Welch v. Kerckhoff

• Decision Date: 08 June 1936
• Docket Number: No. 8013.,8013.
• Citation: 84 F.2d 295,106 ALR 1434
• Parties: WELCH, Collector of Internal Revenue, v. KERCKHOFF.
• Court: U.S. Court of Appeals — Ninth Circuit

106 ALR 1434, 84 F.2d 295 (1936)

WELCH, Collector of Internal Revenue, v. KERCKHOFF.

No. 8013.

Circuit Court of Appeals, Ninth Circuit.

June 8, 1936.

Robert H. Jackson, Asst. Gen. Counsel, of Washington, D. C., Sewall Key, John MacC. Hudson, and E. F. McMahon, Sp. Assts. to the Atty. Gen., and Peirson M. Hall, U. S. Atty., E. H. Mitchell, Sp. Asst. to U. S. Atty., and Eugene Harpole, Sp. Atty., Bureau of Internal Revenue, all of Los Angeles, Cal., for appellant.

Todd W. Johnson and Philip D. Johnston, both of Los Angeles, Cal., for appellee.

Before WILBUR, MATHEWS, and HANEY, Circuit Judges.

HANEY, Circuit Judge.

Appellee recovered judgment against appellant for the amount alleged to be illegally collected for documentary stamps which were affixed to certain stock certificates issued to appellee.

The facts were stipulated. Appellee's husband died on February 23, 1929, leaving a will, by the terms of which appellee was named as residuary legatee. The stock certificates received by appellee may be segregated into three groups, all of which were in the possession of the executors of decedent's will, immediately prior to the time of their distribution to appellee, which took place about September 25, 1930.

The first group of certificates represented stock in Wm. G. Kerckhoff Company, hereinafter called the first corporation. Decedent was designated as the owner of such stock in the certificates at the time of his death. Some time prior to September 17, 1930, these certificates were surrendered to the corporation, canceled, and new certificates for the same total number of shares were issued, which certificates designated the executors as the owner of the stock represented by the certificates. On September 17, 1930, an order was made in the probate proceedings of decedent's estate, ordering distribution of the stock of the first corporation to appellee. When the stock was distributed to appellee, she expended $700 for documentary stamps, which were affixed to the certificates received by her and canceled. It does not appear whether or not any tax was paid at the time these certificates were surrendered and reissued to the executors.

The stock received by appellee comprising the second group of certificates mentioned came into the possession of the executors in a different manner. At the time of decedent's death, the first corporation owned all the stock of Wabash Securities Company, hereinafter called the second corporation. Said second corporation owned certain other stocks which we will call "market stocks." Some time prior to the date of the order of distribution, the first corporation distributed all the stock which it owned in the second corporation to the executors. It does not appear whether or not the certificates for stock in the second corporation received by the executors were surrendered and reissued in the names of the executors; nor does it appear that any tax was paid on the transaction. It likewise does not appear how the distribution of the stock of the second corporation was made by the first corporation; that is, whether it was made as an ordinary or a liquidating dividend, or in some other manner.

After the distribution to the executors of the stock of the second corporation, it was dissolved and its assets, including the market stocks mentioned, were distributed in the "hands and names" of the executors. Although it does not appear that the distribution of the market stocks was a liquidating dividend, presumably such was the fact. The record does not disclose whether or not any tax was paid on the distribution of the market stocks to the executors.

The order of distribution, above mentioned, also included these market stocks, and thereafter the certificates representing such stocks were by the executors duly indorsed and distributed to appellee. At the time of this distribution to appellee, she expended money (the amount of which does not appear) for documentary stamps which were affixed to the certificates for the market stocks and were canceled.

Possession by the executors of the third group of certificates mentioned was obtained in a manner somewhat similar to the manner in which the executors obtained possession of the second group of certificates. At the time of his death, decedent owned all of the issued and outstanding stock of Terre Haute Corporation, hereinafter called the third corporation. Said third corporation owned all the issued and outstanding stock of San Marino Limited, hereinafter called the fourth corporation. Said fourth corporation owned certain other stocks which we will refer to as "distributed stocks."

On July 17, 1930, the third corporation was dissolved, and the stock of the fourth corporation owned by the third corporation was distributed to the executors. Presumably this distribution was a liquidating dividend, although such fact does not appear in the record. On September 3, 1930, the fourth corporation was dissolved, and its assets, including the distributed stocks mentioned, were distributed in the "hands and names" of the executors, presumably as a liquidating dividend, such fact not being shown in the record.

The record does not disclose whether or not the certificates, for the stock of the third corporation owned by decedent at the time of his death, were surrendered and reissued in the names of the executors, and, if so, whether or not any tax was paid on the transaction. It likewise does not appear whether or not the certificates, for stock of the fourth corporation received by the executors on dissolution of the third corporation, were surrendered and reissued in the names of the executors, and, if so, whether or not any tax was paid on the transaction.

The above-mentioned order of distribution also ordered distribution of the "distributed stocks," and pursuant thereto the executors duly indorsed and distributed such stocks to appellee. At the time of this distribution to appellee she expended a certain sum of money (the amount not being stated in the record) for documentary stamps which were affixed to the certificates for said "distributed stocks" and duly canceled.

The total cost of the stamps affixed to the certificates in the second and third groups of securities was $716.24, and the total cost of the stamps affixed to the certificates in all three groups was $1,416.24.

The trial court held that "title to the property evidenced by the certificates of stock upon which stamps were affixed was transferred and passed to the plaintiff appellee by operation of law upon the death of her husband," and rendered judgment in favor of appellee for the full amount expended for stamps.

The Revenue Act of 1926 imposes a tax (chapter 27, 44 Stat. 101, § 800 et seq., Schedule A, subd. 3) "on all sales * * * deliveries of, or transfers of legal title to shares or certificates of stock * * * or to rights * * * to receive such shares or certificates, whether made upon or shown by the books of the corporation, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale, whether entitling the holder in any manner to the benefit of such stock, interest, or rights, or not."

Article 34 of Treasury Regulations 71, promulgated under the above act, provides among other things:

"The following transactions are subject to the tax:

"(c) The transfer of stock to or by trustees * * *

"(m) The transfer of stock in pursuance of a gift, bequest, or conveyance by trustees.

"(n) The transfer of stock from parties occupying fiduciary relations to those for whom they hold stock.

"(o) The transfer of certificates of stock by an administrator or executor to the legatee or distributee. * * *"

Article 35 of said regulations provides among other things:

"The following transactions are not subject to the tax:

"(g) The transfer of certificates of stock from the decedent to the administrator or executor of the estate * * *

"(q) Transfers of shares or certificates of stock which result wholly by operation of law are not subject to the tax. Transfers of this character are those which the law itself will effect without any voluntary act of the parties, such as transfer of stock from the decedent to executor. * * *"

Appellee contends that under the law of California the real and personal property of the decedent pass immediately upon his death to his heirs or to the beneficiaries named in the will;¹ that a legatee may be designated by the will, but it is only by virtue of the statute, that is, by operation of law, that the legatee acquires title;² that therefore the transfers fall within article 35 (q) of the regulations quoted, and are not taxable.

Both parties have presented arguments with respect to the question as to whether local law, which purports to control or limit the operation of a federal taxing act, must be applied. In Burnet v. Harmel, 287 U. S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed 199, the rule regarding this question is stated to be that "state law may control only when the federal taxing act, by express language or necessary implication, makes its own operation dependent upon state law."

Thus local law was held to be implied for the determination of what is a building and loan association, because the statute referred to such associations as "domestic" associations, meaning "associations sanctioned by the several States." United States v. Cambridge Loan & Bldg. Co., 278 U. S. 55, 49 S.Ct. 39, 40, 73 L.Ed. 180. And in Crooks v. Harrelson, 282 U.S. 55, 51 S. Ct. 49, 75 L.Ed. 156, the federal taxing statute required property of a decedent which was subject to the payment of expenses of administration to be included in the gross value of the estate for estate tax purposes, and local law was applied to determine whether or not the property in question was subject to such payment. And, where it is necessary to determine the extent of one's ownership in property, under a taxing act which...