Opinion
Docket Nos. 6673-6676 7970 7971.
1946-05-24
ETHLYN L. ARMSTRONG, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Lee W. Eckels, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
In 1941 petitioner sold shares of stock of Campbell Transportation Co. at a profit. They claim that the shares were acquired either by themselves or by persons from whom they received them by gift on March 6, 1940, and that they sold them on September 10, 1941; that they held them for a period of 18 months, 4 days, and that the gains from the sales were long term capital gains, only 66 2/3 percent of which is includible in gross income. Held, that the shares were sold on September 10, 1941, but they were not acquired prior to March 28, 1940, at the earliest, and that the gains are short term capital gains, taxable on 100 percent of the amount thereof. Lee W. Eckels, Esq., for the petitioners. Homer F. Benson, Esq., for the respondent.
These proceedings, consolidated for hearing, involve income tax liabilities for 1941 as follows:
+-----------------------------------------------------------------------------+ ¦Petitioner ¦Docket ¦Deficiency¦ ¦ ¦No. ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦Ethlyn L. Armstrong ¦6673 ¦$433.03 ¦ +--------------------------------------------------------+---------+----------¦ ¦Marie L. Bostwick ¦6674 ¦8,506.62 ¦ +--------------------------------------------------------+---------+----------¦ ¦Dora Belle Reed ¦6675 ¦1,968.47 ¦ +--------------------------------------------------------+---------+----------¦ ¦Virginia E. Thorp ¦6676 ¦517.62 ¦ +--------------------------------------------------------+---------+----------¦ ¦Dora Belle Reed Trust No. 1, Commonwealth Trust Co. of ¦ ¦ ¦ ¦Pittsburgh, ¦ ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦trustee ¦7970 ¦785.90 ¦ +--------------------------------------------------------+---------+----------¦ ¦Dora Belle Reed Trust No. 2, Commonwealth Trust Co. of ¦ ¦ ¦ ¦Pittsburgh, ¦ ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦trustee ¦7971 ¦785.90 ¦ +-----------------------------------------------------------------------------+
The question in issue in each of the cases is whether gains realized by the petitioners from the sales of shares of stock of Campbell Transportation Co. in 1941 were long term capital gains realized from the sale of securities held for a period of from 18 months to 24 months, or short term capital gains held for a period of less than 18 months. In the petition of Virginia E. Thorp (Docket No. 6676) the petitioner claims a refund by reason of the fact that in her return for 1941 she failed to claim a deduction of $300 for earned income. In the determination of the deficiency the respondent allowed the earned income credit.
FINDINGS OF FACT.
The petitioners, other than the two trusts, are residents of Pittsburgh, Pennsylvania. All of the petitioners filed income tax returns for 1941 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.
In 1941 the petitioners sold shares of stock of Campbell Transportation Co. at a profit. In their returns they reported these profits as having been derived from the sale of capital assets held for a period of more than 18 months but less than 24 months and included in gross income on 66 2/3 percent of the profits realized. In the determination of the deficiencies the respondent has held that the shares of stock were held for a period of less than 18 months and that the gains are includible in gross income to the extent of 100 percent thereof.
In January 1940 Charles T. Campbell was a director, president, and general manager of Campbell Transportation Co., and the owner of one-half (2,500 shares), of the outstanding shares of stock of that corporation. The other 2,500 shares of stock were all owned and held by John W. Hubbard.
Campbell agreed with Hubbard to purchase his 2,500 shares of stock for $600,000, or $240 per share. Prior to the time of agreeing to purchase the stock, he had discussed the matter with the Colonial Trust Co., of Pittsburgh, which indicated to him a willingness to lend him $400,000 for the purchase of ths stock, When he went to the trust company on or about March 1, 1940, to secure the loan the trust company refused to make it. Prior to this time he had an understanding with A. E. Dyke that he would purchase one-sixth of the shares of stock and pay $100,000 for them. He also had an understanding with Earl F. Reed that he and associates in his law firm would purchase a like amount of stock at the same price.
When the Colonial Trust Co. refused to make Campbell a loan of $400,000 he took the matter up with Dyke, who agreed to purchase 1,250 shares and pay therefor $300,000 and to enter into an agreement with Campbell that he could repurchase two-thirds of them from him within a given period at the same price. He then further negotiated with the Colonial Trust Co., which agreed to advance $300,000 toward the purchase of the stock upon the condition that Campbell Transportation Co. would be liable for the loan and that 1,250 shares were to be taken by Campbell Transportation Co. and held as treasury stock.
Under this arrangement Dyke turned over to the Colonial Trust Co. $300,000, which company then issued two checks to Hubbard of $300,000 each for the purchase of his 2,500 shares. Hubbard executed a bill of sale under date of March 6, 1940, for 1,250 shares of the stock to Campbell. This stock was then turned in to Campbell Transportation Co. as treasury stock in return for the $300,000 which the trust company had advanced. The other 1,250 shares of Hubbard stock was taken in the name of Dyke.
Pursuant to the understanding which existed between Dyke and Campbell, those individuals executed the following agreement:
THIS AGREEMENT, executed and delivered this 6th day of March, 1940, by and between A. E. DYKE, of the City of Pittsburgh, Allegheny County, Pennsylvania, and CHARLES T. CAMPBELL, of the same City, County and State.
WITNESSES:
WHEREAS Dyke, at the request of Campbell, has purchased for $300,000.00 in cash, 1,250 shares of the capital stock of Campbell Transportation Company, a Delaware corporation, and
WHEREAS, Campbell is the owner of 2,500 shares of capital stock of said Campbell Transportation Company, representing 2/3ds of the issued and outstanding stock of said Company, excluding 1,250 shares of stock purchased or to be purchased by said Company for its treasury, and
WHEREAS, the parties have orally agreed that Dyke will resell to Campbell and Campbell will buy from Dyke 2/3ds of the shares of stock purchased by Dyke, at the price paid by Dyke therefor,
NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter set forth, and for other good and valuable considerations, the receipt whereof is acknowledged, the parties hereto, each intending to be bound hereby, covenant and agree, each with the other, as follows:
1. Dyke will sell to Campbell, and Campbell will purchase from Dyke, 834 shares of capital stock of Campbell Transportation Company (out of the 1,250 shares heretofore purchased by Dyke), as follows:
(a) 417 shares on or before the 31st day of August, 1940;
(b) 417 shares on or before the 31st day of December, 1940.
Campbell shall have the right to purchase all or any part of said shares of stock at any time or from time to time prior to the final dates set forth in sub-paragraphs (a) and (b) above, but shall be under no obligation to complete the purchase of either block of shares until the final date set forth above with respect to the particular block.
2. The purchase price of the shares of stock to be purchased by Campbell shall be the sum of $240.00 for each share, plus interest on said amount at the rate of 6% per annum from the date of this agreement to the date of payment of the purchase price by Campbell, but in calculating such interest there shall be deducted the amount of any dividends which Dyke may have received prior to the date of payment of the purchase price by Campbell.
3. To the extent that he may lawfully control the election of directors Campbell agrees that, until he shall have completed the purchase of all of the shares of stock to be purchased by him, A. E. Dyke, Harry Steele and Charles T. Campbell, and, if Campbell so desires, his son, Thomas Campbell, shall be the directors of Campbell Transportation Company. In addition, so long as A. E. Dyke shall be the owner of not less than 350 shares of stock of the Campbell Transportation Company, Campbell will use his best efforts, to the extent that he may lawfully do so, to cause the election of Dyke, or his nominee, as a director of said Company.
4. This agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, representatives and assigns.
Although the above agreement contemplated that Campbell should purchase from Dyke two-thirds of the 1,250 shares to be acquired by Dyke, the agreement was later modified to permit Dyke to remain the owner of 625 shares, or one-half of the total. Campbell acquired from Dyke only 625 shares.
In these circumstances it was impossible for Campbell immediately to sell shares of the Hubbard stock to Reed and his associates, as both had contemplated. Campbell then wrote the following letter to Reed and Bostwick under date of March 8, 1940:
I have entered into an agreement dated March 6, 1940, with A. E. Dyke, of Pittsburgh, for the purchase from Mr. Dyke of 834 shares of the capital stock of the Campbell Transportation Company, at $240.00 a share, plus interest thereon from the date of that agreement to the date I take up the shares. I am required to take up half of the shares before August 31, 1940 and the other half before December 31, 1940, but have the right to take them up earlier.
I have agreed with you to sell to you and your associates 400 shares of the stock so to be acquired by me from Mr. Dyke, at the same price. You desire to pay for your shares now in order to stop the running of interest, so we have agreed as follows:
You are to pay me, before April 10, the price of 400 shares at $240.00 a share, and 6% interest thereon from March 6, 1940, and when I lift the first stock from My Dyke I will deliver the certificates to you. Meanwhile, I will turn over to you as security for the performance of this agreement 400 shares of my own stock of the Campbell Transportation Company, which you are to hold to secure the performance of this agreement, without transferring it into your name. If I have not delivered the other shares to you by August 31, 1940, you are entitled to transfer the shares which you hold in lieu of those which I am to acquire. Any dividends that might be declared on the stock before you receive your final certificates are to belong to you.
In consideration of the purchase of these shares, I agree to exercise my control of the Company in such a way as not to dispose of treasury shares at a price less than you are paying for yours. I also agree that my combined salary and bonus shall not exceed $50,000 a year without your consent, and that if I make any deal to sell a controlling interest in the Company I will see that an opportunity is afforded to you and your associates to sell your shares on the same basis upon which the controlling interest is sold.
You and your associates also agree that before selling the shares which you are purchasing to anyone, you will give me the first opportunity to purchase them at the price offered by such other person.
Your acceptance of this letter at the bottom hereof will constitute the contract between us.
Yours very truly,
(Signed) CHARLES T. CAMPBELL
ACCEPTED:
EARL F. REED
R. G. BOSTWICK
Both Campbell and Reed testified that this letter states the substance of the oral agreement which had theretofore existed between them.
Under date of March 28, 1940, Campbell caused a stock certificate for 1,250 shares which was registered in his name to be split up. Out of that certificate two certificates for 150 shares each and two for 50 shares each were made out in the name of Charles T. Campbell, who endorsed them in blank and turned them over to Reed. On the same date Reed wrote the following letter to Campbell:
In accordance with your letter to Mr Bostwick and myself, dated March 8, 1940, I am handing you herewith checks in the amount of $96,352.00 made up as follows:
+--------------------------------------------+ ¦Earl F. Reed ¦$36,000.00¦ +---------------------------------+----------¦ ¦R.G. Bostwick ¦36,000.00 ¦ +---------------------------------+----------¦ ¦Clyde A. Armstrong ¦12,000.00 ¦ +---------------------------------+----------¦ ¦C.M. Thorp, Jr. ¦12,000.00 ¦ +---------------------------------+----------¦ ¦Thorp, Bostwick, Reed & Armstrong¦352.00 ¦ +--------------------------------------------+
This represents the purchase price of 400 shares of stock of the Campbell Transportation Company, in accordance with your letter of March 8th.
Pending the delivery of the shares to us on or before August 31, 1940, you have delivered to us 400 shares of your stock, represented by the certificates listed below, and this will be your receipt for those shares:
+--------------------+ ¦ ¦Shares¦ +-------------+------¦ ¦Cert. No. 25 ¦150 ¦ +-------------+------¦ ¦Cert. No. 26 ¦150 ¦ +-------------+------¦ ¦Cert. No. 27 ¦50 ¦ +-------------+------¦ ¦Cert. No. 28 ¦50 ¦ +--------------------+
The item of $352.00 is interest on $96,000.00 for twenty-two days.
The revenue stamps in connection with the purchase of this stock will be attached to our copy of this letter, and so when the stock is ultimately delivered and transferred, no stamps will be necessary on it.
Some time after March 28, 1940, Campbell purchased from Dyke 417 shares of stock which stood in Dyke's name. He then caused 7 certificates, 1 for 100 shares and each of the others for 50 shares, to be issued as shown by the letter of Reed to Campbell dated June 4, 1940, reading as follows:
On behalf of myself and my associates, I acknowledge receipt of the following stock certificates of Campbell Transportation Company:
Cert. No. 51, for 100 shares, issued in the name of Earl F. Reed
Cert. No. 52, for 50 shares, issued in the name of Earl F. Reed
Cert. No. 53, for 50 shares, issued in the name of R. G. Bostwick
Cert. No. 54, for 50 shares, issued in the name of R. G. Bostwick
Cert. No. 55, for 50 shares, issued in the name of R. G. Bostwick
Cert. No. 56, for 50 shares, issued in the name of Charles M. Thorp, jr.
Cert. No. 57, for 50 shares, issued in the name of Clyde A. and Ethlyn L. Armstrong.
In accordance with the agreement set forth in my letter of March 28, 1940, I will deliver to you, against your receipt, the following certificates of stock of Campbell Transportation Company:
+------------------------+ ¦ ¦Shares¦ +-----------------+------¦ ¦Cert. No. 25 for ¦150 ¦ +-----------------+------¦ ¦Cert. No. 26 for ¦150 ¦ +-----------------+------¦ ¦Cert. No. 27 for ¦50 ¦ +-----------------+------¦ ¦Cert. No. 28 for ¦50 ¦ +------------------------+
As indicated in my said letter, the four certificates last listed were delivered by you to us, to be held as security for final delivery of the certificates acknowledged in this letter.
Later on the certificate for 50 shares in the name of Clyde A. and Ethlyn L. Armstrong was split into 25 shares to Clyde A. Armstrong and 25 shares to Ethlyn L. Armstrong.
On November 30, 1940, Reed transferred and delivered as a gift to his wife, Dora Belle Reed, the 150 shares of Transportation stock received by him and on December 2, 1940, Roy G. Bostwick transferred and delivered as a gift to his wife, Mary L. Bostwick, the 150 shares of Transportation stock purchased by him, and on December 3, 1940, Charles M. Thorp, Jr., transferred and delivered as a gift to his wife, Virginia E. Thorp, 50 shares of Transportation stock which had been purchased by him.
On June 14, 1941, Dora Belle Reed executed two trust agreements, respectively, with trustee No. and trustee No. s, and, simultaneously with the execution thereof and pursuant thereto, she transferred and delivered as a gift 50 shares to each trustee for the uses and purposes set forth in the trust agreements.
Under date of March 10, 1941, all of the stockholders of Campbell Transportation Co. entered into an agreement or agreements with Mississippi Valley Barge Line Co. (hereinafter called Mississippi Co.), for the sale of their shares at a price of $419.16 per share. Before Mississippi Co. could acquire these shares it was necessary for the Interstate Commerce Commission to consent to the purchase. The Mississippi Co. agreed immediately upon the execution of the agreement to make request of the Interstate Commerce Commission for such approval. It was provided in the agreement that Campbell should have authority to speak for all of the stockholders of Campbell Transportation Co. in effecting the sale.
The agreement provided for both a ‘Closing Date,‘ and a ‘Delivery Date,‘ and that the ‘Closing Date,‘ should be the last day of the month during which the Interstate Commerce Commission gave its approval to the purchase. The ‘Delivery Date‘ was to be the 10th day of the following month. The agreement permitted some modifications with the approval of Campbell and the Mississippi Co. It specifically provided that ‘Delivery Date,‘ means ‘the date on which the sale is to be consummated and the purchase price is to be paid, viz., the 10th day of the month following the Closing Date.‘
The agreement provided that the sellers should furnish the buyer with many affidavits, opinions of counsel, and financial statements before the buyer would be bound to take the stock and that the buyer should pay the escrow agent therefor before the sale would be consummated.
The Interstate Commerce Commission gave its approval to the purchase on July 31, 1941, and the buyer immediately notified Campbell of such approval. It was impracticable, if not impossible, for the sellers to submit all of the information required by the escrow agreement on August 10, 1941. Campbell therefore requested the buyer to consent to a postponement of the delivery date from August 10 to September 10, 1941, which request was granted. On September 10 the last of the required information, financial statements, etc., referred to in the agreement of March 10, 1941, were furnished the buyer and on that date it deposited with the escrow agent funds for the purchase of the stock and the sale was consummated on September 10. Shortly thereafter the petitioners received from the escrow agent checks in payment for their shares.
OPINION.
SMITH, Judge:
The only question presented by these proceedings is whether the profit, the amount of which is not in dispute, realized by the petitioners from sales of their shares of stock of Campbell Transportation Co. in 1941 was a long term capital gain (from the sale of capital assets held for a period of 18 months but less than 24 months) or was a short term capital gain as contended by the respondent. No question is raised but that the holding period of the petitioners dates from the time when shares of stock were acquired by Earl F. Reed and his associates. The respondent contends, however, that in no event did the holding period start prior to March 28, 1940, when they paid for their shares, and further contends that the shares were sold on July 31, 1941, when the Interstate Commerce Commission approved the purchase by the Mississippi Co. of the shares.
These cases are companion cases to that of Albert E. Dyke, 6 T.C. 1134, one of the stockholders who sold his shares of stock in Campbell Transportation Co. under the same agreement of March 10, 1941. It was stipulated in that proceeding that Dyke acquired his shares on March 6, 1940. We found upon the evidence in that case, which was also made evidence in these proceedings, that the selling date was September 10, 1941, and not July 31, 1941, as contended by the respondent. We therefore hold in these proceedings that the selling date of the shares was September 10, 1941.
An important question for consideration is whether the petitioners or their predecessors in interest acquired their shares of stock on March 6, 1940, as contended by them. They submit that Reed, speaking for them, had an agreement with Campbell under which he was to acquire for himself and his associates shares of stock of the Campbell Transportation Co. which were to be acquired from John W. Hubbard. They furthermore point out that, pursuant to this agreement, a settlement was made with Campbell on March 28, 1940, for the shares and that they paid interest on their purchases from March 6 to March 28. They therefore submit that they were the owners of the shares within the contemplation of the statute from March 6, 1940.
In section 117(a)(1) of the Internal Revenue Code the term ‘capital assets‘ is defined as meaning ‘property held by the taxpayer.‘
It was held In McFeeley v. Commissioner, 296 U.S. 102, that the term ‘held‘ means the same as ‘acquired and held‘ which was the language used in the Revenue Acts of 1921, 1926, and 1928. The Court further observed:
In common understanding to hold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding. * * *
The evidence in this case shows that Reed, speaking for himself and his associates, agreed with Campbell to take up to $100,000 purchase price of shares of stock of Campbell Transportation Co. which were to be acquired by Campbell from John W. Hubbard.
By reason of financial difficulties encountered by Campbell in purchasing Hubbard's 2,500 shares at a price of $600,000, the original plan contemplated had to be changed. What actually happened was that A. E. Dyke acquired 1,250 shares of Hubbard's stock at a price of $300,000 and Campbell acquired a like number of shares at the same price, which he was required to turn in to the treasury of Campbell Transportation Co. as treasury stock in order to satisfy the Colonial Trust Co., which was advancing $300,000 for the purchase. In these circumstances it was impossible for Campbell to permit Reed to acquire his shares immediately. An agreement existed between Dyke and Campbell under which Campbell was to acquire a part of the stock that Dyke purchased. It was these shares which Campbell was to acquire from Dyke that Campbell was to sell to Reed and his associates. The fact is clear, however, that the 1,250 shares of Campbell Transportation Co. stock which were purchased by Dyke and stood in his name were stock owned by Dyke until they were ‘lifted‘ from Dyke by Campbell. Quite clearly Dyke and Reed and his associates could not both be the owners of these shares of stock while they were held by Dyke.
In order to keep his agreement with Reed to permit him and his associates to acquire some of Hubbard's stock, Campbell, on March 28, 1940, caused his certificate for 1,250 shares which he had owned since some time in 1938 to be split up. He caused two 150 share certificates and two 50 share certificates to be issued in his name, which he immediately on March 28 turned over to Reed and his associates, and they on that date paid for the shares at the rate of $240 per share, plus interest which had accrued from March 6. When Campbell later acquired from Dyke some of Dyke's shares they were turned over to Reed and his associates in place of the certificates then held by them.
Up to March 28, 1940, Reed and his associates simply had an executory contract for the purchase from Campbell of shares of stock of the Transportation Co. Such executory contract did not amount to a contract of sale. It did not vest in Reed and his associates title to any of the shares of Campbell Transportation Co.
We sustain the respondent's contention that Reed and his associates did not acquire their shares prior to March 28, 1940. The petitioners sold their shares on September 10, 1941. They therefore did not hold them for a period of 18 months. The respondent did not err in the determination of the deficiencies.
Decisions will be entered for the respondent.