Moorshead v. Commissioner

O. MOORSHEAD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Moorshead v. Commissioner Docket No. 57045. United States Board of Tax Appeals 28 B.T.A. 252; 1933 BTA LEXIS 1150; June 1, 1933, Promulgated *1150 In the circumstances herein the petitioner received no dividends constructively in the taxable years. Ray G. Ransom, C.P.A., and Herschel L. Washington, Esq., for the petitioner. A. H. Fast, Esq., for the respondent. LANSDON *252 The respondent has determined deficiencies in surtaxes for the years 1927 and 1928 in the respective amounts of $2,987.84 and $18,928.09, *253 to which he has added negligence penalties at 5 percent, of $160.95 and $946.40. Two issues are pleaded by petitioner: (1) That respondent erroneously increased his income in each of the taxable years by adding thereto certain amounts which he determined that petitioner constructively received from the Hanlin Supply Co. in such years as dividends, and (2) a further erroneous addition to income in 1928 which petitioner contends was the income not of himself but of the Hanlin Supply Co. FINDINGS OF FACT. The petitioner is an individual residing near Newton, in Harvey County, Kansas. In each of the taxable years he was president of the Hanlin Supply Co., a Kansas Corporation, hereinafter called the company, with its principal office at Newton, where it was in*1151 business as contractor to supply commission stores to the Santa Fe Railway and other customers. Such company had outstanding at all times material here capital stock in the amount of 600 shares of the par value of $100 each, of which petitioner, his wife and his daughter owned 461, 110 and 8 shares, respectively. Twenty shares were owned by the secretary of the company and the remaining one share was issued to petitioner's father-in-law to qualify him as a director. In the year 1927 the company purchased 160 acres of farm land near the city of Newton for $20,000 and paid cash therefor in the amount of $10,000 and gave a purchase money mortgage for the balance. In the years 1927 and 1928 it spent $17,337.19 and $111,872.11 for buildings, other improvements and equipment on the land. Among such improvements was a 10-room dwelling and the landscaping of some 15 or 20 acres of the land. The company acquired the land here involved and expended the amounts set out above for the production of certain commodities used in its business and for the purpose of having a suitable place for the entertainment of the officers of the Santa Fe Railway Co. and other customers when at Newton*1152 on business connected with the company's contract to supply commissary stores and also as a place for holding its own corporate meetings. This was necessary on account of the poor hotel facilities in Newton at that time. Upon the completion of the dwelling the petitioner rented it from the company for $200 a month and lived there with his family in the taxable years. This rental was charged to petitioner monthly on the books of the company and at the end of each year was paid in full. In addition to the stated rental, petitioner, at all times, was *254 required to and did keep the residence available for the purposes of the company. When the company acquired the land, legal title thereto was taken in the name of A. E. Branine, an attorney in its employment at that time. In the same year Branine, by duly executed and recorded warranty deed, transferred such title to the petitioner. On December 31, 1927, petitioner and his wife executed their warranty deed conveying their title to the company. This deed was delivered to the secretary of the company, who stored it in a safe place where he kept all the corporate papers of the company, but did not have it recorded on the*1153 books of the Register of Deeds of Harvey County. At December 31, 1927, the company had surplus accumulated after March 1, 1913, sufficient to pay a dividend of $27,337.19 and at December 31, 1928, it had such surplus sufficient to pay a dividend of $111,872.11. The cost of the land and improvements in question was included in the surplus account. Upon examination of the petitioner's income tax return for the years 1927 and 1928 the respondent determined that petitioner had constructively received dividends from the company in such respective years in the amounts of $27,337.19 and $111,827.11. These amounts represent the company's expenditures for the land, improvements and equipment in the taxable years. At all times material here the costs of the land, improvements and equipment involved here were carried in the asset accounts of the petitioner in the books that it kept in connection with its business. OPINION. LANSDON: The principal question here is whether the petitioner received constructive dividends from the Hanlin Supply Co. in 1927 and 1928 as determined by the respondent. "Constructive receipt is an artificial concept which must be sparingly applied, lest*1154 it become a means of taxing something other than income and thus violating the constitution itself." . There was no corporate action declaring dividends nor any book entries evidencing dividend obligations of the corporation or credits and charges of the amounts to the petitioner. At all times the costs of the lands, improvements and equipment were included in the asset accounts of the company's books. There is, therefore, no recorded act of the company that evidences the payment of the amount in question to the petitioner. The determination of the respondent therefore rests wholly upon his interpretation of the meaning of the facts. *255 The petitioner was the president of the company. He and other members of his family owned about 96 percent of its issued stock. For a time at least legal title to the property was in the petitioner. He occupied the dwelling as his home at a rental too low to constitute a profitable return on the investment. These facts must be the basis upon which respondent has made his determination. In our opinion they are not sufficient. As long as the law recognizes that a corporation and its shareholders*1155 are separate entities the relative stockholdings are not material. The record discloses that when the company acquired the land legal title was taken in the name of the lawyer, Branine, who was then in its service. Since it is clear that the company purchased the land for its own purposes and paid with its own funds, it is obvious that the lawyer was a mere conduit through whom title was taken from the transferor. This being true it follows that Branine could convey to petitioner no greater interest in the property than he possessed in his own right, that is, the bare legal title that petitioner and his wife passed on to the company, which, in our opinion, was at all times after the purchase in 1927, the beneficial owner of the property that it acquired and improved for its own purposes. In a controversy of this nature it is not material that the deed through which the company finally acquired its legal title was not recorded. In Kansas, while an unrecorded deed means nothing to strangers to a land transfer, it is completely binding on the parties thereto as to any controversies between themselves. Revised Statutes of Kansas, 1928, ch. 57, p. 223; *1156 ; . It is undisputed that petitioner lived in the property, but it is equally well established that he not only paid a stated rental for it but that he agreed to and did hold it available to the company at all times for the purposes for which it was acquired. In this circumstances we are of the opinion that petitioner did not constructively receive dividends in the taxable years in the amounts determined by the respondent. Since no evidence was adduced in respect of the second issue, the determination of the respondent thereto is affirmed. The evidence indicates that the petitioner's income tax returns were, for the taxable years, consistent with the facts and conclusions set out herein. The penalty, if any, for negligency should not be collected. Decision will be entered under Rule 50.