Kaufmann v. Commissioner

Oliver M. Kaufmann, Petitioner, v. Commissioner of Internal Revenue, Respondent. Irwin D. Wolf and Martha K. Wolf, Petitioners, v. Commissioner of Internal Revenue, Respondent Kaufmann v. Commissioner Docket Nos. 5165, 6567 United States Tax Court 6 T.C. 444; 1946 U.S. Tax Ct. LEXIS 268; March 12, 1946, Promulgated *268 Decision will be entered for the respondent. Gifts of shares of stock held to have been made in 1925 rather than in 1921, as petitioners contend, and cost basis thereof determined in accordance with stipulation. W. A. Seifert, Esq., Sidney B. Gambill, Esq., and A. G. Wallerstedt, C. P. A., for the petitioners. Homer F. Benson, Esq., for the respondent. Smith, Judge. SMITH *444 These proceedings, consolidated for hearing, involve income tax deficiencies for 1940 of $ 4,739.95 (Docket No. 5165) and $ 3,153.97 (Docket No. 6567). *445 The question in issue in both proceedings is the cost basis to be used in determining profit upon the sale during that year of certain shares of 5 percent preference stock of Kaufmann Department Stores, Inc., which shares had been acquired by the vendors by gift. Martha K. Wolf is the wife of Irwin D. Wolf. The husband appears as petitioner in Docket No. 6567 solely by reason of the fact that husband and wife filed a joint income tax return for 1940. The term "petitioner" in this report will hereinafter be understood to refer only to Martha K. Wolf, so far as Docket No. 6567 is concerned. It is the respondent's contention*269 that each of the petitioners received a gift of 1,000 shares of common stock of Kaufmann Department Stores, Inc. from their brother, Edgar J. Kaufmann, in 1925. The petitioners contend that these gifts were received in 1921 and that the correct basis for the determination of gain is the cost or March 1, 1913, value of the shares, since Edgar J. Kaufmann had received the shares by gift from his father, Morris Kaufmann, who acquired them prior to March 1, 1913. The parties have stipulated in Docket No. 5165: * * * If it is finally determined in this proceeding that the aforesaid gift was made to the petitioner [Oliver M. Kaufmann] in 1925 as contended by the respondent, then the cost basis as shown in the deficiency letter is correct and should stand. * * * A similar stipulation is made in Docket No. 6567. FINDINGS OF FACT. Oliver M. Kaufmann is a resident of Coraopolis, Pennsylvania, and Martha K. Wolf is a resident of Aspinwall, Pennsylvania. Both filed income tax returns for 1940 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh. In 1940 Oliver M. Kaufmann sold 4,373.81 shares of 5 percent preference stock of Kaufmann Department*270 Stores, Inc., for $ 439,692.54. Included in the 4,373.81 shares were 807.57 shares that had been received by him in exchange or exchanges for stock received by him as a gift in a prior year. The respondent in determining the deficiency, as shown in the statutory notice of deficiency, determined the cost basis of these 807.57 shares to be zero, plus certain reorganization expenses that are not in dispute. In 1940 Martha K. Wolf sold 645 shares of the 5 percent preference stock of Kaufmann Department Stores, Inc., for $ 64,884.84. This stock was received by her in an exchange or exchanges for other stock that she had received by gift in a prior year. If the shares were received by gift in 1925, as determined by the respondent, the cost basis is zero, plus certain reorganization expenses that are not in dispute. *446 The father of the petitioners was Morris Kaufmann, who died in 1917. Edgar J. Kaufmann is a brother of the petitioners. In about 1915 Morris Kaufmann agreed to give to his son, Edgar J. Kaufmann, 10,000 shares of the common stock of Kaufmann Department Stores, Inc. There was some writing evidencing such agreement. Prior to his father's death Edgar J. Kaufmann*271 had received only 2,000 shares of the stock. Several years after his father's death the executors and trustees paid over to him the remaining 8,000 shares which his father had agreed to give him. In 1921 4,000 of the 8,000 shares received by Edgar J. Kaufmann from his father's estate had been deposited by Edgar with the Union Trust Co. of Pittsburgh as collateral on a personal indebtedness to the bank. On June 22, 1921, Edgar owed the bank $ 300,000 and the bank held as collateral for the loan the following: (a) 4,000 shares of the 8,000 shares of stock of Kaufmann Department Stores, Inc., received by Edgar J. Kaufmann from the estate of his father. (b) 3,374 of preferred stock of Kaufmann Department Stores, Inc., of a par value of $ 100 per share; and (c) $ 20,000 of Rock Island & La. R. R. bonds. In 1921 Edgar J. Kaufmann decided to give to Oliver M. Kaufmann and Martha K. Wolf each 1,000 shares of the common stock of Kaufmann Department Stores, Inc., which were then up as collateral with the Union Trust Co. of Pittsburgh as security for his indebtedness to that company in the amount of $ 300,000. Pursuant to his intention to make the gifts, he requested the Union Trust Co. to*272 transfer 1,000 shares to the name of his brother Oliver and another 1,000 shares to the name of his sister Martha. This the Union Trust Co. refused to do. Thereupon Edgar contacted Martha's attorney to see what could be done to effect his intention with regard to making the gift to Martha. The attorney suggested that he should execute an assignment of the shares to Martha. Accordingly, the petitioner executed the following assignment: KNOW ALL MEN BY THESE PRESENTS That I, Edgar J. Kaufmann, for value received, have bargained, sold, assigned and transferred, and by these presents do bargain, sell, assign and transfer unto Martha C. Wolf, one thousand (1,000) shares of the common stock of the Kaufmann Department Stores, Inc., standing in my name on the books of the said company, represented by Certificate or Certificates No. --, and held as collateral security by the Union Trust Company of Pittsburgh and I do hereby constitute and appoint -- my true and lawful Attorney irrevocably for me and in my name and stead, but to my use, to sell, to assign, transfer and set over, all or any part of the said stock, and for that purpose, to make and execute all necessary acts of assignment*273 and transfer and one or more persons to substitute with like full power, hereby ratifying and confirming all that said Attorney or the substitute or substitutes of said Attorney shall lawfully do by virtue hereof. *447 In Witness Whereof, I have hereunto set my hand and seal the 22d day of June, 1921. [Signed] Edgar J. Kaufmann (seal) Signed, sealed and delivered in the presence of [Name not legible] Edgar then sent this assignment to his sister at Paragould, Arkansas, on June 22, 1921, accompanied by the following letter: Mrs. Irwin W. Wolf, Paragould, Arkansas. Dear Martha: I have today transferred into your name one thousand shares of the common stock of the Kaufmann Department Stores, Inc. This stock is pledged at the Union Trust Company on a loan which I made for the Estate of Morris Kaufmann. Am making this transfer as I do not care to have the dividends come to me in my name for Federal Tax purposes. As soon as I get the certificate numbers of the new transfer I will give you the numbers and you can insert them in the blank line, where it reads -- "represented by Certificate or Certificates No. ." This paper makes the transaction a bona fide transfer in*274 your name and the dividends will be sent to you quarterly for One Thousand Dollars. If for any reason you can make use of these quarterly dividends you need not send them to me. The only instruction I care to give you in this letter is that in case of my death I will have to depend upon your settling this stock satisfactorily with my estate. Do not want you to feel in the least obliged to return these dividends to me because I know that this Thousand Dollars every quarter will come in handy as pin money for you. On the same date Edgar orally advised his brother Oliver what he was doing for his sister and that he was doing the same for him. Oliver accepted the declaration of Edgar "with great glee." On the same date Edgar wrote to Kaufmann Department Stores, Inc., Pittsburgh, Pennsylvania, as follows: Kaufmann Department Stores, Inc., Pittsburgh, Pa. Gentlemen: I have today instructed the Union Trust Co. to transfer into my name four thousand (4000) shares of stock that they have been holding in the name of Morris Kaufmann. When this transfer has been completed you will kindly accept this letter as a dividend order and make all future dividend checks payable until further notice*275 as follows: Lillian S. Kaufmann $ 2,000.00 Martha C. Wolf 1,000.00 Oliver M. Kaufmann 1,000.00 Very truly yours, [Signed] Edgar J. Kaufmann Martha received the assignment above referred to in due course and deposited it in a safe deposit box until she returned it to Edgar in 1925 as noted below. *448 From June 22, 1921, Oliver and Martha each received dividends on 1,000 shares of the common stock of Kaufmann Department Stores, Inc., standing in the name of Edgar and held as collateral by the Union Trust Co., and they never paid over any of the dividends to Edgar. For some time prior to 1921 and thereafter Edgar was actively engaged in acquiring additional shares of the common stock of Kaufmann Department Stores, Inc. He purchased several thousand shares from the estate of his father. In making these accumulations he borrowed large sums of money from different banks. In 1925 Edgar was in New York in connection with an arrangement whereby a new corporation, "Kaufmann Department Stores Securities Corporation," hereinafter referred to as "Securities," was to be organized and new stock or securities were to be issued in exchange for Kaufmann stock. Under the plan as *276 contemplated it was necessary to transfer to Securities 38,000 shares of Kaufmann common stock for 100,000 shares of new Securities common stock on the basis of 2.631 shares of new Securities stock for each share of Kaufmann common turned in. Edgar did not have 38,000 shares of Kaufmann common stock. He had discussed the arrangements with his brother Oliver and his sister Martha prior to his trip to New York. After Edgar arrived in New York he requested Oliver and Martha and her husband to come to New York to discuss an arrangement whereby their stock would be combined with his own in exchange for new Securities stock. Oliver and Irwin D. Wolf went to New York for this purpose. Martha did not attend this New York meeting but her husband was designated spokesman for her. It was agreed that the arrangement outlined by Edgar should be carried out and it was thereafter consummated. Under the arrangement Securities was to obtain a loan from a New York bank upon the security of the Kaufmann stock which had been received by it. Securities was to lend a part of this money to Edgar, who would then pay off his indebtedness to various banks and, as soon as he was able, make repayments *277 to Securities, which would enable it to pay off its indebtedness to the New York bank and recover clear title to approximately 38,000 shares of Kaufmann common stock deposited with the New York bank as collateral. In 1925 Oliver owned between 5,000 and 6,000 shares of Kaufmann common stock in addition to the 1,000 shares which his brother Edgar had agreed to give him in 1921. Oliver and Irwin D. Wolf agreed to deposit their shares of Kaufmann common stock with Securities in exchange for its common stock and Irwin D. Wolf, speaking for his wife Martha, consented that she should likewise receive shares of Securities stock for her interest in the Kaufmann stock which had been assigned to her by Edgar on June 22, 1921. In the consummation *449 of the plan Oliver and Martha each received 2,631 shares of Securities stock for their interest in the 1,000 shares of common stock which Edgar had agreed to give each of them on June 22, 1921. By 1938 Edgar had repaid to Securities the advance which he had obtained from it and Securities had in turn recovered its collateral from the New York bank. Securities was a Delaware corporation. After Securities had recovered its collateral in 1938*278 there was a merger or consolidation of these two companies. Kaufmann Department Stores, Inc., then obtained authority to issue a certain number of shares of 5 percent preference stock and Oliver and Martha, in a nontaxable exchange, received for their shares of Securities stock a given number of shares of 5 percent preference stock and common stock of the recapitalized Kaufmann Department Stores, Inc. In 1940 Oliver and Martha sold certain shares of preference stock as indicated above. Kaufmann Department Stores, Inc., was incorporated on or about January 1, 1913, under the laws of the State of New York. It succeeded to a long established business which theretofore had been conducted as a partnership under the name of Kaufmann Brothers. The business had been extremely profitable. For the five years 1908 to 1912, inclusive, the partnership books show an average annual net profit of $ 872,845.52. The corporation was organized with a capitalization of 25,000 shares of 7 percent preferred stock of a par value of $ 100 each, or a total of $ 2,500,000, which was the value of the tangibles at the date of incorporation, and 75,000 shares of common stock of a par value of $ 100 each. *279 Its intangibles were valued at $ 7,500,000. Immediately prior to the date of incorporation Morris Kaufmann owned a two-thirds interest in the business and Edgar J. Kaufmann a one-third interest. He had purchased this interest from his uncle, who was also his father-in-law, in the latter part of 1912 for a consideration of "six hundred-some thousand dollars" cash and $ 1,000,000 of notes payable in 20 years. Dividends were paid on the 7 percent preferred stock from the date of issuance. The preferred stock was reduced from year to year through purchases for redemption. The last of the outstanding preferred stock was redeemed in 1940. No dividends were paid upon the common stock prior to 1920, in which year dividends were inaugurated at the rate of $ 4 per share, which rate was paid until 1925, when the dividend was increased. OPINION. The principal question presented by this proceeding is whether Edgar J. Kaufmann made a gift of 1,000 shares of common stock of Kaufmann Department Stores, Inc., to his brother Oliver *450 and a like amount at the same time to his sister Martha in 1921, as contended by the petitioners, or in 1925, as contended by the respondent. It is conceded*280 that if the gifts were made in 1925 the respondent's determination of deficiencies is correct. If, on the other hand, the gifts were made in 1921, a different basis must be used. In ; affd. (C. C. A., 5th Cir.), , we said: From an examination of the authorities we find the essential elements of a bona fide gift inter vivos to be (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; , and authorities there cited. Cf. ;*281 ; affd. (C. C. A., 6th Cir.), ; certiorari denied, . Does the evidence in this case show "a clear and unmistakable intention on the part of the donor [Edgar J. Kaufmann] to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti"? The respondent contends that it does not. In his letter to his sister, Martha, dated June 22, 1921, Edgar did not inform his sister that he was making her a gift of the stock. He did inform her that he was transferring 1,000 shares of the common stock of the Kaufmann Department Stores, Inc., to her name and that the stock was pledged at the Union Trust Co. on a loan which Edgar made for the estate of Morris Kaufmann. He then said: "Am making this transfer as I do not care to have the dividends come to me in my name for Federal Tax purposes." He further informed her that the dividends would be sent to her quarterly. She clearly was advised by this letter that she was to get the dividends. He further advised her: "Do not want you to feel*282 in the least obliged to return these dividends to me because I know that this Thousand Dollars every quarter will come in handy." Quite clearly Martha could upon the receipt of this letter understand that she was to receive the dividends on the shares of stock. There would certainly be no reason for his assuring her not to feel obliged to return the dividends if there was an absolute gift of the shares to her. He further advised her that: "The only instruction I care to give you in this letter is that in case of my death I will have to depend upon your settling this stock satisfactorily with my estate." Of course, if Edgar had made an absolute gift of the shares to his sister there would be no occasion for her settling anything with Edgar's estate in case of his death. *451 It is further noted that in his letter of June 22, 1921, to Kaufmann Department Stores, Inc., Edgar advised the corporation: "When this transfer has been completed you will kindly accept this letter as a dividend order and make all future dividend checks payable until further notice as follows." (Italics supplied.) This letter was over the signature of Edgar J. Kaufmann. Why was this reservation made*283 in the letter to Kaufmann Department Stores, Inc., unless Edgar J. Kaufmann intended to retain dominion and control of the shares? We think that the evidence does not show an intent on the part of Edgar absolutely and irrevocably to divest himself of the title, dominion, and control of the subject matter of the gift. The shares of stock which Edgar purported to give to his brother Oliver and to his sister Martha were in his own name. He had the right to vote them; he had the right to direct to whom the dividends should be paid. He also had the right to do anything with the shares that an owner had. There was absolutely no delivery of any muniment of title to the alleged donee. The alleged gift of the 1,000 shares to his brother Oliver was orally made. Oliver testified that the arrangement made by Edgar with him was the same as the arrangement made with his sister Martha. Whether Oliver saw the letter that was sent to Martha by Edgar, he does not remember. Edgar did not make any written assignment of any shares to Oliver. There was absolutely no delivery of anything to Oliver. He simply received the dividends upon the shares and no call was ever made upon him by Edgar to return*284 them to him. The petitioners allege that a person can make a valid gift of shares of stock owned by him and deposited as collateral. But it is plain that such collateral is subject to the debts secured thereby. See . Even if Edgar had intended to give to his brother and sister the deposited collateral, the only property which Edgar had in the deposited collateral was the value of the collateral in excess of the debt. The petitioners contend that the value of the collateral to secure the $ 300,000 loan from the Union Trust Co. was greatly in excess of the amount of the loan. Even if this be so, the Union Trust Co. was not required to look to any particular collateral as security for the loan. In case of default by Edgar upon his note to the Union Trust Co., that company clearly would have been entitled to sell the 4,000 shares of common stock which stood in Edgar's name. There is no evidence of record to show the value of the 2,000 shares of collateral stock which Edgar purported to give to his brother and sister in 1921 over the amount of the indebtedness. The petitioners contend that the shares of stock which*285 were given to them by Edgar were received by Edgar as a gift from his father long prior to his death. Edgar testified that the gift made to him by his father in about 1915 was evidenced by some writing, but that *452 writing has not been put in evidence. Edgar was interrogated as to whether the 4,000 shares of common stock which he claimed to have received from his father as a gift was a part of the assets of his father's estate and administered as a part of the estate. He first testified that that was so, but later contradicted himself. It is not understood why if these shares were received from his father as a gift they should have been held by the executors and trustees for a period of about four years before they were delivered to Edgar. He was at a loss to understand why they had not been delivered to him immediately upon his father's death. The petitioners contend that the basis for determining the value of the shares of stock is the cost or March 1, 1913, value of the shares to Morris Kaufmann, and much evidence was introduced to show the financial condition of the company on March 1, 1913, and prior thereto. We are of the opinion, however, that it is not necessary*286 to determine the "fair market value" of the shares on March 1, 1913. The respondent admits that the petitioners acquired their shares of 5 percent preference stock, or the shares from which they were derived, from Edgar by gift. He contends, however, that since there was no delivery of these shares prior to 1925, at which time each of the petitioners received shares of Securities, the basis for the shares can not antedate 1925. The parties have stipulated that if it can not antedate 1925, then the determinations of the respondent are correct. We are of the opinion that the respondent has made no error in his determination. Decision will be entered for the respondent.