Cooley v. Commissioner

ROBERT C. COOLEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Cooley v. Commissioner Docket No. 63282. United States Board of Tax Appeals 27 B.T.A. 986; 1933 BTA LEXIS 1262; March 24, 1933, Promulgated *1262 1. TENANTS BY THE ENTIRETY - INCOME THEREFROM IN MASSACHUSETTS TAXABLE TO THE HUSBAND. - Petitioner and his wife were domiciled in the State of Massachusetts and owned certain stocks and bonds as tenants by the entirety. Held, that under the laws of the State of Massachusetts the husband has the absolute and exclusive right to the control, use, possession, rents, issues and profits of property held as tenants by the entirety and therefore dividends and interest received from such property during the taxable year in question were all taxable to the husband. 2. SUBSCRIPTION RIGHTS TO PURCHASE CONVERTIBLE BONDS. - The petitioner, as a stockholder of the American Telephone and Telegraph Company, in 1929 received "rights" to subscribe for bonds convertible into shares of a new issue of stock at stated prices, and exercised the right to acquire bonds, which were not converted into stock. Held, that the market value of the subscription rights does not constitute taxable income. T. I. Hars Powel,27 B.T.A. 55, followed. Robert C. Cooley, Esq., prose. J. H. Yeatman, Esq., for the respondent. BLACK *986 This proceeding*1263 is for the redetermination of a deficiency of $850.93 for the calendar year 1929. FINDINGS OF FACT. The case was submitted on the following stipulation: The petitioner and his wife, Harriet M. Cooley, were domiciled in the State of Massachusetts throughout the calendar year 1929 and filed separate Federal income tax returns for said year. During the said year petitioner and his wife owned certain stocks and bonds as tenants by the entirety and received certain income therefrom in the form of interest and dividends. Of the income so received, Harriet M. Cooley reported the following in her return, such being one equal half of such income: 1. Interest $2,029.92 2. Interest on tax free covenant bonds 1,081.25 3. Dividends 4,544.00 $7,655.17 Respondent has included all of the above in the income of the petitioner in computing the deficiency involved herein, and has deducted the said amount from the income reported by Harriet M. Cooley in computing her tax liability for the year 1929. That on or about April 30, 1919, the American Telephone and Telegraph Company issued to its stockholders a certain offer in writing, to subscribe for bonds convertible*1264 into shares of a new issue of stock at stated prices. *987 That the petitioner and his wife, Harriet M. Cooley, at the close of business on May 10, 1929, were the owners and holders as tenants by the entirety of 368 shares of the American Telephone and Telegraph Company's capital stock and received in said year 368 rights to subscribe to the debentures described in Exhibit A. At the time these rights were received by the petitioner and his wife, Harriet M. Cooley, they had a fair market value of $5.6875 each. The amount of $2,093.00 representing the aggregate value of the said 368 rights was included in the income of the petitioner as a dividend by respondent in computing the deficiency involved herein. That under the terms of the offer, petitioner and his wife exercised in 1929 their option to subscribe for the 10-year convertible 4 1/2% debentures, entitling them to 61 1/3 of said debentures at par ( $100), and purchased 4 rights to subscribe to said debentures at $15 (3 5/8 plus commission of 50 ) - acquiring thereby, as tenants by the entirety, on payment of $6,200.00, 62 of said debentures. A copy of the offer made by the American Telephone and Telegraph Company*1265 of its convertible bonds to stockholders for subscription, dated April 30, 1929, is attached to the stipulation as Exhibit A and is incorporated herein by reference. OPINION. BLACK: The pleadings present two questions for our decision, which we will discuss in their order. (1) Where husband and wife, domiciled in the State of Massachusetts, receive income from personal property held by them as tenants by the entirety, is all such income taxable to the husband, or is one half taxable to him and one half to the wife? The petitioner contends that income from personal property held by husband and wife as tenants by the entirety in the State of Massachusetts is, for income tax purposes, taxable one half to each spouse, the same as income from community property in community property states, and cites . We find nothing in the decisions of the Massachusetts courts to support this contention. An estate by the entirety may exist in personal as well as real property in the State of Massachusetts; *1266 ; ; ; , and . In ; , the Supreme Judicial Court of Massachusetts, after analyzing the various decisions on the subject of estates by the entirety, said: Thus by a series of decisions, it is established that the rights of a husband in an estate by the entirety are the same as they existed at common law. At common law the husband during coverture and as between himself and wife, had the absolute and exclusive right to the control, *988 use, possession, rents, issues and profits of property held as tenants by the entirety. The common law rule is followed in Massachusetts. In the case of , the Supreme Judicial Court of Massachusetts held that where real estate is held by husband and wife as tenants by the entireties, the rents and profits belong to the husband. In the case of *1267 ; , it was held that the husband has during coverture the usufruct of all the real estate which his wife has in fee simple, fee tail or for life. To the same effect see . These decisions of the Massachusetts courts demonstrate that the common law estate by the entirety between husband and wife continues to exist in that state in both real and personal property, unaffected by any statutes enabling married women to own, hold and dispose of property the same as a feme sole; that the entire income from property so held, as at common law, belongs to the husband and is property returnable by him for income tax purposes. Cf. , and . Rules relating to income from community property have no bearing in this case, for the reason that Massachusetts is not a community property state. On this issue we hold for respondent. The remaining question is, Where a stockholder in a corporation receives in the taxable*1268 year as an incident to his stock ownership, rights to subscribe to bonds of the corporation which have a fair market value when received by the stockholder, do such rights constitute taxable dividends to the stockholder to the extent of their fair market value when he does not sell the rights in the taxable year, but exercises them to acquire the bonds? The Board considered this identical question in , in which case the petitioner, as a stockholder of the American Telephone and Telegraph Company, in 1929 received "rights" to subscribe for gold debenture bonds convertible into shares of a new issue of stock at stated prices, and we held that the market value of the subscription rights did not constitute taxable income. In that case the "rights" received by Powell as stockholder in the American Telephone and Telegraph Company were of the very same series as those involved here. Accordingly, in the instant case there was, as we held in the Powell case, no realization of income on which to levy a tax. The mere receipt of subscription rights to purchase convertible bonds is not income. Decision will be entered under Rule 50.