Semar v. Commissioner

WILLIAM SEMAR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Semar v. Commissioner Docket Nos. 52300, 59030. United States Board of Tax Appeals 27 B.T.A. 994; 1933 BTA LEXIS 1264; March 24, 1933, Promulgated *1264 Frank S. Bayley, Esq., for the petitioner. John D. Kiley, Esq., for the respondent. MATTHEWS *994 Docket No. 52300 involves a deficiency for the calendar year 1926 of $290.73; Docket No. 59030, deficiencies for 1927 and 1928 in the amounts, respectively, of $307.74 and $1,400.27. A stipulation of the facts was filed covering both proceedings. As the same issue is raised in both proceedings, they will be considered and disposed of in a single opinion. A sole issue arises, whether the respondent erred in including in petitioner's income for the several years the full amounts received as dividends on certain stock held by the petitioner, the petitioner contending that the stock was acquired after his marriage, was community property under Washington law, and consequently that only one-half the amount of such dividends was properly returnable by him as his individual income. FINDINGS OF FACT. The facts were stipulated and are as follows: Petitioner is an individual residing at Seattle, Washington. On January 5, 1922, he entered into a contract with the Sunny Point Packing Company, a Washington corporation, (hereinafter called the Company) and*1265 its stockholders wherein he was employed as the manager of the Company. The contract provided for salary of $250.00 per month for two years with the right to purchase one-sixth of the capital stock of the Company at an agreed price of $20,000.00, the stock to be supplied by stockholders, with certain alternatives if the Company was liquidated or the employment contract was terminated. The next of the contract follows: IT IS HEREBY AGREED by and between WILLIAM SEMAR, party of the first part; SUNNY POINT PACKING CO., a corporation, party of the second part, and H. C. *995 STRONG, C. H. BLACK, Sr., J. C. BLACK, W. G. STRONG, L. H. BLACK, D. W. HUNT, L. M. THAYER, and CHAS. H. BLACK, Jr., parties of the third part, as follows: First party agrees to become Manager for the second party, and to devote all his time, energy and ability to the management of its business under the direction of the Board of Trustees, at a salary of Two Hundred and Fifty Dollars ($250.00) per month beginning January 1, 1922. Second party agrees to employ and pay first party as aforesaid. It is mutually agreed that unless sooner terminated by either party, said employment shall continue until*1266 January 1924; provided, however, that if the same shall be terminated by either party prior to January 1, 1924, and provided further the net profits earned by second party during the management of first party shall in the sole judgment of H. C. Strong, of Ketchikan, Alaska, be sufficient and satisfactory, then said first party shall be paid for the time he has served as Manager at the rate of Four Hundred and twenty dollars ($420.00) per month instead of Two Hundred and Fifty Dollars ($250.00) as above specified, settlement for the difference to be made at the time the employment ceases and only upon receipt by second party of a written certificate from said H. C. Strong that in his opinion said extra amount should be paid. It is specially understood and agreed that the decision of said Strong in this particular shall be absolutely final. In consideration of the foregoing, the parties of the third part, being all the stockholders of second party, hereby agree that if first party shall and does continue to act as Manager, as hereinbefore provided, until January 1, 1924, they will thereupon and at that time sell to first party one-sixth of the capital stock of second party, to-wit, *1267 16 2/3 shares, for which first party agrees to pay the book value per share as of December 31, 1921. All dividends declared upon any of said stock after Jan. 1, 1922, while this contract is in force and while any of said stock remains unpaid for, shall be paid to third parties, but shall be credited upon the purchase price of said stock in case first party buys the same, as herein provided. Parties of the third part agree that for the purpose of carrying out their part of this agreement they will forthwith deliver to C. H. Black and H. C. Strong, as Trustees, sufficient of their stock to cover their pro rata share of the said stock to be sold first party, and that said Trustees - unless this contract and employment be sooner terminated - shall hold the same until paid for by first party as herein provided, at which time or times said Trustees shall, upon payment therefor, deliver to first party the pro rata amount necessary from each of third parties to make up the number of shares then paid for by first party. It is understood that the said Trustees shall credit upon the amount due each of third parties all dividends received since January 1, 1922, on his pro rata amount of stock*1268 sold, and that upon final delivery to first party of the full amount of stock due him any excess stock in the hands of said Trustees shall be returned to the respective owners thereof. If first party is unable to pay in full for all of said stock on January 1, 1924, he shall be entitled to receive from the Trustees such part thereof as is then paid for either by him or by application of dividends. The balance of said stock shall be held by the Trustees until January 1, 1929, and the terms of this agreement shall be extended to that date; Provided, however, that first party agrees to and shall apply on the purchase price of the remainder of said stock all dividends paid on any and all of his stock in said company, and that he shall and will use every effort to take up and pay for said stock in full at the earliest possible date, and provided further that if first party is still employed by second *996 party on January 1, 1924, and desires to purchase its stock as herein provided, he shall and will at that time enter into an agreement with second party covering his employment by it for a further period of five years from said date, at a salary to be then agreed upon, and provided*1269 further that all stock purchased by first party under this agreement shall remain in the hands of said Trustees until the entire amount set aside to first party is paid for, and that in case first party shall desire to sell any or all of said stock he shall first offer it to parties of the third part, who shall have thirty days prior right to buy same at the figure offered first party by any bona fide purchaser. It is understood and agreed that in case of a sale of the assets of second party or the liquidation thereof before January, 1924, and while first party is still in its employ hereunder, first party shall receive from said Trustees any and all amounts distributed to and on account of the stock set aside hereunder for the first party in excess of its book value December 31, 1921, deducting from said book value, however, dividends paid on said stock since January 1, 1922. It being the intention that in case the completion of this contract is rendered impossible because of a sale or liquidation of second party's assets, then first party shall be entitled to receive the distributive share of said stock less any amount then unpaid on its purchase price. It is understood and*1270 agreed that first party in purchasing said stock shall be protected as to the book value of December 31, 1921, against any decline in value by reason of additional assessments, imposts or taxes levied by the government against said company. IN WITNESS WHEREOF, said parties have executed this agreement in triplicate this fifth day of January, 1922, and said Trustees have affixed their signatures in acceptance of said trust, but without any personal liability for the collecting of said stock from the parties of the third part. (Signed) WILLIAM SEMAR, Party of the First Part. SUNNY POINT PACKING CO., By CHAS. H. BLACK, JR., Sec. & Treas. Party of the Second Part. (Signed) J. C. BLACK, (Signed) H. C. STRONG, Trustees. Signed: C. H. BLACK, H. C. STRONG, J. C. BLACK, W. G. STRONG, L. H. BLACK, D. W. HUNT, L. M. THAYER, CHAS. H. BLACK, JR. Parties of the Third Part. The petitioner remained in the employ of the Company for the prescribed period of two years, during which the Company had earnings of $214,158. No dividends were declared or paid during the period which ended January 1, 1924, which period terminated the first phase of the*1271 contract. The petitioner had not at the latter date exercised his right to acquire one-sixth of the stock of the Company. In accordance with the terms of the contract the period of employment was extended for a further period of five years, during which the petitioner might acquire stock of the company, either by purchase with his own funds or by the payment of dividends to record stockholders. Early in 1924 the Company sold its operating assets and name to the Skinner and Eddy Corporation for $375,000, paid in cash and short-term notes. Its name was changed to Occident Investment Company. The deal was completed *997 on March 3, 1924, but was effective as of January 1, 1924. The profit from the sale was $176,569.05. The surplus account of the Company from December 31, 1921 to December 31, 1924, is reconstructed from annual reports of the Company and revenue agent's reports as follows: Surplus Balance 12/31/21 $70,384.61 Earnings 1922 $74,417.10 Appreciation of trap sites $50,000.00 $124,417.10 Balance 12/31/22 194,801.71 Earnings 1923 139,741.66 Less income tax 1922 7,363.85 132,377.81 Balance 12/31/23 327,179.52 Earnings 1924: Operating 8,853.02 Sale of assets 176,569.05 185,422.07 Total 512,601.59 Deduct: Credit trap sites 116,303.62 Income tax 1923 17,467.70 Dividend paid 120,000.00 253,771.32 Balance 12/31/24 $258,830.27 *1272 On November 8, 1924, a dividend of $120,000.00 was declared and paid the stockholders of record, and in accordance with the contract of January 5, 1922, as extended from January 1, 1924, one-sixth of that amount, $20,000.00 was credited on the petitioner's purchase contract and a certificate for 16 2/3 shares, par $500.00, was delivered to the petitioner. The surplus before payment of the dividend on November 8, 1924, was approximately $375,000.00 after having given effect to a debit of $116,303.62 on account of reducing the value of trap sites. No dividends had been declared or paid from January 1, 1922 until November 8, 1924. The petitioner was married to Genevieve Semar on March 1, 1924. A certificate for 16 2/3 shares of stock of the Occident Investment Company - formerly Sunny Point Packing Company - was delivered to the petitioner November 8, 1924, under the employment and stock purchase contract entered into January 5, 1922. In 1926 the petitioner received from his investment in the Occident Investment Company a dividend of $20,000.00, and from the same source of dividend of $20,017.55 in 1927. In 1926 petitioner received from the Company certain shares of stock of*1273 the Northland Transportation Company. This was a dividend paid in stock and was treated as of no value. The shares so received were sold in 1928 for $25,666.66, and the entire proceeds reported as income. One-half of the foregoing amounts - dividends in 1926 and 1927 and profit from the sale of stock in 1928 - was returned by the petitioner and one-half by his wife for the years 1926, 1927 and 1928. *998 OPINION. MATTHEWS: The only question is whether the stock of the Sunny Point Packing Company acquired by petitioner is community property. This depends in Washington law, as will be shown, mainly on when it was acquired - if acquired before marriage, it is separate property of the husband; if afterwards, the nature of its acquisition becomes important, for all such after-acquired property except as specifically excepted belongs to the marital community. The petitioner contends that he acquired before his marriage on March 1, 1924, only an option, or executory contract, to purchase the shares of stock, and that before the delivery of title and possession of the stock to him in November 1924, he had no property interest or rights in the stock. Respondent, on the other*1274 hand, argues that petitioner acquired a substantial property interest in the stock before his marriage, this interest being matured by the expiration of of his first contract of service with the corporation on January 1, 1924. Alternatively, it is urged upon us by respondent that since under the contract petitioner performed no services in consideration for the stock after January 1, 1924, it follows on the petitioner's theory that the petitioner's services were not given before that date, that the stock when delivered in November 1924, was a gift and as such under Washington law petitioner's separate property, the income from which is also separate property and, therefore, taxable to petitioner. The relevant provisions of the Washington statutes (2 Remington's Comp. Stat. (1922)) are as follows: § 6890. Separate property of Husband. Property and pecuniary rights owned by the husband before marriage, and that acquired by him afterward by gift, bequest, devise or descent, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber, or devise, by will, such property without the wife*1275 joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried. § 6891. Separate property of Wife. The property and pecuniary rights of every married woman at the time of her marriage, or afterward acquired by gift, devise, or inheritance, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of her husband, and she may manage, lease, sell, convey, encumber or devise by will such property, to the same extent and in the same manner that her husband can, property belonging to him. § 6892. Community Property Defined - Husband's control of Personalty. Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of *999 his separate personal property, except he shall not devise by will more than one-half thereof. If we turn now to the provisions of petitioner's contract with the company, we find that he agreed on January 5, 1922, to act as manager*1276 for the company at a salary of $250 per month (to be increased to $420, in the discretion of a stockholder, one H. C. Strong) until January 1, 1924. As a further consideration for petitioner's services, the stockholders of the company, also parties to the contract, agreed to sell to petitioner 16 2/3 shares, being one-sixth of the company's capital stock, on January 1, 1924, at its December 31, 1921, book value. The stockholders agreed to deliver this stock to two of their number as trustees to hold until paid for by the petitioner. It was expressly provided that: * * * All dividends declared upon any of said stock after Jan. 1, 1922, while this contract is in force and while any of said stock remains unpaid for, shall be paid to third parties, but shall be credited upon the purchase price of said stock in case first party buys the same as herein provided. * * * If first party is unable to pay in full for all of said stock on January 1, 1924, he shall be entitled to receive from the Trustees such part thereof as is then paid for either by him or by application of dividends. The balance of said stock shall be held by the Trustees until January 1, 1929, and the terms of this*1277 agreement shall be extended to that date; * * * Then follows this significant paragraph: It is understood and agreed that in case of a sale of the assets of second party or the liquidation thereof before January, 1924, and while first party is still in its employ hereunder, first party shall receive from said Trustees any and all amounts distributed to and on account of the stock set aside hereunder for the first party in excess of its book value December 31, 1921, deducting from said book value, however, dividends paid on said stock since January 1, 1922. It being the intention that in case the completion of this contract is rendered impossible because of a sale or liquidation of second party's assets, then first party shall be entitled to receive the distributive share of said stock less any amount then unpaid on its purchase price. The petitioner was still in the company's employ on January 1, 1924, and continued to act thereafter as manager for it. On that date, however, he had not paid anything toward the purchase of the stock nor had any dividends been declared which must have been applied toward its purchase. In November 1924, the company sold its assets at a large*1278 profit, declared a resulting dividend, and the amount thereof allotted to the petitioner was sufficient to pay for his stock, which was thereupon, and after his marriage on March 4, 1924, delivered to him. Was petitioner's interest in this contract after January 1, 1924, and before his marriage on March 4 of that year "property" within the meaning of Washington law and therefore part of his separate *1000 estate? A well known authority on the law of community property says: That the word "property" as used in the codes and statutes defining separate and community property, should be given a broad and inclusive meaning is conceded by all the authorities. * * * The term "property," as used in the statutes defining separate and common property can not reasonably be held to be less than the meaning of the same word in the law of bankruptcy. It includes choses in action as well as choses in possession, and inchoate rights as well as those perfected by higher forms of legal security. And accepting these decisions relating to causes of action for personal injuries as sound, we have, as the result, a meaning of the word "property" so broad as to include not only property*1279 in the ordinary sense but all forms of enforceable claims having a pecuniary value, even when they arise out of the violation of the right to personal security. (McKay on Com. Prop. 2nd ed., 1925, § 178, pp. 137, 138.) It is quite obvious that the petitioner had much more than, as he contends, a mere option to buy the stock. He had a right to have the dividends which might be declared on such stock applied by the stockholders toward the purchase of the stock for himself. While not owning legal title to the tree, in other words, he was to be given its fruits; the right to enjoy the fruits being, of course, one of the most important incidents of ownership. Furthermore, in the event of sale of the company's assets so as to render performance of the contract according to its terms impossible, petitioner was to receive his proportionate share of amounts distributed to stockholders in excess of the 1921 book value plus dividends. The facts amply show that the company's stock had increased greatly in value by January 1, 1924, and that its surplus was large. Moreover, there had already been initiated at this time the contract of sale which was finally performed later in the year. *1280 While it is no doubt true that even a stockholder has no ownership of his corporation's assets, the legal personality of the corporation intervening between stockholder and assets, , it is nevertheless true that a stockholder has a very immediate interest in those assets on their sale and the dissolution of the corporation. And again, while petitioner here was not on January 1, 1924, a stockholder in the company, his interest on that date so closely approximated one that it would be very difficult to draw any line of substance between his interest and that of a stockholder of record. We are of the opinion that petitioner's contract right on January 1, 1924, which later brought him title to the company's shares, was one of real substance and clearly "property" within the meaning of the Washington statutes. And we are of the opinion that petitioner's "property" was acquired before March 4, 1924, when he married. It has been said: *1001 As between husband and wife, when a right, legal or equitable, is acquired whether before or during marriage, all things of value into which the initial right*1281 develops by the performance of conditions, the running of time or the like, or into which it is converted by an assignment, or if the initial right rests in obligation, all that which is obtained through the performance, discharge, satisfaction, enforcement or assignment of the obligation, are deemed in law to have been acquired as of the date of the acquisition of the initial right, and take the character, as separate or common, of that right. [McKay, § 517, p. 352.] And again by the same authority: Property acquired by or in discharge of a conventional obligation. - Such property as between husband and wife and all others claiming under them, has its origin and is acquired as of the date when the obligation becomes binding, and not as of the time when the money is paid or the thing is delivered or conveyed. ; ; . The authorities are practically unanimous in support of this rule. * * * [§ 533, p. 359.] There is no doubt on the authorities that this rule obtains in Washington. *1282 The date of acquisition of property determines its character as separate or community property, (Washington); and cases therein cited. And the date of acquisition taken is that when the equitable interest arises and not when the legal title is transferred, ; (Washington); (Washington); (Washington). The same rule appears to be general, as stated by McKay, § 533, supra, and to obtain also in Nevada, ; and in California, . Cf. 5 R.C.L. 834. Our prior decisions have supported the same view. In ; affirmed in , money and stock received by the petitioner during marriage in payment for property sold by him before marriage was held not community property. The stock was held in escrow so that he did not receive title to it until after marriage. We said: *1283 * * * The property which was sold and which gave rise to the money, the income now under consideration, was the separate property of the husband. He had sold it and had completely divested himself of title thereto and dominion thereover prior to his marriage. At the time of the sale the amount to be received by the petitioner was definitely fixed and constituted an obligation due him. The right to receive the purchase price was itself property; it became vested in the petitioner prior to his marriage and could not, therefore, become community property under the Louisiana statute. More recently we held in , with respect to a fee received by a lawyer after the death of his wife but on a contract entered into with his client during the period of his marriage, that it was community property, to be returned as income *1002 by the lawyer and his deceased wife's estate, one-half each, as such. We said: * * * Petitioner contends that in cases of inchoate rights it is the time of the inception of the initial rights that determines the status of property as between community and separate. In this connection, McKay, a*1284 recognized authority, in his book on Community Property, 2d ed., par. 520, says: An inchoate title or pecuniary right is property in the sense of the law of separate and common property, just as truly as the most unimpeachable or perfect title. It takes its rank as separate or common property, for the same reason, and in response to the same tests, as the perfect or complete title or right, and it retains its character as separate or common so long as it can be traced; its development from an inchoate to the absolute or complete form does not shift it from one fund to another; it may be relieved of conditions and burdens but this does not change its character; it may pass from a conditional to an unconditional form, without change or legal character; it may be exchanged for other things or rights, and its character as separate or common passes to whatever was acquired by the exchange. If the property consists of an obligation, either contractual or delictual, it may be performed or enforced; and whatever is so acquired takes the same character as the obligation. [Italics supplied.] We think, as we have said, that the petitioner here had an inchoate right to the stock in*1285 question before his marriage which does not, because of the subsequent acquisition of legal title and receipt of the stock certificates thereafter, any the less constitute property owned before the marital community began; that such stock was the separate property of the petitioner; and that all dividends from it, therefore, constitute income to the petitioner for all the years here in question. Reviewed by the Board. Judgment will be entered for the respondent.