Norman B. Livermore & Co. v. Commissioner

NORMAN B. LIVERMORE & CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. NORMAN B. LIVERMORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Norman B. Livermore & Co. v. Commissioner Docket Nos. 6422-6424. United States Board of Tax Appeals 11 B.T.A. 428; 1928 BTA LEXIS 3810; April 6, 1928, Promulgated *3810 Held, that the property in question belonged to the corporation and should be included in its invested capital and the income therefrom should not be taxed to the individual, Livermore. Arthur H. Redington, Esq., Albert J. Dibblee, Esq., and George E. H. Satchell, C.P.A., for the petitioners. P. M. Clark, Esq., for the respondent. TRAMMELL *428 These are proceedings for the redetermination of deficiencies in income and profits taxes of Norman B. Levermore & Co., a corporation, Docket Nos. 6422 and 6424, and Norman B. Livermore, an individual, Docket No. 6423. The three proceedings were consolidated for the purpose of hearing and decision. With respect to the appeal of the corporation, Norman B. Livermore & Co., Docket No. 6422, the proceeding involves a deficiency for 1917 in the amount of $191.91, and in the amount of $6,023.16 for 1918. With respect to the appeal of the corporation, Norman B. Livermore & Co., Docket No. 6424, the deficiencies in controversy are, for 1919, in the amount of $1,272.97; for 1920, in the amount of $13,989.95; and for 1921, in the amount of $98.64. With respect to the individual, Norman B. Livermore, *3811 Docket No. 6423, the deficiencies in controversy are, for 1920, in the amount of $950.35, and for 1922, in the amount of $6,810.22. There was an overassessment for 1921 in the case of the individual. Norman B. Livermore, in the amount of $591.52. The question involved in these proceedings is whether certain assets, real estate and stocks were owned by Norman B. Livermore as an individual or by the corporation. FINDINGS OF FACT. The petitioner, Norman B. Livermore & Co., is a California corporation with its principal office at San Francisco. The petitioner. Norman B. Livermore, is a citizen of the United States, residing in San Francisco. In 1908, and for several years prior thereto, Norman B. Livermore, was and had been transacting business individually under the name of Norman B. Livermore & Co. The business was that of machinery sales generally, besides which he dealt in investments of various kinds, including stocks and bonds and other things. In 1908 Livermore conceived the idea of incorporating his business. He thereupon took steps to organize a corporation and in November *429 of that year a corporation known as Norman B. Livermore & Co. was incorporated. *3812 The authorized activities of the corporation as set forth in its articles of incorporation were broadly stated, the purpose being to enable the corporation to engage not only in the activities previously carried on by Livermore as an individual, but in other things which are not pertinent here. As soon as the incorporation had been perfected, Livermore made a written offer to transfer all of his holdings to the corporation for all of its capital stock. By the terms of this written offer it provides that: There shall pass by the acceptance of this offer all and singular the property of the said business, whether standing in the trade name or in my individual name, but being part of the said business * * * as the same is evidenced by the books of the said business, and further evidenced by a statement of assets and liabilities of the said business brought down to the date hereof, a copy of which is hereto attached and made a part of this offer; it being further understood that all property or assets of the business from the date of said statement to the time of the acceptance of this offer shall be included in the property hereby offered for sale. * * * The offer also contemplated*3813 and provided for the assumption by the corporation of all liabilities accrued or to accrue with respect to the said properties and business. The directors, by resolution, formally accepted the offer. Attached to the said offer was the following statement of assets and liabilities as of October 31, 1908. ASSETS: Accrued interest $1,811.50 Bills receivable 31,518.12 (Assessment acct 16,050.80) (Surplus investment 60,682.50) Certified checks 661.00 First National Bank 95.92 Salt Lake rev. acct 38.00 Seattle rev. acct 5,580.26 Atlantic Equipment co 277.50 Stock accounts 32,604.28 Office equipment 1,237.80 Accounts receivable 36,490.76 Livermore, H.P 4,400.00 Downey & Prine 60.05 Freight claims 678.42 $192,186.91 LIABILITIES: Bills payable to bank 26,000.00 Bills payable to factories 595.72 Profit on Mitchell 839.50 Bartlett & Co 300.00 Accounts payable 29,172.43 N.B.L. as bank 4,342.36 61,250.01 *430 The stock was issued by the corporation and delivered to Livermore in payment for assets. No other instrument in writing was executed by Livermore for the purpose of transferring the assets to the corporation. *3814 The directors, at the same meeting at which they accepted Livermore's offer, vested in Livermore who had been made president of the corporation, the power to carry on every business transaction necessary or proper in the conduct of the business for which the company had become incorporated and generally to supervise, conduct and direct the business of the corporation. Thereafter the corporation began business, using the assets referred to as having been transferred to it by Livermore. These assets, however, remained of record in the name of Livermore as before. The corporation received all the income therefrom and paid all expenses in connection therewith. As income was derived from investments, or as assets were sold, reinvestments were made, the title to which generally appeared in the name of Livermore and not the corporation, although sometimes in the name of third parties, and sometimes in the name of the corporation itself, but when nonnegotiable securities were taken in the name of Livermore or a third party, they were endorsed in blank and deposited in the corporation's safe deposit box. This course was followed from 1908 up to and through the taxable years here involved. *3815 All returns from the sale of any of the corporation's assets and all income derived therefrom passed to the credit of the corporation, and all disbursements made on account thereof were made out of funds of the corporation. The bank account in which the funds were kept stood originally in the name of Livermore as an individual, such being the title of the account prior to the incorporation, and it remained under that title until 1917 when Livermore was called into foreign service and thenceforth it stood, during different periods of time, either in the name of the corporation or in the name of Livermore. The bank, however, at all times recognized the accounts as the same and always as the corporate account. At stated periods the bank requested and obtained financial statements for the purpose of extending credit. These financial statements were uniformly made by the corporation and in its name and showed thereon all of the assets, including the assets which are involved in these proceedings, whether of record in the name of the corporation or in the name of Livermore. During the years 1917 to 1922 the bank account stood in Livermore's name only a short period, that is, from*3816 January to and including September, 1917, and in the corporation's name from October, 1917, to and including January, 1921, and from February, 1921, to the end of the period at the close of 1922, in Livermore's name. *431 All capital-stock-tax returns made by the corporation showed all capital assets, whether in the name of the corporation or Livermore, including such disallowed items as had then been acquired, and the same is true of the State franchise-tax returns. At the time of the organization of the corporation when Livermore transferred the assets to it, the assets consisted entirely of personal property, but thereafter real estate was acquired and other personal property with funds derived either from the income or the sale of the corporation's assets. The following is a statement of the real estate acquired in this way: Balance at Dec. 31 Description on books — 1916 — — 1917 — — 1918 — — 1919 — 1045 Vallejo Street $47,595.00 $47,595.00 $47,595.00 $47,595.00 Jones-Green Street 29,646.34 29,646.34 29,646.34 29,646.34 Russian Hill Place 43,660.52 43,660.52 43,660.52 43,660.52 Jackson Street 19,096.60 19,096.60 18,096.60 18,096.60 1071 Vallejo Street 20,106.56 20,106.56 20,106.56 20,106.56 Montesol Ranch 37,200.00 37,200.00 37,200.00 57,787.75 Merced Ranch 13,328.75 13,328.75 13,328.75 13,328.75 Vallejo Street improvement 5,894.99 5,894.99 5,894.99 5,894.99 Silverado South Dakota lands Total per R.A.R. 215,528.76 215,528.76 215,528.76 236,116.51 *3817 Balance at Dec. 31 — 1920 — — 1921 — — 1922 — $47,595.00 $47,741.35 $47,741.35 29,646.34 29,646.34 29,646.34 43,660.52 43,660.52 43,660.52 18,096.60 18,096.60 18,096.60 Sold. 62,306.43 62,306.43 62,545.29 Sold. 5,894.99 5,894.99 5,894.99 2,000.00 2,000.00 700.00 205,898.82 209,346.23 210,285.09 All of the above assets were excluded by the respondent from the assets of the corporation, Norman B. Livermore & Company, and were considered as the assets of Norman B. Livermore. The corporation's invested capital was thus reduced and the income from the property added to the individual's income. The property described as 1045 Vallejo Street was acquired in 1916 from Helen E. Livermore for $47,500, evidenced by a promissory note for $32,500 and the assumption of a mortgage in the amount of $1,500. The mortgage note was set up on the corporation's books as a liability and interest was paid by the corporation. The note for $32,500 was likewise set up as a corporate liability and interest paid by the corporation. The Jones-Green Street property was paid for out of corporate funds. A portion of this property was allocated on*3818 the books of the corporation to another parcel known as Russian Hill Place. In connection with the Russian Hill Place, Livermore, on behalf of the corporation, borrowed $35,000 on his personal note and this note was set up as a liability of the corporation and the corporation subsequently paid the note. The investment was a source of income which was paid over to the corporation and disbursements with respect to the property were paid by the corporation. The same is true with respect to the property known as 1071 Vallejo Street and all of the other real estate here involved, except *432 that known as the Montesol Ranch, which property was inherited by Livermore through his mother's estate and had been held in his individual name since 1879. During his father's lifetime the property had been occupied by the Livermore family as a country home. Livermore, the petitioner, conceived the idea that his father had certain rights to the property during his lifetime and for that reason it was not included in the transfer of assets to the corporation in 1908. In 1918, after the death of Livermore, Sr., Livermore, the petitioner, caused the property to be transferred to the corporation*3819 upon its books as one of the corporate assets, and the corporation has ever since that time received therefrom all the income and has paid out in connection with it all expenses and disbursements which had been entered upon the corporation's books. This property was neither listed among the original assets nor was it acquired out of corporate funds. The parcel known as the Montesol Ranch which was herein referred to, is but a small fraction of the present Montesol holding, large acreage of adjoining lands having been subsequently acquired and paid for out of corporate funds. The original Montesol holding consisted of 490 acres. Since 1918 it has been increased to 5,000 acres. The Merced Ranch was acquired in 1916 through an exchange of property belonging to the corporation situate in Ross, Marian County. It was an even exchange and the Merced Ranch was subsequently sold at a price in excess of its exchange value and the proceeds were deposited in the corporation's funds and the corporation received and accounted for the income therefrom. The South Dakota lands were acquired in 1922 and were taken over in settlement of a debt due to the corporation from one of its customers. *3820 All of the herein described real estate appeared of record in the name of Norman B. Livermore and was determined by the respondent to be the property of the individual. Among the assets which were included in the offer of Livermore to the corporation at the time of the organization thereof was "surplus investment $60,682.50." This item was composed of certain corporate stocks and bonds which appear and remained of record in the name of Norman B. Livermore. Other securities were purchased with funds of the corporation. In the list of assets contained in the offer of Livermore to the corporation appeared one designated "Assessment Account $16,050.80." This assessment account was made up of advancements made before incorporation by Livermore for account of members of his family in order to pay assessments which had been levied on stock of the Pacific Gas & Electric Co. aggregating the sum of $16,050.80, and when the corporation was *433 organized this account was transferred to it as one of its original assets. After incorporation the corporation made further advancements for the account of certain members of Livermore's family, and on March 31, 1910, a final settlement*3821 was reached whereby the family debts, including the so-called assessment account, were liquidated by Livermore and in satisfaction thereof there were transferred to the corporation 814 shares of the common stock of the Pacific Gas & Electric Co. This stock appeared in Livermore's name and was endorsed by him and placed in the corporation's safe deposit box and immediately written into the assets of the corporation. Through a legacy from his uncle, Livermore inherited 355 shares of preferred stock in the Pacific Gas & Electric Co., and from his mother, 50 shares of the Electro Silicon Co. Neither of these items was set over to the corporation at the time of the incorporation. These items were treated, both by Livermore and the corporation, as Livermore's personal property. Livermore, however, in negotiating for the repurchase of certain employees' bonus shares of stock, transferred these securities to the corporation, the transaction being shown by the entries upon the corporation's books. Livermore was credited with the sale to the corporation of 355 shares of Pacific Gas & Electric preferred, $31,950; 50 shares of Electro Silicon, $4,000, and he was charged on the books with*3822 the purchase of 84 shares of "Chandler stock," 12 shares of "Hutchinson stock," 14 shares "Myers stock," making a total of $33,900. The certificates of stock in the Pacific Gas & Electric Co. were endorsed by Livermore in blank and placed in the corporation's safe deposit box. The remainder of the disallowed shares of the Pacific Gas & Electric preferred represented purchases, exchanges and reinvestments directly traceable to corporate funds or corporate assets. The stock of the Pacific Car & Equipment Co. was acquired as early as 1911 and has ever since been held by the corporation. It has paid a number of assessments thereon. The stock which was secured was originally issued in the name of the corporation. All of the other securities which were disallowed by the respondent as belonging to the corporation were acquired by purchase or exchange of assets which belonged to the corporation or from funds of the corporation. OPINION. TRAMMELL: The only question involved here, outside of the jurisdictional questions which will be hereafter discussed, is whether the assets herein referred to belonged to the corporation or to the individual. This may be divided into two questions: *3823 First, whether the original assets contained in the offer of Norman B. Livermore to *434 the corporation became the property of the corporation and, second, whether the subsequently acquired assets became vested in the corporation. Under the law of California the vesting of title upon a sale of personal property when the subject of the sale is identified, is governed by the intention of the parties to the transaction as disclosed by the terms of the agreement or as may be gathered from the circumstances attending the transaction, and is not dependent upon actual delivery, nor is it dependent upon a written instrument. Section 1140 of the Civil Code of California is as follows: The title to personal property, sold or exchanged, passes to the buyer whenever the parties agree upon a present transfer, and the thing itself is identified, whether it is separated from other things or not. In the case of , the Supreme Court of California stated as follows: It seems well settled that the question as to whether the title has passed is one as to the intention of the parties. And such intention is, as a matter*3824 of course, to be gathered from the language of the parties, considered in the light of all the circumstances of the case. In ; , the court said: When the terms of sale are agreed on, and the bargain is struck, and everything that the seller has to do with the goods is complete, the contract of sale becomes absolute, without actual payment or delivery, and the property and risk of accident to the goods vest in the buyer. Again in ; , the court said: In the case at bar the subject matter of the sale was perfectly identified, and the evidence was such as to justify the conclusion of the court that the parties had agreed upon a present transfer. The evidence therefore supports the finding that title passed to the purchaser at the execution of the contract. The same rule is announced in ; *3825 ; ; ; ; ; . In this case Livermore's offer expressly provided that "it is understood that there shall pass by the acceptance of this offer all and singular the property of said business." In other words, title to the property specified in the offer should pass immediately to the corporation when the contract of sale was completed by the acceptance of the offer. This offer was accepted by the board of directors of the corporation on November 17, 1908. The offer was to sell to the corporation all the property of the business which had been conducted by Livermore "whether standing in the trade name or in the individual name." *435 The assets in question involved in the offer of Livermore were put upon the corporation's books. It paid all expenses in connection therewith, received all the income therefrom both Livermore and the corporation, treating it as corporation assets, and we think under the facts and the law applicable those assets*3826 became the property of the corporation and such property should be included in the petitioner corporation's invested capital and income therefrom should be considered in determining the corporation's earned surplus. With respect to the property subsequently acquired, it appears that this property was acquired, with the exception of about 490 acres known as the Montesol Ranch, with corporate funds or by the exchange of corporate assets. The income from such property was treated as corporation income and expenses were paid by the corporation. It is a well settled rule of law that where one purchases property, real or personal, with funds or assets of another and takes title in his own name, a resulting trust in the property so purchased will arise in favor of the person whose funds or assets were used in its purchase. Section 853 of the Civil Code of California provides: When a transfer of real property is made to one person, and the consideration therefor is paid by or for another, a trust is presumed to result in favor of the person by or for whom such payment is made. In the case of *3827 , the court states as follows: It is settled law that where one pays the purchase price of land and the land is thereupon conveyed to another, the title to the land is held, under such conveyance, in trust for the person who has paid the purchase price. (Civ. Code, Sec. 853.) In ; , the court says: The equitable principle that when, upon the purchase of lands, the consideration therefor is furnished by one person, and the conveyance is taken in the name of another, a resulting trust in the lands is created in favor of the one from whom the consideration came, is well recognized. And again the court says in ; : The rule is well settled that when real property is purchased, and one party pays the purchase money and another takes the title, a resulting trust arises in favor of the former, and the latter holds the title as his trustee. * * * It is not, however, necessary that the money should have been actually paid by*3828 the party setting up the trust. It may have been paid by the party who took the title, but advanced as a loan to the other party, and if so, a trust results. The same rule is announced in ; ; ; ; ; ; ; ; ; ; *436 ; ; Perry on Trusts, sec. 133; 39 Cyc. 26, 104, 118, 119. In , the court said: If the consideration for the conveyance proceeds from the corporation, title taken in the name of an officer will be held in trust for the corporation, * * * and this is so even though the grantee is the sole owner of all the stock of the corporation. In 14-A, C.J. 131, it is stated that - A director, officer or agent who is charged*3829 with the duty of purchasing stock for the company has no right to purchase for himself * * *. Where he purchases for himself with corporate funds, he holds the stock as trustee for the corporation. And again in the same volume of C.J. at page 116, it is said: The rule that one may not purchase and hold as his own property which he is in duty bound to purchase for another applies to officers and directors of a corporation. Where they do so, they will be deemed to hold the title in trust for the corporation. The courts have also held that a trust will result pro tanto in favor of one who advances part of the purchase money of land, the title to which it taken in the name of another. ; ; ; ; ; ; ; . The rule as to resulting trusts in property purchased with funds of another applies to personal property as well as real estate. *3830 ; Perry on Trusts, sec. 130; 39 Cyc. 125. In the citation from Perry on Trusts, the author says: The rule embraces personal property as well as real estate, and if a man purchase a bond, annuity, stock, mortgage, or other personal interest, in the name of a third person, the equitable ownership results to the person from whom the consideration moves. In view of the foregoing authorities and the facts in this case, it is our opinion that the real estate and securities which were acquired subsequent to the organization of the corporation and which were determined by the Commissioner not to be corporate assets, were the assets of the corporation, Norman B. Livermore & Co. With respect to the Montesol Ranch, consisting of 490 acres, it appears that this was not purchased with corporate funds or assets but was acquired by Norman B. Livermore by inheritance. The corporation paid no consideration for the transfer of this property but it was set up on the corporation's books as corporate property, the corporation assumed possession, made improvements and repairs and paid all amounts of expenses connected with it with its own *437 *3831 funds and received all income therefrom. In other words, the corporation had the actual use, possession and enjoyment of the property. In our opinion, the parol gift, coupled with the actual possession, the improvements and expenditures, the fact that the corporation and the individual donor treated and considered the property as the corporation's property, was sufficient to vest the ownership of the property in the corporation. In the case of ; , the Supreme Court of California said: It is well settled in this state and elsewhere that a gift of real estate may be made by parol, if possession is given and taken under such gift and acts done by the donee to carry out the purpose of the gift. ; ; ; ; . The remaining portion of the Montesol Ranch subsequently acquired, although the title was held in the name of Livermore as an individual, *3832 having been acquired with corporate funds, was the property of the corporation and Livermore merely held the title in trust for the corporation. With respect to the jurisdictional questions raised, we do not have jurisdiction of the year 1921 of the Norman B. Livermore proceeding, Docket No. 6423. In that year no deficiency was asserted. . Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.