Winton v. Kelm

• Decision Date: 08 June 1954
• Docket Number: 4178.,4177,Civ. No. 4176
• Citation: 122 F. Supp. 649
• Parties: WINTON v. KELM (two cases). JONES v. KELM.
• Court: U.S. District Court — District of Minnesota

122 F. Supp. 649

WINTON v. KELM (two cases).

JONES v. KELM.

Civ. Nos. 4176, 4177, 4178.

United States District Court D. Minnesota, Fourth Division.

June 8, 1954.

Best, Flanagan, Rogers, Lewis & Simonet, Ward B. Lewis, and Salisbury Adams, Minneapolis, Minn., for plaintiffs.

H. Brian Holland, Asst. Atty. Gen., Andrew D. Sharpe, Paul S. McMahon and Allen A. Bowden, Sp. Assts. to Atty. Gen., George E. MacKinnon, U. S. Atty., Washington, D. C., and Alex Dim, Asst. U. S. Atty., St. Paul, Minn., for defendant.

JOYCE, District Judge.

These three suits for tax refund involving identical issues were consolidated for trial.

The three plaintiff taxpayers are surviving children of Joel Winton and Mrs. Helen S. Winton who died in 1934 and 1947 respectively. In 1937 the children established a charitable trust designated as the Joel Foundation in memory of their father. On December 19, 1947 they established a similar trust, the Elizabeth Fund, in memory of their mother. Both trusts qualified for and received from the Treasury Department certificates of exemption from tax as charitable organizations under Section 101 of the Internal Revenue Code, 26 U.S.C.A. § 101.

Since the inception of the trusts the three cotrustees of each have been two of the present taxpayers, David J. Winton and Charles J. Winton, Jr., and Robert J. Flanagan. As to the Joel Foundation the Wintons had for a number of years followed the practice of making additional gifts of cash or stock, such gifts usually being made late in each calendar year.

On December 20, 1947 each of the Wintons as owners of certain shares of the capital stock of Winton-Oregon Timber Company, a Delaware corporation, purported to transfer to Robert J. Flanagan, one of the trustees and as nominee for the Joel Foundation, 200 shares, and to the same individual as nominee for the Elizabeth Fund 100 shares of such stock. The transfers were effected by assignment of the share certificates, transfer on the stock records of the corporation, and delivery of the certificates to Flanagan on the date mentioned. The practice of holding stock, for the sake of convenience, in the name of a nominee was authorized and permitted by the instruments under which the trusts were established.

Pursuant to a plan of liquidation the corporation paid final liquidating dividends to the trusts, or to Flanagan as their designated nominee, some time after December 23rd in 1947. The three taxpayers in their 1947 Federal income tax returns claimed as charitable deductions amounts equal to the value of the Winton-Oregon stock transferred and reported no gain upon the liquidation of such corporation. The taxpayers' returns were timely filed and the taxes there reported due were paid.

The Commissioner upon audit of the returns determined that the payments in liquidation were taxable to the Wintons at capital gain rates and made a deficiency assessment. The additional tax and interest was paid by each of the plaintiffs in the amount of $1,786.06 on March 28, 1952. Following payment, claims for refund of such amounts with interest were made and perfected and the present suits were timely commenced.

The sole issue, since the cost basis of the stock had already been recovered through prior tax-free distributions, is whether the admitted gain upon liquidation of the corporation was realized by and taxable to the Wintons or was realized by the charitable trusts and exempt from tax.

Winton-Oregon had been reorganized in 1925 under the laws of Delaware for the purpose of holding certain timber lands in the State of Oregon for the purpose of sale. As of December 8, 1947 all of the lands had been sold or lost under tax foreclosure and the corporation's assets, except perhaps for certain redemption rights to tax-forfeited lands, consisted solely of cash. Accordingly on that date the Board of Directors adopted a resolution containing a plan of liquidation pursuant to section 39 of the Corporation Law of Delaware, 8 Del.C. § 275.

At that time the corporation had outstanding 5,000 shares of its capital stock held by thirty-one individual and fiduciary shareholders residing in seven states. The three plaintiff-taxpayers owned respectively 606.83, 655.72 and 447 shares, of which, as indicated, 300 shares each were the subject of the gifts here in question.

There is no question but that as of that time the Wintons were desirous of effecting a liquidation, and equally clear that they were not in a position to control the corporation's action. Under Section 39 of the Delaware Corporation Law two methods of corporate dissolution are provided: (1) the adoption of a plan by action of the Board of Directors followed by a meeting of shareholders upon three weeks published notice and a vote in favor of such plan by a two-thirds majority of stockholders there present; or (2) in lieu of such notice the written consent of one hundred per cent of the shareholders.

Since time was short and some if not all of the parties involved desired to complete the liquidation before the end of 1947, the Board of Directors solicited consents under the alternative method mentioned. As of December 20, 1947, the date of the stock transfers to the trust, consents covering 3,680.51 shares had been received. Two days thereafter consents were received with reference to the balance of the shares including that of Robert J. Flanagan as to the 900 shares standing in his name as nominee for the trusts.

At the stockholders' meeting of December 23, 1947 there was accordingly unanimous approval given to the plan of dissolution and liquidating dividends were paid thereafter in 1947.

The plaintiffs contend that they made complete and absolute transfers to the trusts and that the incidence of the tax upon the gain resulting from the subsequent corporate liquidation is properly upon the transferees and not upon them in accordance with the well established general principle of income tax law that the tax liability on income from property is a concomitant of ownership. Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465.

The defendant maintains that in substance and reality the subject of each transfer was merely a right to receive an appropriate portion of the corporate assets upon liquidation, and such was the exclusive expectancy of the recipients. While the Government concedes the effectiveness of the gifts to transfer such right it asserts such gifts were anticipatory assignments of income and ineffective to insulate the transferors from income tax liability, citing Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L. Ed. 75.

It is of course well established by the Horst case and others of similar tenor which are discussed in Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898, that the Government and the courts in the application of the revenue laws must look to the substance and not the form of tax transactions. The dominant purpose of the revenue laws is the taxation of income to those who earn it or otherwise create the right to receive it. The transfer merely of a right to receive income prior to its actual receipt by the transferor will not insulate him from tax liability.

It is equally true that where income is the product of property and the taxpayer makes a complete and irrevocable transfer of such property, retaining no direct or collateral control over the receipt of its income, the incidence of the tax shifts to the transferee as to income subsequently earned or realized upon such asset. Blair v. Commissioner, supra.

While the defendant upon brief concedes the effectiveness of the transfers to pass rights to receipt of proceeds in liquidation, he questions the effectiveness of the gifts with reference to the stock itself claiming in substance a lack of intent to transfer such stock.

The requisite elements of a valid gift of corporate stock are the subject of an exhaustive opinion in Apt v. Birmingham, D.C.N.D.Iowa, 89 F.Supp. 361. Intent on the part of the transferor to divest himself completely and irrevocably of all present and future dominion and control over the subject matter is one of the five, or possibly six, requirements of a valid gift.

The Government apparently concedes, as it must, the presence of all elements of a valid gift aside from intent.

The Government's basic claim, which involves incidentally the matter of intent, is that sufficient legal action had been taken prior to the gifts...