Van Meter v. Commissioner of Internal Revenue

• Decision Date: 18 November 1932
• Docket Number: 9377.,No. 9376,9376
• Citation: 61 F.2d 817
• Parties: VAN METER v. COMMISSIONER OF INTERNAL REVENUE. INGLEMAN v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

61 F.2d 817 (1932)

VAN METER v. COMMISSIONER OF INTERNAL REVENUE.

INGLEMAN v. SAME.

Nos. 9376, 9377.

Circuit Court of Appeals, Eighth Circuit.

November 18, 1932.

James C. Davis and Guy A. Miller, both of Des Moines, Iowa, for petitioners.

John MacC. Hudson, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Nathan Gammon, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before STONE and KENYON, Circuit Judges, and OTIS, District Judge.

STONE, Circuit Judge.

The Hawkeye Life Insurance Company was organized March 9, 1920, and commenced business on the following July 1st. The Van Meter Company was organized April 29, 1920, by five persons, one of whom was this petitioner Van Meter. On June 15, 1920, and subsequently on January 21, 1924, the Hawkeye and Van Meter Companies entered into contracts whereby the latter was appointed the general agent for the former, and provided, among other things, that renewal commissions were to be paid the Van Meter Company "or its assigns" by the Hawkeye Company. At various meetings of the stockholders of the Van Meter Company, that company assigned the renewal commissions on business written under the general agency contracts to various persons, among whom was the taxpayer in this case. The Van Meter Company was dissolved on August 31, 1925. During the years 1922, 1923, 1924, and 1925, the Hawkeye Company paid direct, by individual check, to the various assignees of the Van Meter Company all of the renewal commissions arising under the two general agency contracts, and no part of the renewal commissions was paid to the Van Meter Company. During the years in controversy, the assignees paid an income tax upon the sums so received by them.

The present taxes are sought as taxes of the Van Meter Company for the years 1922 to August 31, 1925, and the claimed liability of this petitioner is as a transferee under section 280 of the Revenue Act of 1926 (44 Stat. 61 26 USCA § 1069 and note). While petitioner argues that the Van Meter Company was a personal service corporation, we do not deem it necessary to examine that matter except to say this taxable period begins with the year 1922 and personal service corporations were subject to taxation after December 31, 1921. Revenue Act of 1921, § 218 (d), 42 Stat. 245. The decisive question presented here is whether these assignments of renewals prevented such renewals from being income of that company, in a taxable sense, for the years in which they were paid by the insurance company to the assignees.

There is no question that these renewal premiums constitute taxable income. There is no question that the Van Meter Company and it alone earned this income. There is no question that the company made assignments of this income to petitioner with authority, accepted and acted upon by the insurance company, for direct payment to petitioner, and that this income was never received nor enjoyed by the Van Meter Company. If the Van Meter Company is taxable for this income, it must be because Congress has the power to tax income to the earner, irrespective of whether he or someone else actually receives and enjoys it, and because Congress has exercised this power.

The Supreme Court has definitely determined that Congress has the power to tax the earner of income therefor, irrespective of whether it is paid to someone else. Burnet v. Leininger, 285 U. S. 136, 142, 52 S. Ct. 345, 76 L. Ed. 665; Lucas v. Earl, 281 U. S. 111, 114, 50 S. Ct. 241, 74 L. Ed. 731; Corliss v. Bowers, 281 U. S. 376, 378, 50 S. Ct. 336, 74 L. Ed. 916; Old Colony Trust Co. v. Commissioner, 279 U. S. 716, 49 S. Ct. 499, 73 L. Ed. 918. Our only question is, therefore, has Congress manifested such an intention in the statutes here applicable.

The "earner" of income is one whose personal efforts have produced it; who owns property which produced it or a combination of the two. Decisions of the Supreme Court have declared that the income statutes require taxation to the earner in each of the three above sources of income where the income was actually realized but never came to beneficial enjoyment by the earner. Lucas v. Earl, 281 U. S. 111, 50 S. Ct. 241, 74 L. Ed. 731, is the decision in the instance of income earned by personal efforts alone — the income there being fees and salary of an attorney. Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 74 L. Ed. 916, is the instance of income from owned property. Burnet v. Leininger, 285 U. S. 136, 52 S. Ct. 345, 76 L. Ed. 665, is the instance of combined personal effort and property (or capital). These decisions were made upon the sections of the statutes defining taxable income here involved (sections 210, 213, and 233 of Revenue Act of 1921 42 Stat. 233, 237, 254, and sections 210, 213, and 233, Revenue Acts 1924 and 1926 26 USCA § 951 note; § 954 and note; § 985), or upon sections of other federal income statutes having precisely the same meaning in this respect. All of these decisions are governing authority in this case — the Lucas Case being more exactly so only because that and this case both deal with income earned through personal effort (in the Lucas Case by Earl, and here by the agents of the Van Meter Company).

In determining who is taxable for an income, there are three considerations which may be of importance, to wit, who earns the income, who receives it, and who enjoys it. Where the same person earns, receives, and enjoys the income (the normal and usual situation), there is no difficulty. Where different persons earn, receive and/or enjoy the income, disputes occur. In determining such disputes, the vital matter is always the relation of the earner (whether a person, owner of property or combination of the two) of the income to the income so earned. The rule and intent of the taxing statutes is that the earner of income which he might and, normally, would receive and enjoy for himself is not relieved because he chooses not to receive or not to enjoy it, and this is not necessarily changed by such deprivation taking the form of an obligation legally binding him thereto. If there exists a legal relationship of the earner to others which results in the earnings (in part or whole) being for the benefit of others than the actual earner, the statutes do not attempt to tax the earner for such income as he was not earning in his own right,¹ but where the earner of the income does nothing more than transfer the income earned in his own right to another, even though such disposal be in advance of the earning thereof (Burnet v. Leininger and Lucas v. Earl, supra), or where he retains any power of control over the income earning property or the income therefrom (Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 74 L. Ed. 916, and analogous as to transfer tax Chase Nat. Bank v. U. S., 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. 405, 63 A. L. R. 388; Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410, 66 A. L. R. 397, and as to State succession tax Saltonstall v. Saltonstall, 276 U. S. 260, 48 S. Ct. 225, 72 L. Ed. 565), such income is taxable to him within the intent of the statute (Burnet v. Leininger, Lucas v. Earl and Corliss v. Bowers, supra).

It is argued that it was the intention of the incorporators of the Van Meter Company from the first that "the Van Meter Company was contemplated only as a vehicle, as an intermediary by which to conduct the sale of life insurance for the Hawkeye Life Insurance Company, and the contract for selling life insurance for the Hawkeye was made between the Van Meter Company and the Hawkeye; the commissions and renewal commissions were contemplated as being paid direct from the Hawkeye Life to the individuals, without using the Van Meter Company as an intermediary" (testimony of McBride). This may be taken as true, but the fact remains that the Van Meter Company was the actual earner of these renewals under its contracts with the insurance company and was not a mere agency of the incorporators. A corporation is, in its very nature, an entity operating for the benefit of its stockholders. To permit it to be treated as the mere agent of the stockholders in a taxation sense would be to violate all legal conceptions of the true relationship and would open the door to unlimited escape from taxation.

It is argued that these assignments were effective as passing title to the renewals as choses in action. It may be conceded that the assignments legally entitled the assignees to have the renewals. That is not determinative here. There was no assignment of the agency contract. The Van Meter Company alone acted thereunder, and it alone produced the insurance business which was the basis or earning of the renewals. The actual effect of the assignments was to transfer to the assignees what had been solely earned by the Van Meter Company and to authorize direct payment thereof to the assignees by the Hawkeye Company. What it did with its earnings cannot affect the application of the taxing statutes. The Burnet v. Leininger and Lucas v. Earl Cases, supra, did not turn on any failure of the contracts there involved to pass the taxed income from the earner, but in both cases those contracts were treated as fully effective for that purpose and yet were held not to affect the application of the taxing statutes.

Petitioner strongly urges several Circuit and District cases as...