Hobson v. Commissioner

Estate of Arthur L. Hobson, Deceased, John L. Hobson, Administrator, C. T. A., and Mrs. Alice C. G. Hobson, Surviving Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent. George W. Langdon, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. George W. Langdon, Jr., Individually and as Administrator of the Estate of Marjorie B. Langdon, Petitioner, v. Commissioner of Internal Revenue, Respondent Hobson v. Commissioner Docket Nos. 25951, 25961, 25962 United States Tax Court 17 T.C. 854; 1951 U.S. Tax Ct. LEXIS 35; November 27, 1951, Promulgated *35 Decision in Docket No. 25951 will be entered for the petitioners. Decision in Docket No. 25961 will be entered for the respondent. Decision in Docket No. 25962 will be entered under Rule 50. Arthur L. Hobson and George W. Langdon, Jr., executed an agreement by the terms of which the former agreed to sell and the latter agreed to purchase certain shares of stock. The total consideration involved was $ 36,250, payable over a designated period of time. During such period, which was later extended, Hobson was to remain record owner and in possession of the shares until the agreed amount was fully paid. He was also to credit any and all dividends paid to him by reason thereof against such purchase price. Held: Dividends received by Hobson in 1943, 1944, and 1945, by reason of his retaining title to the stock, but applied by him against purchase price thereof, were not ordinary income to Hobson. Such dividends belonged to and were constructively received by Langdon and constituted ordinary income to him. Charles D. Post, Esq., for petitioners in Docket No. 25951, and Bennett Sanderson, Esq., for petitioners in Docket Nos. 25961 and 25962. Joseph Landis, Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN *855 The Commissioner determined deficiencies in income and income and victory tax as follows: Docket No. Year Amount [1943] $ 8,727.08 25951 (Hobson, income tax) [1944] 3,776.91 [1945] 908.38 [1944] 4,809.15 25961 (Langdon, income and victory tax) [1945] 3,230.90 25962 (Langdon & Wife, income and victory tax) [1943] 7,748.90 The contested deficiency in each instance arises by reason of the payment of dividends by Bradley-Goodrich, Inc., on 250 of 253 shares of capital stock outstanding during the taxable years, as follows: [1943] $ 16,250 [1944] 10,500 [1945] 6,000 Respondent concedes that $ 2,614.10 of the $ 16,250 distributed in 1943 did not constitute ordinary income. As for the balance of the 1943 distribution and those of 1944 and 1945 all petitioners concede *37 that such distributions are taxable as ordinary income. The only dispute is which of petitioners are properly taxable thereon. Because the identical income and issue are involved in all three dockets, these proceedings have been consolidated for hearing and disposition. FINDINGS OF FACT. The facts stipulated in each case are so found and made a part hereof. The petitioners in these consolidated cases are the Estate of Arthur L. Hobson, deceased, and Alice C. G. Hobson, surviving wife (both hereinafter referred to as petitioners Hobson); George W. Langdon, Jr., both individually and as administrator of the Estate of Marjorie B. Langdon (in either capacity hereinafter referred to as petitioners Langdon). In the case of petitioners Hobson, the pertinent income tax returns were filed with the collector of internal revenue for the district of New Hampshire. In the case of petitioners Langdon, all such returns were filed with the collector of internal revenue for the district of Massachusetts. *856 In 1943 Hobson owned 250 shares of Bradley-Goodrich, Inc. (hereinafter sometimes called the Corporation), which he had acquired in 1931 as security for a loan of $ 25,000 to Everett Bradley, *38 who died insolvent in 1940. On February 25, 1941, all of the other shares of the Corporation were donated by Langdon, Langdon's wife as executrix, and Hobson, to the Corporation, leaving Hobson's 250 shares as the only stock outstanding except for three other shares used to qualify directors. Hobson had taken over the 250 shares in his own name on February 27, 1941. He had previously taken a bad debt deduction for the entire $ 25,000 on his 1938 income tax returns. At about the same time (1941) the business of the Corporation, under Langdon as president and treasurer, was changed from the manufacture of shoes to the manufacture of various articles of leather and canvas on war contracts. Prior to 1941 the Corporation had a long record of losses. For the years 1941 to 1945, inclusive, it earned substantial profits. By contract dated October 11, 1943, Hobson agreed to sell to Langdon, and Langdon agreed to purchase, the 250 shares constituting the outstanding capital stock of the Corporation for the price of $ 36,250. This agreement provided, in part, as follows: 1. Said Hobson agrees to sell and said Langdon agrees to purchase shares of stock of Bradley-Goodrich, Inc., a corporation*39 duly organized by law and having its usual place of business in said Haverhill, in the amounts and upon the terms and conditions hereinafter set forth. 2. Said Hobson agrees to sell and said Langdon agrees to purchase one hundred twenty-five (125) shares of said stock on or before December 15, 1943 and to pay therefor the price of One hundred forty-five ($ 145.00) Dollars per share, or a total of Eighteen thousand one hundred twenty-five ($ 18,125.00) Dollars. Said Hobson agrees to sell and said Langdon agrees to purchase an additional one hundred twenty-five (125) shares of said stock on or after January 3, 1944 and not later than December 30, 1944 and to pay therefor the price of One hundred forty-five ($ 145.00) Dollars per share, or a total of Eighteen thousand one hundred twenty-five ($ 18,125.00) Dollars. 3. It is agreed that said Hobson shall hold all of said two hundred fifty (250) shares of said stock in his name until the full amount of Thirty-six thousand two hundred fifty ($ 36,250.00) Dollars shall have been paid to him, and that upon completion of the payment for said additional one hundred twenty-five (125) shares, he will transfer and deliver to said Langdon all of*40 said two hundred fifty (250) shares, being the total number of shares in the two lots purchased. * * * * 4. Said Hobson agrees to hold said stock in his name and not to sell, pledge, mortgage or otherwise alienate said stock or encumber it in any way until such time as it has been fully paid for by said Langdon, provided, however, that there is no breach of this Agreement by said Langdon. If said Langdon does breach this Agreement, said Hobson may sell said stock at public auction and credit the proceeds upon the balance of the purchase price; or, in the event that there is a surplus over said purchase price, all of such surplus, if any, after reasonable charges for the expense of such sale, shall be paid over to said Langdon. *857 5. Said Hobson agrees that he will credit upon said purchase prices at the respective times when said payments are made any dividends that he may have received upon any of said two hundred fifty (250) shares of stock. 6. It is mutually agreed that no interest shall be charged upon said purchase price of Thirty-six thousand two hundred fifty ($ 36,250.00) Dollars until and unless there is a breach of this Agreement by said Langdon, and it is further*41 agreed that until said transaction is completed, John L. Hobson, now a Director of said Bradley-Goodrich, Inc., shall remain on the Board of Directors, or, in the event he becomes incapacitated for any reason, said Hobson shall have the right to designate his nominee for the Board of Directors and to cast his votes as a stockholder and elect the same. * * * * During 1943 Hobson received dividends of $ 16,500 and $ 1,875 on Langdon's personal check. During 1944 Hobson received $ 10,500 in dividends. Under date of December 15, 1944, the time provided for completion of the payments was extended from December 30, 1944, to January 8, 1945. On January 5, 1945, Hobson received $ 6,000 in dividends and $ 1,625 on Langdon's personal check. Thereupon on the same date Hobson transferred to Langdon the 250 shares of stock. On March 17, 1945, Hobson filed ownership certificates certifying Langdon as the actual owner with reference to the dividends paid in 1943 and 1944 to Hobson as record owner. On March 8, 1946, Hobson likewise filed a similar statement with reference to the dividends paid in 1945. Hobson, in his income tax returns for all three years, reported the dividends and other money*42 received on the stock as a long term capital gain from a basis of zero. Langdon did not include any of these dividends in his returns for any year. Of the $ 16,250 paid in 1943 by the Corporation as dividends, $ 2,614.10 was paid from its capital and not from accumulated or current earnings and profits. Earnings and profits of the Corporation during 1944 and 1945 were in excess of distributions to shareholders in such years. By notice of deficiency mailed September 13, 1949, to the Estate of Hobson, who died November 9, 1946, the Commissioner determined that the foregoing dividends were taxable as ordinary income to Hobson in the years in which they were received. By notices of deficiency also mailed September 13, 1949, to Langdon, the Commissioner determined that the same amounts were taxable to Langdon as ordinary income in the same years. It is stipulated that if and to the extent it is concluded that Langdon had ordinary income because of the disputed dividends, Hobson was not taxable, and, conversely, if it is found that Hobson had ordinary income because of the disputed dividends, Langdon is not taxable. OPINION. Respondent has conceded that $ 2,614.10 of the $ 16,250 distributed*43 by Bradley-Goodrich, Inc., in 1943 was properly *858 reported by Hobson. As for the remainder of the distributions made during the period under review, respondent contends that they were taxable dividends within the meaning of section 115 (a), Internal Revenue Code. 1 This contention is not disputed by petitioners. It is agreed by all that some one owes the tax. The decision as to which petitioners are taxable on such dividends constitutes the sole issue herein. *44 The facts briefly summarized are these: On October 11, 1943, Hobson and Langdon executed a contract in which the former agreed to sell and the latter agreed to buy 250 shares of the stock of the corporation at a price of $ 36,250. The total shares outstanding at this time numbered 253. The 250 shares here in question had previously been placed with Hobson as collateral for his loan of $ 25,000 to one Everett Bradley. Upon default in repayment of any of this loan, Hobson had had these shares transferred to his own name, having previously taken a deduction for the entire $ 25,000 as a bad debt. The agreement between Hobson and Langdon called for a purchase of 125 such shares in 1943 for which $ 18,125 would be paid and the purchase of the remaining 125 shares in 1944 for a like payment. All shares were to be left in Hobson's name and possession until the total purchase price had been fully paid. The contract also provided that Hobson would not sell, alienate, or otherwise encumber these shares except upon default by Langdon. In this event Hobson could sell them at public auction and apply the amount so received against the remaining purchase price with any excess payable to Langdon. *45 It was further agreed that any dividend received by Hobson as record owner should be credited on the purchase prices. In 1943, 1944, and 1945 Hobson received such dividends in the amounts of $ 16,250, $ 10,500, and $ 6,000, respectively. He also was paid $ 1,875 in 1943 and $ 1,625 in 1945 by Langdon's personal checks. The 250 shares were transferred on the corporate books to Langdon on January 25, 1945. Hobson, in his returns for all three years, reported the amounts so received as a long term capital gain from a basis of zero. Langdon reported none of the dividends in his returns for any year. The dividends were distributed from the corporation's current earnings and profits, and represented earnings upon its stock shares taxable to some one. DeGuire v. Higgins, 159 F. 2d 921, certiorari denied 331 U.S. 858. Langdon argues that since Hobson was the record owner of the shares until January 5, 1945, the dividends theretofore *859 paid were prima facie his income unless he made timely disclosure of the actual owner thereof, citing Regulations 111, section 29.147-8. 2 Although Hobson filed the requisite Forms*46 1087, for each taxable year prior to the running of the statute of limitations thereon, he did not file them within the time limit prescribed. For this tardiness, among other reasons, petitioners Langdon argue that such distributions should be held taxable to petitioners Hobson. We do not agree. *47 So far as this particular argument is concerned, the pertinent facts here are somewhat similar to those in Ralph Hochstetter, 34 B. T. A. 791. There the petitioner had received certain dividends on stock he held as nominee for others. He did not timely file the necessary Form 1087, but the rights of the Commissioner were not jeopardized by such delinquency. Citing the pertinent regulation which was the forerunner of and, in all material respects, identical to the one here in question, the Commissioner contended that Hochstetter was taxable on the dividends so received by him because of his tardiness in making the essential disclosure. In denying the Commissioner's contention the Board of Tax Appeals said, inter alia: The purpose of the cited regulation is to provide a means by which the Commissioner will be advised of the true owner of income in ample time prior to the running of the statute of limitations to permit him to determine and assess the correct amount of tax against the true owner of the income. * * * The instant proceeding is not a case where the nominee has entirely failed to file the required form 1087. Nor is this a case where*48 although having filed the required form it was so delinquent that the Commissioner's rights were jeopardized thereby. What our decision would be in the event of either of such situations we need not now decide. Suffice it to say that in the instant proceeding the Commissioner has not been prejudiced in any way by the failure of petitioner to file form 1087 prior to January 1935. * * * The foregoing is particularly apposite in the instant case and the Commissioner would be unable here to invoke that provision of the regulation under discussion. Certain it is that such regulation may *860 not be relied on by one taxpayer as against another when, as here, the true ownership of income is in controversy. Regulations 111, section 29.147-8, supra, not being controlling, we turn to consideration of the true ownership of the disputed income without reference to that regulation. The argument advanced by petitioners Langdon that the transaction was, in effect, intended to be only the re-paying of the old debt due Hobson, finds no support in the evidence. Such debt had been cancelled and extinguished prior to 1943 and was not then in existence. Allen v. Trust Company of Georgia, 180 F. 2d 527.*49 The contention that it would be inequitable in view of Hobson's earlier actions to allow him capital gain treatment on the dividends and to place the income tax burden on Langdon, leaves us unmoved. Regardless of the niceties of the situation here, it is well settled that when a creditor accepts collateral in satisfaction of an obligation the amount by which the debt exceeds the fair market value of the property so received is deductible as a bad debt. Commissioner v. Spreckels, 120 F. 2d 517, affirming a Memorandum Opinion, Board of Tax Appeals; Commissioner v. National Bank of Commerce of San Antonio, 112 F. 2d 946, affirming 40 B. T. A. 471. See, also, Bingham v. Commissioner, 105 F. 2d 971; I. T. 3548, 1942-1 C. B. 74. If the property so acquired is subsequently sold, its basis in the hands of the creditor-vendor for the purpose of determining gain or loss is its fair market value as of the date of such acquisition. Allen v. Trust Company of Georgia, supra;Bennett v. Commissioner, 139 F. 2d 961,*50 modifying and affirming a Memorandum Opinion of this Court. Attention is directed to the fact that the bad debt deduction was taken in 1938, prior to the enactment of section 23 (k) (4) which provided that for deduction purposes a nonbusiness bad debt is to be treated as a capital loss. For years prior thereto the statute allowed them in full. Petitioners Langdon have taken the position that the transaction between Hobson and Langdon did not result in a completed sale; that title to and possession of the stock was specifically retained by Hobson until he received the full price agreed upon; and that, therefore, any dividends paid prior to the passage of title constitutes income to Hobson. In support thereof, petitioners Langdon cite Northern Trust Co. of Chicago, Executor v.United States (N. D. Ill., Dec. 1, 1950), and Max Viault, 36 B. T. A. 430. In the Northern Trust Co. case the vendor and vendee of the stock involved entered into a written escrow agreement on August 14, 1936, which contained provisions concerning the allocation of dividends similar to those in the contract before us. The court there held that a dividend subsequently*51 declared on December 16, 1936, out of profits earned prior to August 10, 1936, resulted in no gain, profit or benefit to the vendee. We must confess our inability to find a satisfactory *861 distinction between that case and the instant one unless it be in the agreement which is not fully set forth in the court's findings. Otherwise, we must respectfully differ with that decision. As for Max Viault, supra, we note that Fay Harvey Moore, 42 B. T. A. 949, has been, so far as we can find, the only decision to follow it on the issue here involved. The Moore case was later reversed on this point in Moore v. Commissioner, 124 F. 2d 991. Accordingly, we do not feel bound to follow the Viault case here. Hobson retained possession and title to the property which formed the basis of the transaction only as security for the payment of the agreed purchase price. The beneficial use of the property was in Langdon. The dividends which came to Hobson by virtue of his being record owner, were not subject to his unfettered command, but first had to be credited against Langdon's obligation to pay the full consideration. *52 Long v. United States, 66 Ct. Cl. 475. It has long been held that "* * * taxation is not so much concerned with refinements of title as it is with actual command over the property taxed -- the actual benefit for which the tax is paid. * * *." Corliss v. Bowers, 281 U.S. 376; Griffiths v. Helvering, 308 U.S. 355. If the dividends here in question belonged to Hobson as ordinary income, we have the unusual situation of Hobson taking his own income to pay himself an obligation that Langdon owed him. Moore v. Commissioner, supra. We are of the opinion that the dividends paid Hobson belonged to and were constructively received by Langdon, constituting income to him, and we so hold. Accordingly, respondent's determination in Docket No. 25951 is reversed. His determination in Docket No. 25961 is affirmed. As amended by respondent's concession on brief, respondent's holding in Docket No. 25962 is affirmed. Decision in Docket No. 25951 will be entered for the petitioners. Decision in Docket No. 25961 will be entered for the respondent. Decision*53 in Docket No. 25962 will be entered under Rule 50. Footnotes 1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS. (a) Definition of Dividend. -- The term "dividend" when used in this chapter * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. * * *↩ 2. REGS. 111, Sec. 29.147-8 (As amended by T. D. 5313, December 21, 1943, T. D. 5687, Feb. 16, 1949, and T. D. 5859, September 20, 1951). Information as to Actual Owner. -- When the person receiving a payment falling within the provisions of the Internal Revenue Code for information at the source is not the actual owner of the income received, the name and address of the actual owner or payee shall be furnished upon demand of the individual, corporation, or partnership paying the income, and in default of a compliance with such demand the payee becomes liable for the penalties provided. Dividends on stock are prima facie the income of the record owner of the stock. Upon receipt of dividends by a record owner, he should execute Form 1087 to disclose the name and address of the actual owner or payee. Form 1087 should be filed with the Commissioner of Internal Revenue, Processing Division, C. C. Station, Kansas City 2, Missouri, not later than February 28 of the succeeding year. Unless such a disclosure is made, the record owner will be held liable for any tax based upon such dividends. The filing of Form 1087 is not required (a) if the record owner is required to file a fiduciary return on Form 1041, or a withholding return on Form 1042, disclosing the name and address of the actual owner or payee, or (b) if the actual owner or payee is a nonresident alien individual, foreign partnership, or foreign corporation and the tax has been withheld at the source prior to receipt of the dividends by the record owner.↩