Brunton v. Commissioner

CLARA BRUNTON, EXECUTRIX OF THE LAST WILL AND TESTAMENT OF ROBERT BRUNTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brunton v. Commissioner Docket No. 13539. United States Board of Tax Appeals 15 B.T.A. 348; 1929 BTA LEXIS 2872; February 12, 1929, Promulgated *2872 1. In the absence of an agreement to the contrary, the earnings of a wife in California are community property and are taxable to the husband. H. A. Belcher,11 B.T.A. 1294, followed. 2. The sale of stock involved herein held to have been made in the year 1921. Lynden Bowring, Esq., for the petitioner. Shelby S. Faulkner, Esq., for the respondent. MARQUETTE *348 This proceeding is for the redetermination of deficiencies asserted by the respondent against Robert Brunton, now deceased, in the amounts of $1,128.67 for the year 1920, and $11,060.61 for the year 1921. Several issues are raised by the pleadings, but at the hearing the parties stipulated as to all of the issues except two, leaving for determination only the questions as to whether the respondent erred in including in the income of Robert Brunton for the years 1920 and 1921, the separate earnings of Clara Brunton, wife of Robert Brunton, and whether the gain arising from the sale by Robert Brunton of certain shares of the capital stock of Robert Brunton Studios, Inc., was income to him for 1921. FINDINGS OF FACT. The petitioner, Clara Brunton, is and*2873 has been since April 17, 1923, the duly appointed, qualified and acting executrix of the last will and testament of Robert Brunton, who died some time subsequent to the year 1921, a resident of the State of California, and this proceeding was brought on behalf of the estate of said decedent. During the years 1920 and 1921 Robert Brunton and his wife, Clara Brunton, the petitioner herein, were members of a partnership doing business at Los Angeles, Calif., under the firm name and style of Asia Rug Co., Robert Brunton owning a one-fourth interest therein. The other members of the firm were Michael C. Levee and Rose Levee. The business of the partnership consisted of renting to motion picture producing companies a stock of oriental rugs and draperies. During the year 1920 the partnership stock of rugs and draperies, due to wear and tear, sustained depreciation in the amount of $5,840. In the year 1921 the partnership sold said stock of rugs and draperies to Robert Brunton Studios, Inc., for $531.50, less than their depreciated cost as of December 31, 1920. During the years 1920 and 1921 Clara Brunton, wife of Robert Brunton, was employed as a scenario writer by Robert Brunton*2874 Studios, Inc., at a salary of $2,600 for 1920, and $2,400 for 1921. *349 On and prior to October 20, 1921, Robert Brunton was the owner and holder of 125 shares of the capital stock of Robert Brunton Studios, Inc., and the owner and holder of the beneficial interest in and to 1,231 shares of the capital stock of said corporation, which interest was represented by trust certificates, the stock being held by trustees under a voting trust agreement. The cost to Robert Brunton of said capital stock and said certificates of beneficial interest was $28,913.84. On the 20th day of October, 1921, Robert Brunton gave to M. C. Levee a written option to purchase said 125 shares of the capital stock of Robert Brunton Studios, Inc., and said beneficial interest in and to said 1231 shares of the capital stock of said corporation, which option was in the words and figures following, to-wit: KNOW ALL MEN BY THESE PRESENTS: That for a valuable consideration, receipt whereof is hereby acknowledged, ROBERT BRUNTON, of Los Angeles, California, a party of the first part, does hereby give and grant unto M. C. Levee, of Los Angeles, California, party of the second part, an option to purchase, *2875 at the price hereinafter set forth, one hundred twenty-five shares of the capital stock of Robert Brunton Studios, Inc., of Deleware, now owned and held by said first party, and also an option to purchase, at the same price, the beneficial interest in and to twelve hundred thirty-one shares of said corporation, represented by Trust Certificates issued under and pursuant to a certain stockholders' Trust Agreement made and entered into by and between certain stockholders of said Robert Brunton Studios, Inc., of Delaware, under date of March 26, 1920. It is understood and agreed that the price to be paid for said shares, and the beneficial interest therein, shall be fifty ($50.00) dollars per share, less ten per cent (10%) commission to be paid to Motley H. Flint, of Los Angeles, California. The first party agrees, upon the execution of this agreement, to deposit in escrow with the Los Angeles Trust & Savings Bank of Los Angeles, California, stock certificates and trust voting certificates representing the shares hereinbefore referred to, with instructions to said bank to deliver same to the second party or to his order, upon payment within the time hereinafter specified, of the*2876 purchase price and commission above provided. It is further agreed that this option shall continue in force to and including the 20th day of December, 1921, and if not exercised on or before said day that said stock certificates and trust certificates shall be immediately redelivered to the first party by said bank upon demand. In WITNESS WHEREOF the said first party has hereunto set his hand and seal this 20th day of October, 1921. (Signed) ROBERT BRUNTON [SEAL]. On the said 20th day of October, 1921, and immediately following the execution of said option agreement, stock certificates representing said 125 shares of the capital stock of Robert Brunton Studios, Inc., and said trust certificates representing said beneficial interest in and to said 1231 shares of the capital stock of Robert Brunton Studios, Inc., were deposited by Robert Brunton with the Los Angeles Trust & Savings Bank, the escrow holder mentioned in said *350 option agreement, with written instructions as provided for in said option agreement. Said written instructions were in the words and figures following, to wit: OCTOBER 20, 1921. LOS ANGELES TRUST & SAVINGS BANK, Los Angeles, Calif.*2877 GENTLEMEN: I hand you herewith certain hereinafter described Stock certificates representing shares of the Capital Stock of Robert Brunton Studios, Inc., of Delaware, and also certain hereinafter described Trust Certificates representing the beneficial interest in and to shares of stock of said corporation issued under and pursuant to a stockholders' Trust Agreement made and entered into by and between certain stockholders of said Robert Brunton Studios, Inc., of Delaware, under date of March 26, 1920. You are authorized and instructed to deliver said Stock Certificates and Trust Certificates to Mr. M. C. Levee of this city upon receipt for my account of the amount of money equal to $50 per share of all of said stock represented by said Stock Certificates and Trust Certificates. You are further authorized and directed to pay a commission of 10% of the total amount received for my account for said stock, the same to be paid to such person or persons as may be designated by Mr. M. C. Levee. If said Stock Certificates and Trust Certificates are not taken up and paid for by Mr. Levee on or before the 20th day of December, 1921, the same are to be redelivered to me immediately*2878 upon demand. Said Stock Certificates and Trust Certificates herewith handed you are described as follows: Stock Certificate #9 dated March 25, 1920 1 share Stock Certificate #64 dated June 2, 1920 124 shares Trust Certificate #1 dated March 26, 1920 1,231 shares Total 1,356 shares Said option was taken and obtained by said M. C. Levee for the purpose and with the design of attempting to resell the shares of stock and beneficial interest covered by said option to various persons, and immediately following the 20th day of October, 1921, the said Levee entered into negotiations with various persons for the purpose of arranging a resale of said stock and said beneficial interest. Subsequent to the 20th day of October, 1921, and prior to the 20th day of December, 1921, it was brought to the attention of Robert Brunton that the Congress of the United States would in all probability provide in the Revenue Act of 1921, a lower rate of income taxes and surtaxes for the year 1922, and also a special and lower rate upon gains, profits and income derived from the sale of capital assets during the taxable year 1922; and that said contemplated provisions of the Revenue*2879 Act of 1921 would or might result in a considerable reduction of the amount of income tax and surtax required to be paid on any gains that might be realized from the sale of said shares of the capital stock of Robert Brunton Studios, Inc., and said certificates of beneficial interest owned by Robert Brunton, provided that *351 the sale and the receipt of the purchase price therefor and any gains therefrom were postponed until some time during the year 1922. Subsequent to the 20th day of October, 1921, and at various times and occasions prior to December 20, 1921, the said M. C. Levee attempted to induce Robert Brunton to accept considerations other than money as a part of the purchase price to the paid for said stock and beneficial interest certificates covered by said option of October 20, 1921, and particularly tried to induce Robert Brunton to accept as a part of the purchase price of said stock and said beneficial interest certificates, a certain promissory note of one Selznick, a motion picture distributor of the City of New York. Robert Brunton refused to modify the terms of said option agreement or to accept considerations other than money as the purchase price of*2880 said stock and beneficial interest certificates, and up to and including the expiration date of said option, to wit, the 20th day of December, 1921, the said M. C. Levee was unable to, and did not exercise said option and comply with the terms thereof. On the 20th day of December, 1921, Robert Brunton and the said Levee abrogated, canceled, and rescinded said option of October 20, 1921, and agreed upon and entered into a new written agreement relative to said stock and said beneficial interest, which agreement was in the words and figures following: THIS AGREEMENT made and entered into this 20th day of December, 1921, by and between ROBERT BRUNTON, of Los Angeles, California, party of the first part, and M. C. LEVEE, of the same place, party of the second part, WITNESSETH, That WHEREAS, heretofore and under date of the 20th day of October, 1921, the parties hereto made and entered into a certain agreement in writing whereunder and whereby the first party gave and granted unto the second party an option to purchase One Hundred Twenty-five (125) Shares of the capital stock of Robert Brunton Studios, Inc., a corporation organized and existing under and by virtue of the laws of*2881 the State of Delaware, and also the beneficial interest in and to Twelve Hundred Thirty-One (1231) Shares of said stock, as evidenced by Trust Certificates issued by the Trustees under a certain Stockholders' Trust Agreement, dated March 26, 1920, made and entered into by and between certain of the stockholders of said corporation and Robert Brunton, H. C. Hickman and M. C. Levee, Trustees, said option extending to and including the 20th day of December, 1921; and WHEREAS Certificates of Stock and Trust Certificates representing said shares of stock and beneficial interest therein have, by the first party, been deposited in escrow with the Los Angeles Trust & Savings Bank of Los Angeles, California, to be delivered to the second party as provided in said Option Agreement; and WHEREAS the party of the second part desires to purchase said stock and beneficial interest therein at the price set forth in said option agreement above referred to, said purchase, however, to be made upon the terms, and to be consummated at the time herein provided; NOW THEREFORE, in consideration of the premises, the sum of One ($1.00) Dollar, to each of the parties in hand paid by the other, receipt*2882 of which is *352 hereby acknowledged, and the mutual covenants, promises and agreements herein contained, it is agreed as follows: FIRST: It is agreed that simultaneously with the execution and delivery of this Agreement, first party shall sell and deliver, and the second party shall purchase said 125 shares of the capital stock of said Robert Brunton Studios, Inc. (of Delaware), mentioned in said Option Agreement, the purchase price thereof (to-wit, $45.00 per share, net to the first party) to be paid by the second party to said Los Angeles Trust & Savings Bank for the account of first party. SECOND: It is further agreed that the first party shall sell, and the second party shall purchase, and he hereby agrees to purchase, for the price of $45.00 Dollars per share, net to the first party, the said beneficial interest in and to the said 1231 shares of said capital stock of said corporation, represented by said Trust Certificates mentioned in said Option Agreement, said purchase to be consummated and said purchase price paid on the 28th day of March, 1922. THIRD: The first party agrees to cause to be delivered to the second party forthwith on the execution and delivery*2883 of this Agreement, all of the Trust Certificates representing said beneficial interest in and to said 1231 shares of said stock, said Trust Certificates to be properly and regularly endorsed in blank by said first party; it being expressly understood and agreed, however, that such Trust Certificates shall not be transferred, or registered as transferred upon the Transfer Books of said Trustees, until full payment has been made to the first party therefor, as hereinbefore provided. FOURTH: It is expressly understood and agreed as an essential term and condition of this agreement, that the second party shall have, and he is hereby given and granted by the first party an unlimited and irrevocable proxy and power of attorney (with full power of substitution in whole or in part) in any manner and for any and all purposes, to vote upon said Trust Certificates and otherwise control the action of said Trustees and/or their agents with respect thereto, and the beneficial interest in said stock represented thereby, in like manner and at the same extent as the first party might or could do if this Agreement had not been made. Said proxy and power of attorney shall remain in full force and*2884 effect to and including the day herein fixed for the payment to the first party of the purchase price of said interest in said stock represented by said Trust Certificates, to-wit; the 28th day of March, 1922. FIFTH: It is further agreed that simultaneously with the execution and delivery of this Agreement, and as a condition precedent to any obligation or liability of the first party thereunder, the second party shall deposit with the said Los Angeles Trust and Savings Bank, as pledgeholder, the collateral and securities mentioned and described in the list and schedule hereto attached, marked "Exhibit A," and made a part hereof, said collateral and securities to be held by said Bank as a pledge for the benefit of the first party and his assigns, to secure the full and faithful performance of this agreement on the part of the second party, and the full and prompt payment of all sums provided to be paid to the first party hereunder. IT IS FURTHER AGREED that said Bank is hereby authorized and empowered by said second party, in the event of any non-performance of any obligations of the second party herein contained, or in the event of the non-payment of any sum herein agreed to*2885 be paid to the first party, to sell said collateral and securities in such manner as it may deem proper, without notice, either at any brokers Board, or any public or private sale, applying the proceeds to the payment of such sums as may then be unpaid to the first party hereunder, after deducting all legal and other costs and expenses of collection, sale and delivery. If any of such proceeds shall remain after such payment to the first *353 party, the balance thereof shall be accounted for and paid over to the second party by said Bank. It is understood and agreed that upon any sale of said collateral by said Bank, the first party and/or said Bank may purchase and hold for his or its own account, and not as pledger, any property offered at such sale. IN WITNESS WHEREOF the parties hereto have reheunto set their hands and sales the day and year first above written. ROBERT BRUNTON [SEAL] Party of the first part. M. C. LEVEE [SEAL] Party of the second part. SCHEDULE "A" Collateral security to be deposited in the Los Angeles Trust & Savings Bank of Los Angeles, California, by M. C. Levee, pursuant to attached Agreement, dated December 20th, 1921, is*2886 made and entered into by and between ROBERT BRUNTON of Los Angeles, California, party of the first part and M. C. LEVEE, of the same place, party of the second part: United States Government, Third Issue Four and one quarter (4 1/4%) per cent Liberty Loan Bonds, with and unmatured interest coupons attached, of the denominations and bearing numbers as follows, to-wit: 1/$10,000 Bond #-58212. 37/$1000 Bonds #'s 1234581 to 607, incl. 1234630 to 632 incl. 1615060, 1089185, 63813, 1264779 to 1264782, inclusive. 1/ $500 Bond -#506493. 1/ $50 Bond #6426539. 6/ $100 Bonds #'s 4606116 to 4606119 inclusive 1606418, 1476401. 48,150 total. All of the above with March 15th, 1922, and all subsequent coupons attached. Promissory note for the principal sum of Eight Thousand ($8,000) Dollars dated the first day of December, 1921, made and executed by MYRON SELZNICK, in favor of ROBERT BRUNTON, payee, payable March first, 1922, with interest at the rate of seven per cent. (7%) per annum, endorsed without recourse by said Robert Brunton in favor of M. C. Levee and by said M. C. Levee endorsed to Robert Brunton with guarantee of payment. Pursuant to said written agreement*2887 of December 20, 1921, the stock certificates representing said 125 shares of the capital stock of Robert Brunton Studios, Inc., were immediately taken and paid for by M. C. Levee, and Robert Brunton received therefor as the purchase price thereof the amount of $5,625. Pursuant to said agreement of December 20, 1921, the said M. C. Levee was also given possession of said trust certificates representing the beneficial interest on said 1,231 shares of the capital stock of Robert Brunton Studios, Inc., together with a proxy and power of attorney to vote and act with respect to said trust certificates as provided in said agreement, and the said M. C. Levee deposited with the Los Angeles Trust & Savings Bank $48,150 4 1/4 per cent United States Liberty Loan Bonds and a promissory note for $8,000 dated December 1, 1921, and executed *354 by Myron Selznick, to secure the performance of said agreement of December 20, 1921, as provided therein. On the 28th day of March, 1922, the said agreement of December 20, 1921, was consummated and fully performed according to its terms and the purchase price for said trust certificates representing the beneficial interest in said 1,231 shares*2888 of the capital stock of Robert Brunton Studios, Inc., was thereupon paid to and received by Robert Brunton. The said trust certificates represented thereby were transferred and conveyed to M. C. Levee on the transfer books of the trustees under said voting trust agreement some time subsequent to the 28th day of March, 1922. On January 11, 1922, Robert Brunton borrowed from the Los Angeles Trust & Savings Bank the amount of $30,000 upon his promissory note dated January 11, 1922, payable April 11, 1922, with interest at the rate of 7 per cent per annum, which note was secured by its collateral security as follows: Ageeement between M. C. Levee and Robert Brunton dated December 20, 1921, secured by certain Liberty Loan bonds mentioned in said agreement. Said note was paid by Brunton on March 29, 1922. The respondent, upon audit of the income and profits-tax returns of Robert Brunton for the years 1920 and 1921, determined that the amount of depreciation sustained by the Asia Rug Co. on its rugs and draperies during the year 1920 was $2,676.67 instead of $5,840, as theretofore claimed. He therefore disallowed such depreciation in excess of the amount of $2,676.67 and adjusted*2889 Robert Brunton's distribute shares of the partnership income accordingly. The respondent also included in the taxable income of Robert Brunton for the years 1920 and 1921 the separate earnings of Clara Brunton for those years hereinabove set forth, and also determined that Robert Brunton realized a taxable profit of $38,461.16 in the year 1921 upon the sale of his 125 shares of the capital stock of Robert Brunton Studios, Inc., and the trust certificates representing the beneficial interest in and to said 1,231 shares of the capital stock of Robert Brunton Studios, Inc. OPINION. MARQUETTE: The parties hereto have stipulated that the Asia Rug Co. is entitled to deduct in computing its net income for the year 1920, the amount of $5,840 as depreciation sustained on its stock of rugs and draperies, and that it sustained a loss of $531.50 on the sale thereof in 1921. Robert Brunton's distributive share of the partnership income for 1920 and 1921 will be adjusted accordingly. The petitioner contends that her earnings for the years 1920 and 1921 should not be included in the income of the decedent for the *355 reason that she and the decedent had agreed that her earnings*2890 were to be her separate property. The respondent denies that such an agreement existed and the petitioner has failed to produce any evidence to show that it did. Under the laws of California, as construed by the courts and by this Board, a wife's earnings are, in the absence of an agreement to the contrary, community property and taxable to the husband. Section 687, Civil Code of California; ; ; . On the record we must affirm the determination of the respondent. The only other question is whether the sale of the beneficial interest owned by Robert Brunton in and to the 1231 shares of the capital stock of Robert Brunton Studios, Inc., was made in the year 1921 or in 1922. The petitioner contends that the sale was made and the income therefrom realized in 1922, while the respondent urges that it was made and gave rise to income in 1921. There is no dispute as to the amount of the gain. We are of opinion that the transaction under consideration was a sale in 1921 and that Robert Brunton realized the equivalent of cash therefrom in that year. It is true*2891 that Brunton, with the intent to defer the realization of income and to avoid taxation thereon in 1921, expressly stipulated in the agreement with Levee that the sale should not be consummated until 1922, but what was done does not conform to the intention thus expressed. The transaction, so far as Brunton was concerned, was executed December 20, 1921. At that time he delivered to Levee the trustee certificates evidencing his beneficial interest in the stock and also gave to him an irrevocable proxy and power of attorney which obviated the necessity of having the certificates transferred on the trustee's books at that time. He invested Levee with all the requisites and essentials of ownership and reserved nothing to himself. In return Levee agreed by the contract of December 20, 1921, to pay to Brunton the full purchase price on March 28, 1922, and this promise was secured by Liberty bonds and other collateral in an amount greater than the amount to be paid. In our opinion the situation would have been little different if Levee had given Brunton his unqualified promissory note payable March 28, 1922. The contract secured by the Liberty bonds and Selznick's note had a readily*2892 realizable or fair market value, as is shown by the fact that Brunton borrowed $30,000 from the bank using the contract as collateral. We hold that the transaction in question was a sale in 1921 and that the petitioner realized a profit therefrom in that year. Judgment will be entered under Rule 50.