquired any stock in the Company within ten years following the redemption. The agreement was thereafter executed and mailed to the District Director on July 15, 1958, and an identical agreement was attached to the amended return of October 15, 1958. On December 18, 1959, the District Director assessed the deficiency now in question, claiming that the proceeds from the redemption should be treated as ordinary income.
The treatment to be accorded the proceeds hinges upon interpretation of § 302 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 302. The general rule, as stated in § 302(a), is that a redemption of stock will be treated as a distribution in part or full payment in exchange for the stock if paragraph (1), (2), (3), or (4) of § 302(b) applies.
Plaintiffs rely upon § 302(b) (3), which allows capital gains treatment if the redemption is in complete redemption of all of the stock of a corporation owned by the taxpayer. This would dispose of the case except for § 302(c) (1) wherein the constructive ownership rules of § 318 (a) (1) are made applicable to § 302. Section 318(a) (1) attributes the ownership of stock, owned by a taxpayer's spouse, to the taxpayer. Since Mr. Van Keppel owned stock in the Company at the time of the redemption, his ownership must be attributed to Mrs. Van Keppel, thereby removing the applicability of § 302(c) (2).
However, there is an exception to the application of the constructive ownership rule. Section 302(c)(2)(A) provides:
The regulation referred to in § 302 (c) (2) (A) (iii) is § 1.302-4(a):
It is the Government's position that the failure by Mrs. Van Keppel to file the agreement required by § 302(c) (2) (A) (iii), in the manner prescribed by the regulation § 1.302-4(a), precludes her use of the exception. The plaintiffs' answer is that substantial compliance rather than strict compliance satisfies the statute and that substantial compliance was effected.
The issues hereby framed are two: (1) are the statutory provisions mandatory, requiring strict compliance, or directory, requiring substantial compliance; and (2) if directory, did the...
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