Opinion
Nos. 193, 199, Docket 22240, 22241.
Argued March 13, 1952.
Decided March 28, 1952.
In January, 1942, Edward Bishop owned 942 shares of common, and 698 shares of 7% cumulative preferred, stock in Globe Forge, Inc. His son, E. Lawton Bishop, owned 176 shares of common, and 93 shares of preferred. The total amount of common and preferred issued and outstanding was 4,000 shares. The common and preferred had equal voting rights. Besides the Bishops, there were thirty-five other shareholders, and three other men on the Board of Directors. On January 24, 1942, the directors passed the following resolution, respecting the preferred stock on which back dividends were owing since 1934: "Motion by J.W. Gates, seconded by C.S. Brown that Treasurer (Edward Bishop) be authorized to pay off all back dividends on preferred stock during the year 1942 at his discretion as the condition of the company warrants it." On January 24, there was some $164,864 in the company's capital surplus, and a deficit of $17,000 in earned surplus. Back dividends owing on the preferred stock plus the 1942 dividend would require a $56,000 cash payment.
On August 17, 1942, Edward Bishop gave away all his 548 preferred shares to his wife and son. On April 15, 1943, E. Lawton Bishop gave his 93 preferred shares to his wife. In the Fall of 1942, back dividends of $14.00 per share were paid to preferred shareholders; in July 1943, additional back dividends of $49.00 per share were paid. The Commissioner included in the taxable income of Edward Bishop and his son, E. Lawton Bishop, the 1943 preferred dividends, despite the fact that these taxpayers had previously disposed of their preferred stock. Under protest, they paid assessed deficiencies of $20,859.00 and $1,786.00, and then sued the Commissioner in the United States District Court to recover those amounts. The Commissioner defended on two grounds, i.e., (1) that the intrafamily gifts were a sham to avoid taxes, an issue decided against the Commissioner by the jury, and (2) that gifts of stock after the resolution authorizing payment of dividends amounted to an assignment of the dividend income taxable to the donor. The district judge rejected this second contention in a memorandum opinion. The Commissioner is here appealing from the judgments for the plaintiffs.
Between the date of the resolution and the date of his gift, Edward Bishop sold to third parties 143 shares of common and 150 shares of preferred stock.
Ellis N. Slack, Acting Asst. Atty. Gen., and Edmund Port, U.S. Atty., Syracuse, N.Y. (A.F. Prescott and Carolyn R. Just, of counsel), for appellant.
Smith Sovik and Martin F. Kendrick, all of Syracuse, N.Y., for appellees.
Before SWAN, Chief Judge, and CLARK and FRANK, Circuit Judges.
1. It may be, as the Commissioner argues, that, because of the family context, if the two taxpayers between them had had control of the corporation, both before and after the gifts of the stock, the doctrine of Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898, would govern, with the result that the dividends paid the donees of the stock would be income of those taxpayers. See also White v. Fitzpatrick, 2 Cir., 193 F.2d 398. But we need not consider that question. For the two taxpayers between them, after the gifts, had only 975 voting shares out of a total of 4,000, or about 24%. They were two out of a five-man board of directors. If they had a similar percentage of the stock of a corporation with many widely dispersed shareholders, there would indeed be a very strong inference that they had control. But where, as here, all the stock was closely held, we think the burden was on the Commissioner to prove control by these taxpayers. He did not bear that burden.
Absent control, the case is as if the treasurer of an ordinary corporation, himself holding some preferred shares, had acted pursuant to a resolution, like that here, authorizing him "to pay off all back dividends on preferred stock during 1942 at his discretion as the condition of the company warrants it." A gift by that treasurer to his wife of some of his preferred shares would not, we think, have the effect of making dividends paid after the gift a part of his income. Unlike the taxpayer in the Sunnen case, he could not, after the gifts of stock, continue to exercise control over the flow of the dividend income through control over the policies of the corporation governing the intake and accrual of earnings required for the payment of dividends. And even his discretion to pay back dividends under the resolution was circumscribed by the condition that the company's condition warrant their payment.
2. It cannot reasonably be argued that the January resolution amounted to a realization of income to the Bishops of the dividends subsequently, paid, so that their subsequent gifts of the stock, on which those dividends were owing, amounted to an assignment of income. The Commissioner cites Austin v. Commissioner, 6 Cir., 161 F.2d 666 and Anthony's Estate v. Commissioner, 10 Cir., 155 F.2d 980, to the contrary; but each of these cases involved uncollected income to which the donor had a legally enforceable right before he disposed of its source, and which was therefore subsequently taxed as the donor's income. The resolution here did not set the time for payment of the dividends nor even the date of record at which the distributee shareholders would be determined. The back dividends might be distributed all in one lump sum or at intervals. It is clear that no enforceable rights accrued to any shareholder by means of the January resolution; hence, there was no income assigned by the subsequent gifts of stock. See Putnam's Estate v. Commissioner, 324 U.S. 393, 65 S.Ct. 811, 89 L.Ed. 1023.
Affirmed.