Opinion
No. 46468.
October 7, 1946.
Joseph B. Winokur, of Philadelphia, Pa., (Maurice J. Klein and Loewenstein Winokur, all of Philadelphia, Pa., on the brief), for plaintiffs.
John A. Rees, of Washington, D.C., and Sewall Key, Acting Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES and MADDEN, Judges.
Action by Hetty B. Levy, Harry I. Stern and Maurice M. Fierman, executors under the will of Leon Levy, deceased, against the United States to recover alleged excessive income tax and interest paid under a deficiency assessment.
Judgment for plaintiffs.
This case having been heard by the Court of Claims, the court, upon the stipulation entered into between the parties, makes the following
Special Findings of Fact
1. Plaintiffs are the duly appointed, qualified, and acting executors of the estate of Leon Levy, who died testate August 29, 1942, a resident of the City of Philadelphia, Pennsylvania, and a citizen of the United States and of the Commonwealth of Pennsylvania.
2. On March 13, 1942, Leon Levy filed his Federal individual income tax return for the calendar year 1941, showing a total income of $53,532.60, deductions therefrom of $3,122.62, a net taxable income of $50,409.98, and a total tax of $20,070.23. This tax was thereafter assessed and paid in quarterly installments during 1942 of $5,070.23 on March 13, and three separate payments of $5,000 each on June 23, September 21, and December 17, respectively. The gross income of $53,532.60 reported on the return did not include an item of $7,380 referred to in a statement attached to and made a part of that return. This statement read as follows:
"Taxpayer is in receipt of $7,380.00. This sum represents dividends upon shares of stock of Stern Co., to be applied as portion of the sale price of said shares in accordance with an agreement to sell duly entered into by the taxpayer.
"It is non-taxable as income under the law. See particularly Fay H. Moore v. Commissioner of Internal Revenue, 7th Circuit, opinion dated November 26, 1941. C.C.H. 414, No. 9766, p. 10, 789."
On October 2, 1943, subsequent to the taxpayer's death, a revenue agent prepared a report recommending an additional tax or deficiency of $4,505.91 upon decedent's return as filed for the calendar year 1941. A copy of this report was furnished plaintiffs with a so-called 30-day letter dated October 19, 1943. The report showed, among other things, a net taxable income of $57,814.98, which was a net increase of $7,405, resulting from two additions to income reported upon the return, one being an item of $7,380 as dividends received during 1941 by the taxpayer on common stock of Stern Co. (the same sum referred to in the schedule attached to the return and quoted above) and a further item of $50, representing gain on 15 shares of Bell Telephone Company preferred stock called May 22, 1941, and an additional deduction from income of $25 not claimed upon the return. On December 3, 1943, plaintiffs timely filed a protest to the report of the revenue agent, setting forth reasons why the item of $7,380 should not be considered taxable income. That protest requested a conference which was thereafter held on February 15, 1944, resulting in a denial of plaintiffs' contention that the item in question did not constitute taxable income. Thereafter and on February 24, 1944, there was sent to plaintiffs, by registered mail, a so-called 90-day letter giving notice of a deficiency of $4,505.91 in the tax liability of Leon Levy, deceased, for the calendar year 1941, computed as shown in a statement thereto attached. Such deficiency, together with accrued interest of $619.40, aggregating $5,125.31, was timely assessed against plaintiffs and after due notice and demand was paid by them on July 26, 1944.
3. On November 3, 1944, plaintiffs filed with the Collector of Internal Revenue at Philadelphia a formal claim for refund of $5,117, plus accrued interest, of the sum which they had paid on July 26, 1944, as aforesaid. As grounds, that claim contained a schedule which has been reproduced in full on pages 44 to 46, inclusive, of the petition filed June 20, 1945, in this cause.
Plaintiffs' claim for refund was received by the Commissioner of Internal Revenue on December 6, 1944, but no action has ever been taken thereon.
4. Additional facts bearing upon the question as to whether the item of $7,380 was correctly included in the taxable income of Leon Levy, deceased, for the calendar year 1941, are that Mr. Levy and his wife, Hetty B. Levy, executed a certain written memorandum of agreement on November 19, 1941, of which a true copy appears as Exhibit "A" on pages 8 to 22, inclusive, of the petition in this cause. Affixed to that written agreement are 10 City of Philadelphia documentary stamps in the sum of $300.40 cancelled in pen and ink 11-19-41 and seven federal documentary stamps in the amount of $187.35 similarly cancelled 11-19-41.
Hetty B. Levy, a party to the written agreement dated November 19, 1941, filed a separate individual federal income tax return and her tax liability is not involved in this proceeding.
The four stock certificates numbered 71, 90, 102, and 104 for a total of 246,000 shares, appearing in Exhibit "A" to the written agreement of November 19, 1941, were delivered by Leon Levy to Joseph B. Winokur, Esquire, as escrowee, on November 19, 1941. At that time there was attached to Certificate No. 71 a written assignment for 15,549 shares signed by Leon Levy. The name of the assignee was omitted or left blank. Similar written assignments were attached to certificates numbered 90, 102, and 104 in the respective amounts of 164,840; 46,605; and 19,006 shares.
On December 17, 1941, Stern Co. issued and delivered to Leon Levy a check in the amount of $7,380. This sum represented payment of a 3c dividend upon 246,000 shares of Stern Co. stock. The check was paid and the proceeds received by Mr. Levy during 1941. Notice of such dividend payment was given to Mr. Winokur, as escrowee, who credited the sum of $7,380 against the quarterly payment of $8,217.94 due from Stern Co. on or before March 1, 1942, as provided in the written agreement dated November 19, 1941.
The first delivery of any shares of stock under the terms of the written agreement dated November 19, 1941, was actually made by Joseph B. Winokur, as escrowee, to Stern Co. on December 2, 1942, when old Certificate No. 102 was cancelled and a new Certificate No. 118 for 20,500 shares of stock was issued. Similar deliveries of 20,500 shares of stock have been made each year subsequent to 1942.
5. No part of the payment of $5,125.31 made by the plaintiffs on July 26, 1944, as aforesaid, has ever been repaid or refunded.
The plaintiffs are executors of the will of Leon Levy, who died August 29, 1942.
In his Federal income tax return for the calendar year 1941 Levy had excluded from his gross income a sum of $7,380, which he stated in his return had been received by him but was, as he asserted, nontaxable because representing "dividends upon shares of stock of Stern Co., to be applied as portion of the sale price of said shares in accordance with an agreement to sell duly entered into by the taxpayer," citing Moore v. Commissioner, 7 Cir., 124 F.2d 991.
The agreement thus referred to was entered into November 19, 1941, the parties thereto being Leon Levy (the decedent), his wife, Hetty B. Levy, and Stern Co. The agreement as to Mrs. Levy is not here involved.
By this agreement Levy agreed to sell to Stern Co. 246,000 shares of the common stock of that company, which Levy then held. The agreement recited: "The price to be paid for each share of stock agreed to be sold hereby shall be $1.6035 per share less the credit for dividend payments, as more fully hereinafter set forth." The sales were to begin in 1942, in units of 20,500 each year, extending over 12 years.
Levy agreed to deliver the certificates for the 246,000 shares to Joseph B. Winokur, in escrow, "accompanied by proper assignments," to carry the agreement into effect, and they were so delivered at the time of the agreement.
The agreement further provided: "The sale of each of the certificates compromising units of 20,500 shares * * * shall not be complete or the title passed thereto until the payment for the shares represented by the said certificates shall have been made in full and only thereupon shall Escrowee deliver to Company [referring to Stern Co.] the said certificates comprising units of 20,500 shares * * *. Until delivery by Escrowee of certificates paid for by Company, Leon Levy [and Mrs. Levy] shall continue as owners of their respective shares and shall have all of the rights of shareholders including voting rights as to all of their respective certificates remaining in possession of the Escrowee."
The company was to make quarterly payments to the escrowee on the first day of March, June, September, and December of each year, beginning in 1942, of one-quarter of the purchase price of a 20,500-share unit, using the purchase price of $1.6035 per share.
As these units of 20,500 shares were paid for, the certificates representing them were to be turned over by the escrowee to Stern Co.
Dividends on stock remaining in the hands of the escrowee were payable to Levy. When Levy received them, he was to credit Stern Co. with such receipt as a payment on the purchase price.
The agreement refers to a purchase price of $1.6035 per share "less the credit for dividend payments," and says that "the dividends so paid and applied shall be in reduction of the purchase price."
Reading the contract as a whole, and considering how it worked, it is apparent that the purchase price of $1.6035 was a fixed price, not reducible.
The so-called "reduction" in price meant merely that dividend payments were to be applied to the purchase price, in satisfaction thereof pro tanto.
The dividend payment here involved, $7,380, was received by the taxpayer December 17, 1941. Under the contract both taxpayer and escrowee credited that sum against the first quarterly payment due March 1, 1942, which was $8,217.94, being 20,500 shares at $1.6035 divided by four. The excess of $8,217.94 over $7,380 is $837.94 and under the terms of the agreement this excess was to be met by the company's check payable to the order of the escrowee who was to endorse the check over to Levy without recourse.
The defendant treated the receipt of this sum of $7,380 as income to the taxpayer for the calendar year 1941. Following the established mesne process of the Bureau of Internal Revenue, a notice of deficiency in tax was served upon the plaintiffs, the deficiency, with interest, was assessed and on July 26, 1944, was paid by the plaintiffs.
The plaintiffs on November 3, 1944, filed claim for refund of $5,117 plus accrued interest, and no action has been taken thereon. No question is raised as to jurisdiction.
The contract provided that title did not pass on shares not paid for. Inasmuch as dividends on all unpaid shares were by the contract payments made on the purchase price of shares being sold, the beneficial interest in prospective dividends on all shares not yet acquired by the company had been transferred to and resided in the company.
The company was bound to pay the purchase price of $1.6035 and what the taxpayer received by the name of dividends was this purchase price, for the contract made it part of the purchase price.
Dividends must be income as dividends to someone in order to be taxable as dividends. That proposition is primary and elemental. They are not income to the distributing company, nor are they income to one to whom they are not distributable or distributed. Here we have a contract between distributor and distributee that the dividends shall be income to the distributee only for the purpose of applying them to the purchase price, that is, as income to the distributee only as part of the purchase price.
The taxpayer had no option as to application of dividends on stock standing in his name. He was obligated to credit them to payments of the purchase price. So was the escrowee. As the taxpayer received the so-called dividends, both he and the company were to notify the escrowee as to the amount of credit. This notification governed the escrowee in his disposition of the certificates of stock, but a neglect to notify, or a mistake in notification, did not affect the rights or relations of the parties.
It was a three-sided transaction and what the company parted with, considering the transaction as a whole was installments on the purchase price.
The accounting was simple enough. The dividends were credits on the purchase price of $1.6035.
Instead of crediting the company with a dividend payment and closing that phase of the accounting, the taxpayer credited the company as for a payment on the purchase price. It was not a series of transactions, but was one transaction only, made so by the contract which was its creator.
There was one payment only, and that payment is to be characterized by its object, namely, satisfaction of the purchase price. The money was income to the taxpayer as payment on the purchase price.
We must here consider what the contract accomplished. What it did accomplish was to afford gross income to the taxpayer by way of receipt of the purchase price. For income tax purposes the transaction is one transaction, and cannot be so split up as to convert it into a plurality of incomes.
The construction of revenue legislation must be attended with all possible simplicity. If this were not so, we would here have three incomes, one to the instant taxpayer as recipient of a dividend, another to the company as the recipient of income from the taxpayer (for the purpose of enabling the company to satisfy the purchase price), and the third to the instant taxpayer as receipt on sale of shares of stock. Revenue legislation is complex enough without resort to emphasis where it does not belong. The essence of this transaction is the agreement to sell shares of stock, and the payments on the agreed purchase price.
Certain it is that the taxpayer received no benefit by way of dividends, for he had to apply the payments to the purchase price, which was payable, not by himself, but by the company that had at that very moment paid him. The contract required him to treat the payments as payments of the purchase price. He had no alternative. "* * * taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid." Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed 916. Here the decedent had no command over the payment made by the company — whatever else he might wish to do with it, it had to be applied in satisfaction of the purchase price.
The beneficial interest in the dividends not being in Levy, who did not receive the dividends as dividends, he was not liable for the tax on them as dividends. See Moore v. Commissioner, 7 Cir., 124 F.2d 991, 993. The instant case is more in favor of the taxpayer than was the Moore case, for in the Moore case the purchaser was not the stock-issuing company, but a third party. Here the stock-issuing company was the stock-purchasing company and paid the dividends under an agreement with the vendor that the dividends were to be considered and treated as payments on the purchase price of the stock.
In their very inception, the payments were payments on the purchase price. The company had agreed that it should be so. If it were otherwise, and the dividends were to be treated as taxable dividends in the hands of the decedent, then we would have the anomalous situation of the vendor of the stock paying the purchase price. This could not be so.
The plaintiffs are entitled to recover, and it is so ordered.
Judgment will be rendered upon the coming in of a stipulation by the parties as to the amount thereof.
JONES and WHITAKER, Judges, concur.
LITTLETON, Judge, dissents.
MADDEN, Judge, took no part in the decision of this case.