McInerney v. Commissioner

J. L. MCINERNEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. McInerney v. Commissioner Docket No. 54676. United States Board of Tax Appeals 29 B.T.A. 1; 1933 BTA LEXIS 1018; September 6, 1933, Promulgated *1018 1. In determining the installment basis upon a casual sale of personal and real property, held, the amount of mortgages assumed by the purchaser must be deducted from the selling price in determining the "total contract price" under section 44(b) of the Revenue Act of 1928. 2. Where a corporation was created for the sole purpose of passing title to the purchaser and passing payment to the vendor and was controlled by an attorney who acted for all the parties to the sale, payment made to the corporation by the purchaser must be regarded as constructively received by the vendor. 3. Where the facts show that the vendor did not intend to make a present bona fide gift of one half the property to his wife, but had a continuing intention to effect a sale of the property upon terms previously arranged by him, which the wife carried out, held, the profits arising from the sale are taxable to him. H. A. Mihills, C.P.A., for the petitioner. Prew Savoy, Esq., and J. A. Morawski, Esq., for the respondent. GOODRICH *1 A deficiency in income taxes for the calendar year 1928, in the amount of $21,157.24, is here in controversy. Petitioner*1019 alleges that respondent erred (a) in including in his gross income the entire profit on the sale of certain assets by petitioner to the National Spring & Wire Co., instead of one half of that profit; (b) in determining that the profit arising from the sale should be computed on the completed sale basis rather than the installment sale basis. FINDINGS OF FACT. Petitioner is a resident of Grand Rapids, Michigan, and, prior to July 11, 1927, when it was placed in receivership, was general manager of the National Spring & Wire Co. of Grand Rapids. William H. Baldwin of New York, a creditor of the National Spring & Wire Co., bought in the entire assets of that company at a receiver's sale and thereafter George Wiltshire was appointed trustee for Baldwin and authorized to continue the operation of the properties. *2 After the purchase of the properties by Baldwin and their transfer to Wiltshire as trustee, petitioner continued in the employ of the company, acting in the capacity of president and general manager, although he did not own any of the capital stock of the company. Wiltshire wanted to negotiate a sale of the properties and agreed with petitioner that, should*1020 petitioner arrange a sale, he might retain all the proceeds in excess of $225,000. After various efforts, petitioner in November 1928, made an agreement which, however, was not in writing, to sell the properties to the National Marshall Spring Corporation, a subsidiary of the Nachman Spring Filled Corporation of Chicago. Wilshire, as trustee for Baldwin, transferred the properties, both real and personal, to petitioner on November 8, 1928, for a consideration of $225,000 and the assumption of liabilities of the corporation in the amount of $279,070.03. The real estate was conveyed subject to the following mortgages which were assumed by petitioner: Mortgage dated July 1, 1919, to the Michigan Trust Co. as trustee, securing an issue of first mortgage 7% bonds in the now outstanding amount of $10,000, together with accrued interest thereon. A mortgage dated March 15, 1926, to Chicago Title & Trust Co. and Abel Davis of Chicago, Illinois, as mortgagees, securing a now outstanding amount of $30,000, of second mortgage 6% notes, together with accrued interest thereon. A mortgage dated November 11, 1926, to William H. Baldwin of New York, N.Y., securing an issue of third mortgage*1021 6% notes, now outstanding in the amount of $60,000, together with accrued interest thereon. George B. Kingston, petitioner's attorney, was also attorney for Wiltshire, and in the fall of 1928 became the attorney for the Nachman interests and represented the National Marshall Spring Corporation, the purchaser. The National Marshall Spring Corporation, being apprehensive that difficulties might arise under the bulk sales law of Michigan, insisted upon a corporation being formed through which title to the property might pass to it. Accordingly, Kingston organized the National Spring & Wire Co. on December 4, 1928, and furnished it capital of $1,000. Of its capital stock of ten shares of the par value of $100 each, eight shares were held by Kingston; one share by Esther C. Billburg, his secretary, and one share by M. L. Kelley, a stenographer in petitioner's office. These three individuals comprised its officers and directors. Kington was president and treasurer and Esther C. Billburg was secretary. Neither petitioner nor his wife owned any stock in the corporation. On December 16, 1928, petitioner executed a bill of sale of one half of the personalty to his wife, Katherine*1022 McInerney, while both were in Kingston's office. This instrument was left with Kingston. Petitioner had explained the matter to his wife in Kingston's office *3 at the time and she understood what was being done. She later signed all documents transferring this property to others. On December 17, 1928, petitioner executed a quitclaim deed to the real estate, in which his wife joined, in favor of Esther C. Billburg, who on the same day executed a quitclaim deed to the same property in favor of petitioner and his wife, which deeds were recorded December 22, 1928. On December 17, 1928, petitioner and his wife jointly made an offer to sell to the newly organized National Spring & Wire Co. all of the real and personal property here in question for a consideration of $572,700, the purchaser to assume the mortgage to the Michigan Trust Co. for $10,000 and the mortgage to the Chicago Title & Trust Co. for $30,000, with accrued interest. The offer provided that the "said sale, if consummated, be made as of November 24, 1928." The terms of the sale set out in the offer were $225,000 on the date of the acceptance of the offer; $150,000, or more, on January 15, 1929, and balance*1023 on January 15, 1930, with interest at 5 1/2 percent. This offer was accepted by the corporation on December 18, 1928. On the same date and at the same meeting of the stockholders of the corporation, a resolution was passed authorizing the board of directors to sell and dispose of all of its assets to the National Marshall Spring Corporation. By a joint letter dated December 18, 1928, petitioner and his wife authorized the National Spring & Wire Co. to remit the down payment of $225,000 to Woodward, Baldwin & Co. of New York and charge one half to each of them. On December 18, 1928, petitioner and his wife jointly executed a bill of sale transferring the personal property and a deed conveying the real property to the National Spring & Wire Co. The deed recited that the purchaser assumed and agreed to pay mortgages as follows: Michigan Trust Co., $10,000; Chicago Title & Trust Co., $30,000; William H. Baldwin, $60,000. The deed was recorded December 22, 1928. Kingston, although president of the National Spring & Wire Co., had no part in the negotiations for the sale by petitioner and his wife to that company, but served as legal counsel for petitioner and his wife and also for*1024 the National Marshall Spring Corporation. On December 18, 1928, the National Spring & Wire Co., by resolution of its board of directors, made an offer to sell and convey all of the property it had acquired from petitioner and his wife to the National Marshall Spring Corporation, "as of November 24, 1928, profits and losses since that date to be assumed by you", subject to the same three mortgages, aggregating $100,000, for the consideration of $515,700, payable $400,000 in cash, the balance evidenced *4 by a promissory note due in one year with interest at 5 1/2 percent. On December 18, 1928, by deed recorded December 22, 1928, the National Spring & Wire Co. conveyed the real property to the National Marshall Spring Corporation, which assumed the same mortgages mentioned. On December 19, 1928, it executed a bill of sale of the personalty to the same corporation. The minutes of the National Spring & Wire Co. of December 24, 1928, show that the National Marshall Spring Corporation on December 22, 1928, paid $374,224 in cash and gave its note for $115,700, with interest at 5 1/2 percent to be paid from November 24, 1928. The minutes further show that pursuant to the*1025 request of petitioner and his wife, $225,000 had been remitted to Woodward, Baldwin & Co. of New York. The minutes of January 2, 1929, show the receipt by the treasurer of $25,000, this sum being approximately the balance of the cash payment from the National Marshall Spring Corporation. These minutes fruther show that the National Spring & Wire Co. had a cash balance of $174,224, exclusive of cash capital paid in, and that the treasurer was authorized and directed to pay one half of this amount to petitioner and a like amount to his wife, which was done shortly thereafter. The National Spring & Wire Co. had no operating functions except those connected with the sale and transfer of the assets of the former corporation to the National Marshall Spring Co. It was dissolved in 1931 after the final payment had been made on the notes and passed on to petitioner and his wife. The National Spring & Wire Co. did not give petitioner any security for the purchase price. It was not evidenced by notes and petitioner retained no mortgage on the real estate or lien on the personal property. Petitioner did not consider the National Spring & Wire Co. from a credit standpoint. He assumed*1026 it was practically the Nachman Spring Filled Corporation, or its subsidiary, the National Marshall Spring Corporation, and he only considered the Nachman Co. from a credit standpoint. On December 19, 1928, Kingston, as president of the National Spring & Wire Co., executed an affidavit in connection with the sale of the assets to the National Marshall Spring Corporation, in compliance with the provisions of the Bulk Sales Law of Michigan, and therein listed indebtedness to petitioner and his wife on open account in the sum of $256,350 each, a total of $512,700. The gross selling price of the assets was $612,700. Mortgages were assumed by the purchasers in the amount of $100,000. Doubtful accounts receivable *5 were retained by the vendors in the amount of $10,845.49. The vendor's expenses of the sale were $7,070. The parties have stipulated that in the event this Board should hold that no valid and bona fide gift was made by petitioner to his wife of one half of the property acquired from George Wiltshire, trustee, and if we should further hold that the transaction was a completed sale in 1928 and the computation under the installment sales provision of the act not*1027 permissible, then the profit to petitioner was $115,405.46 instead of $21,663.19 as reported by petitioner in his tax return. OPINION. GOODRICH: It is stipulated upon the record that petitioner and his wife conveyed the properties, both real and personal, acquired by petitioner from Baldwin, through Wiltshire as trustee, to the National Spring & Wire Co. for a consideration of $572,700, this figure being arrived at by deducting $40,000, representing mortgages assumed by the purchaser, from $612,700, the gross selling price of the assets. Upon that basis, petitioner contends that the initial payment received in 1928, the year of the sale, was less than 40 per centum, and the transaction may be treated as an installment sale. We refuse to be bound by this stipulation, for it appears to be contrary to the facts of record. . While it is true that the offer to sell, as recited in the minutes of a meeting of the stockholders of the National Co., mentions encumbrances totaling only $40,000, nevertheless, as set out in our findings of fact, the three liens totaling $100,000 were then outstanding. They were mentioned in the deed*1028 by which Wiltshire, trustee, conveyed to petitioner; they were mentioned in the deed by which petitioner and his wife conveyed to the National Co., and also in the deed by which the National Co. conveyed the properties to the National Marshall Spring Corporation. It may be there is an explanation for this discrepancy, but petitioner has offered none, either in his testimony or upon brief. Consequently, upon the record before us it appears clearly that when these properties were sold by petitioner they were subject to encumbrances, not only of $40,000, the amount which petitioner uses in his computations, but of $100,000, all of which were assumed by the purchaser. Inclusion of an additional lien assumed by the purchaser in the amount of $60,000 presents a basis quite different from that urged by petitioner to be used in determining whether the initial payment exceeded the 40 per centum limitation prescribed by section 44 of the Revenue Act of 1928. The cost to the purchaser becomes $612,700, of which $100,000 consists of mortgages assumed, and the amount receivable *6 by petitioner as vendor becomes $512,700. See article 352, Regulations 74; *1029 (affirming ), and cases there cited; cf. . Petitioner received in 1928 $225,000, which is in excess of 40 per centum; consequently, he is not entitled to the benefit of the installment sales provision of the statute. However, we do not rest our determination solely upon petitioner's failure to overcome the evidence contradicting the stipulated figures, for we are convinced that certainly more than 40 per centum of the basis used by petitioner, and perhaps the entire consideration, was available to petitioner in 1928. The National Spring & Wire Co. was created for the sole purpose of passing title in the properties to the National Marshall Corporation and passing payment therefor to petitioner. It was the instrument of all parties to this sale, and was controlled by Kingston, who served as attorney for all the parties, including petitioner and his wife. As a conduit, it received from the National Marshall Corporation the purchase money due petitioner. So far as the deeds indicate, the sale was a cash transaction, and there was no*1030 written contract covering the deal beyond the offer from petitioner and his wife as recited in the minutes. In contradiction to the terms of that offer it was testified that the terms of sale were "one third down, and one third each year," yet it is undisputed that, upon petitioner's request, he received $225,000 immediately the conveyance was made, and that the balance due him, either in cash or in notes of the National Marshall Corporation in 1928, was paid over to and held by the National Co. We have little doubt but that he could have obtained that balance, had he so desired. We find an explanation for the failure to pay petitioner in full during 1928, in cash or its equivalent, in the following excerpt from the minutes of a meeting of the stockholders of the National Co. held on December 3, 1929: The Treasurer of the corporation made an informal report of the affairs of the company * * *. He stated further that the company was in position to make a substantial reduction of its liabilities to Mr. and Mrs. McInerney, but who had requested that payment be withheld until after Jan. 1st, 1930. [Italics ours.] *1031 We are convinced that the greater part, if not all, of the consideration was available to petitioner in 1928 and might have been received by him upon demand and that, under these circumstances, it must be regarded as constructively received by him. ; ; ; . Respecting the second issue, respondent contends that the conveyance of the real estate by petitioner to himself and his wife created, *7 under the law of Michigan, an estate by the entirety, the profit from which is taxable to the husband, citing . That decision is not here controlling, for we are concerned not with the income from the property, but with the proceeds of sale of the property, which, in this case at least, is quite a different thing. An assignment of the income would not relieve petitioner of the tax thereon, but it is his contention that he transferred to his wife, as a gift, a one half interest in the properties, both real and personal, and*1032 that consequently one half of the proceeds derived from the subsequent sale of the properties belonged to her. It is plain that the motive for the transfers was to divide the profit derived from the sale and thus reduce the tax liability otherwise falling upon petitioner as the sole vendor, and it must be conceded that, so far as form of the transfers is concerned, they were effected by valid means. Interest in the real estate was conveyed by proper deeds and, while the bill of sale covering the interest in the personal property was held by Kingston, Mrs. McInerney was fully advised as to its effect. The record evidences a sufficient delivery and acceptance of a gift of the interest in the properties. But scrutinizing the circumstances surrounding the transaction, as we must do, and looking to the substance of the matter, we conclude that the intention to make a bona fide gift of that interest was lacking. At the time this purported gift was made, all arrangements for the sale of the properties, even to the organization of the "dummy" corporation, had been made; it remained only to pass title and receive the consideration. Although there is some general testimony that petitioner*1033 and his wife had previously worked together on business matters and that petitioner had on occasion given to her a part of the profits of his enterprise, there is no evidence here that Mrs. McInerney had previously been promised an interest in these properties. Nor is there any evidence that her interest in the properties and her share of the sales proceeds were received by her free from the domination of her husband and subject to her own control and desires. On the contrary, the sale was carried out as arranged, the wife joining in passing the title. We are not told whether her assent to this disposition of the properties was of her own volition. Nor are we told why she applied a part of her share of the sales proceeds to the payment of the debt owed by petitioner upon his purchase of the properties, nor what was done with any further amounts received by her, whether applied to uses of her own or turned over to her husband. To us the circumstances indicate not a bona fide gift of an interest in the properties which the wife might control and manage as she desired, but a continuing intention to effect a sale and an acceptance of the interest by the wife with the understanding*1034 that she would *8 pass it on to the purchaser upon the terms previously arranged by her husband. Consequently, the intention and the effect was not to give a present one-half interest in the properties, but an interest in the profit to arise from the sale. That does not relieve petitioner from his tax liability. Cf. ; (affirming ); certiorari denied, ; ; certiorari denied, ; . The transfers were a subterfuge, effected upon the eve of the consummation of the sale in the hope that it would serve to avoid a part of the tax to be imposed upon the profit derived therefrom. We conclude that the real owner and vendor of the properties was petitioner, and that the entire profit is taxable to him. *1035 . Cf. ; Judgment will be entered under Rule 50.