Opinion
No. 72-1153, 72-1156.
December 14, 1972.
Before BOREMAN, Senior Circuit Judge, BRYAN, Senior Circuit Judge and CRAVEN, Circuit Judge.
OPINION BY: [*1] BRYAN
Deficiency assessments of Federal income taxes for 1962 and 1964, were paid by Maxwell A. and Alvin A. Behrend, brothers, and in the District Court they obtained a judgment for the recovery thereof. The United States appeals, but we affirm.
Their wives joined in the returns and suits but the husbands are in actuality the taxpayers and infra that term refers to them.
The question is whether the taxpayers realized dividend income when, after they had donated preferred stock in their controlled corporation to their family owned charitable foundation, the corporation redeemed the stock from the foundation. Taxpayers assert that the redemptive payments to the foundation were deductible corporate contributions for charitable purposes. The Government contends that, in truth, the payments by the corporation in the redemption constituted a dividend to the taxpayers — that it was the same as if the corporation had paid this money to these stockholders and they had in turn paid it to the foundation. Disbursement of this money by the corporation[*2] to the foundation through employment of the intervening "step transactions" did not, the argument is, destroy the reality of the transaction as a distribution of corporate earnings to the stockholder-taxpayers. This proposition obviously ignores the intermediate steps. Its conclusion is that while in form separate acts, in substance they compose an integrated appropriation of corporate earnings for use by the stockholders.
For definition, see Sheppard v. United States, 361 F.2d 972, 977 (Ct. of Claims 1966).
Taxpayers reply that the donation was wholly completed prior to the redemption and was in all respects a valid gift. They deny that their actions amounted to a unitary operation, but on the contrary were a series of independent steps, each taken without obligation of any kind.
The facts were agreed. Taxpayer's corporation, organized under the laws of Maryland on January 2, 1946 with the name of Behrend Brothers, Inc., was an automobile dealership, in Baltimore, continuously from its formation until August 7, 1965. The brothers conducted the business; they and their families owned all of its outstanding stock. Initially, there was but a single[*3] class of voting common stock, with 200 shares issued to Maxwell and 200 to Alvin. On July 15, 1946 Maxwell transferred 100 shares to his wife, Nettie.
The charter was amended on December 19, 1952 to effect a non-taxable reorganization, creating the following four classes of stock:
Amount Type Par Value
5,000 shares Class A Preferred $100
5,000 shares Class B Preferred $100
1,500 shares Class A Common No par
1,500 shares Class B Common No par
The preferred stock was non-voting and, as stipulated, its other pertinent attributes were these:
"(1) Dividends. Class A Preferred was entitled to receive non cumulative dividends not exceeding 6 percent per annum when and as declared. Non cumulative dividends could be declared and paid on Class B preferred, not exceeding 6 percent per annum only if and after dividends have been paid on Class A preferred. After all dividends were declared and paid on both classes of the preferred, stockholders of the outstanding Class A common and Class B common were entitled to receive dividends equally, share for share, as might from time-to-time be declared[*4] by the board of directors.
"(2) Redemption of Preferred Stock. At the option of the board of directors, the whole or any part of Class A preferred or Class B preferred could, upon not less than 30 days' notice, be redeemed at $100 per share, plus any accumulated and unpaid dividends."
On December 30, 1952, the corporation issued: to Alvin 1000 shares of Class A preferred and 1000 shares of Class B preferred; to Maxwell 500 shares of Class A preferred and 500 shares of Class B preferred; and to Nettie 500 shares of Class A preferred and 500 shares of Class B preferred. Thereupon, the corporation retired all of the outstanding original shares of the corporation, and substituted therefor 200 shares of Class A common stock for Alvin, 100 shares of Class B common for Maxwell, and 100 shares of Class B common for Nettie. The following were also among the stipulations:
Without significance here, for completeness we mention that the brothers assigned all of their Class "A" preferred stock to two trusts set up for the benefit of their respective daughters.
"15. At the time that the Class B preferred stock was issued on December 19, 1952, it was the intention of Maxwell and Alvin to form a charitable foundation as expeditiously as possible, to which they would contribute Class B preferred stock (and/or other securities or cash). They intended that the contributed Class[*5] B preferred shares would be purchased or redeemed by the corporation so that cash could be raised in the Foundation to fund its charitable giving."
"18. At the time that Maxwell, Nettie and Alvin made the gifts of Class B preferred stock to the Foundation during the period of 1954-59 as set forth in Item 5, supra, it was the intention of Maxwell and Alvin, as managers of Behrend Brothers, Inc. that the corporation would begin to redeem (or purchase) the donated stock from the Foundation as soon as earnings would permit, and this would occur when the corporation had built up a net worth of about $750,000.
"27. There was never any doubt in the minds of Maxwell and Alvin that the corporation would eventually redeem (or purchase) the Class B preferred stock held by the Foundation."
Maxwell and Alvin on February 23, 1954 organized under Maryland law a charitable non-profit foundation, Behrend Foundation, Inc. It was determined by the Internal Revenue Service, on November 15, 1955, to[*6] be exempt from income taxation and this status has never been withdrawn. From 1954 through 1959 Maxwell, Nettie and Alvin donated 635 shares of Class "B" preferred stock of Behrend Brothers, Inc. to the foundation.
On February 2, 1962 Behrend Brothers, Inc. redeemed from the foundation 120 shares of its Class "B" preferred stock, paying therefor $12,000.00. A like redemption was made June 15, 1964 of 200 shares for which $13,530.00 was paid. These acquisitions were intended to provide the foundation with cash to apply towards loans obtained from Behrend Brothers, Inc. and from banks. The donations of the Class "B" preferred stock of the corporation were claimed by the donors as charitable deductions in their individual tax returns. For 1962 and 1964 Internal Revenue determined that one-half of the redemptive sums paid to the foundation by Behrend Brothers, Inc. during those two years constituted taxable dividend income to the taxpayers.
There is no question here regarding the satisfaction of this assessment, or of the procedural correctness and reasonableness of taxpayers' present suits.
In our judgment the redemption payments of the corporation to the foundation [*7]were not dividends taxable to the Behrends. True, they were planned, that is, from the start it was understood that the corporation would at intervals take up the preferred according to its financial ability. However, this factor did not convert into a constructive dividend the proceeds of the redemptions. Nor was the validity of the gifts impugned by the common identity of the donors and the foundation and the corporation. In a similar situation the same conclusion was reached in National Carbide Corp. v. Commissioner of Internal Revenue, 336 U.S. 422 (1949), the Court observing:
". . . a corporation formed or operated for business purposes must share the tax burden despite substantial identity, in practical operation, with its owner. Complete ownership of the corporation, and the control primarily dependent upon such ownership . . . are no longer of significance in determining taxability. . . ."
Furthermore, the gifts were absolutely perfected before the corporation redeemed the stock. Performance of none of the steps was compellable; there was no binding obligation on the parties to carry through any step. Of such transactions, the Tax Court of the United States, [*8] in The Humacid Company v. Commissioner of Internal Revenue, 42 T.C. 894, 913 (1964), said:
"The law with respect to gifts of appreciated property is well established. A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of sale."
In Humacid, one Huntsinger gave three promissory notes, all executed by a corporation controlled by him, to several charitable institutions. Eleven days later the corporation offered each of the charities redemption of its note at 80% of its face value. The offers were accepted and fulfilled promptly. The Court held that no taxable income was realized upon the retirement of the corporate notes. Clearly, the circumstances of Humacid are not unlike those of the Behrends.
A striking precedent here is Carrington v. Commissioner, 30 TCM 950 (now on appeal to the Fifth Circuit, argued Nov. 14, 1972). In that instance the taxpayer gave more than 50% of his stock in his wholly owned corporation to a church, in accordance with an underlying plan to enable the church to purchase a residence, [*9] owned by the corporation, to be used as a rectory. A week later, in furtherance of the arrangement, the corporation redeemed the stock from the church in exchange for the building. The Court concluded that the taxpayer had not realized any taxable income upon the redemption. Other cases approving the principles of Humacid and Carrington are Jacobs v. United States, 280 FS 437 (D.C. Ohio 1966), aff'd-1 390 F.2d 877 (6th Cir. 1968); Sheppard v. United States, supra, 361 F.2d 972 (Ct. Claims 1966); Martin v. Machiz, 251 FS 381 (D.C. Md. 1966, opinion by Winter, J.).
A predominant force in our decision of the instant case is the indisputable fact that the taxpayers did not participate whatsoever in the beneficence of the foundation. There was nothing deceptive or otherwise questionable in the design patterned by the Behrends. They had the privilege to adopt any lawful method which could save taxes while attaining their wish to fund their charity.
We think the determination of the District Court was correct.
Affirmed.