Opinion
Docket No. 106434.
1942-12-4
B. O. MAHAFFEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
R. D. Fitzgibbon, Esq., for the petitioner. Angus R. Shannon, Jr., Esq., for the respondent.
1. In 1934 the petitioner executed an instrument reciting the assignment to his mother of all dividend income that might be derived during the term of her life from certain shares of corporate stock and that henceforth he was holding the shares in trust for the purpose of accomplishing said assignment. Thereafter the corporation paid the dividends directly to the mother. In 1936 the petitioner sold said shares under a contract which contained no reference to any interest of the mother in the shares or in the income therefrom but excepted from the sale the right of petitioner during his lifetime to receive all income from the shares and provided that upon petitioner's death said shares should pass absolutely to the purchaser as the owner of the remainder interest. Held, that petitioner has failed to show a gift to the mother of a life interest in the shares as distinguished from the dividend income that might be derived therefrom and that the respondent did not err in including in petitioner's income the dividends received by the mother during the taxable years involved herein.
2. In 1936 the petitioner sold in one transaction certain interests in two blocks of stock which he had acquired in the same corporation at different times. Held, that for the purpose of applying the provisions of section 24(a)(6) of the Revenue Act of 1936 prohibiting the allowance of losses on certain transactions, the gain or loss on the two blocks is to be computed separately. R. D. Fitzgibbon, Esq., for the petitioner. Angus R. Shannon, Jr., Esq., for the respondent.
The Commissioner determined deficiencies in the petitioner's income tax of $1,109.40, $445.82, and $462.31 for 1936, 1937, and 1938, respectively. The issues involved are whether the respondent erred (1) in including in the petitioner's taxable income the dividends paid to petitioner's mother during the respective years on certain corporate stock and (2) in determining that the petitioner was not entitled under section 24(a)(6) of the Revenue Act of 1936 to offset capital gains against capital losses on certain corporate stock sold during 1936 to a corporation of which the petitioner directly or indirectly owned more than 50 percent in value of the outstanding stock.
FINDINGS OF FACT.
The proceeding was submitted upon a stipulation of facts and certain related documents. The facts stipulated are found as stipulated.
For the years 1936, 1937, and 1938 the petitioner, a resident of Missouri, filed his income tax returns with the collector of internal revenue for the first district of Missouri.
On January 17, 1934, the petitioner executed and acknowledged the following instrument relative to certain preferred stock owned by him in the Delk Investment Corporation, sometimes hereinafter referred to as Delk:
ASSIGNMENT OF DIVIDEND INCOME FROM STOCKS
WHEREAS, the undersigned, Birch O. Mahaffey, is now the owner and holder of Two Hundred and Fifty (250) shares of the 6% Cumulative Preferred Stock of the Delk Investment Corporation, a Missouri corporation, which said stock the undersigned desires to set aside for the purpose of assigning and transferring to his mother, Mrs. W. F. Mahaffey, of Sulphur Springs, Texas, for the term of her natural life, all dividend income which may be derived from said shares of stock above mentioned.
NOW, THEREFORE, in consideration of the premises and of the sum of ONE ($1.00) DOLLAR, and other good and valuable considerations, the undersigned, Birch O. Mahaffey, hereby ASSIGNS, TRANSFERS AND DELIVERS unto his mother, Mrs. W. F. Mahaffey, of Sulphur Springs, Texas, for the term of her natural life, all dividend income which may be derived from Two Hundred and Fifty (250) shares of the 6% Cumulative Preferred Stock of the Delk Investment Corporation, during the term of her life.
And the undersigned, Birch O. Mahaffey, hereby declares that from this date hence he is holding Two Hundred and Fifty (250) shares of his said Preferred Stock of the Delk Investment Corporation in income assignment above mentioned.
IN WITNESS WHEREOF, the undersigned, Birch O. Mahaffey, has hereunto set his hand on this 17th day of January, 1934.
On January 17, 1934, stock certificate No. 34, dated March 5, 1923, for 500 shares of 6 percent cumulative preferred stock of Delk stood in the name of the petitioner. On that date the petitioner executed the following assignment on the back of said certificate:
FOR VALUE RECEIVED. I hereby sell, assign and transfer unto Birch O. Mahaffey, trustee pursuant to trust declaration dated Jan. 17, 1934 250 Shares of the Preferred Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint . . . Attorney with full power of substitution in the premises.
On May 9, 1934, certificate No. 24 was canceled. In connection therewith and on the same day certificate No. 64 for 250 shares was issued in the name of Birch O. Mahaffey, trustee, and bore the following typed notation on its face:
Dividend income from this stock to go to Mrs. W. F. Mahaffey during her life—See Declaration of Trust by Birch O. Mahaffey, dated January 17, 1934, in Delk doc. envelope #200.
The stub for stock certificate No. 64 recites that the certificate was issued to ‘Birch O. Mahaffey, Trustee, for self and his mother, Mrs. W. F. Mahaffey.‘
The dividend income paid on said 250 shares of stock during the years 1934 through 1938 was paid directly by Delk to Mrs. W. F. Mahaffey.
The petitioner filed a gift tax return for 1934 showing $6,976.87 as the value of the gift described therein and no tax due after claiming an exclusion of $5,000 and a specific exemption of $1,976.87. In answer to question 1 on the return he stated that he had made a gift by the creation of an irrevocable trust and in schedule A described the gift as follows:
+-----------------------------------------------------------------------------+ ¦ ¦Description of Gift, Motive, Donee's Name ¦Date¦Value at ¦ +----+---------------------------------------------------------+----+---------¦ ¦Item¦and Address, ¦of ¦Date ¦ +----+---------------------------------------------------------+----+---------¦ ¦No. ¦and Relationship to Donor ¦Gift¦of Gift ¦ +----+---------------------------------------------------------+----+---------¦ ¦ ¦ ¦ ¦ ¦ +----+---------------------------------------------------------+----+---------¦ ¦ ¦All dividend income from 250 shares of Delk Investment ¦ ¦ ¦ ¦ ¦Corporation 6% Cumulative Preferred Stock to and for the ¦1/17¦ ¦ ¦1 ¦term of the natural life of Mrs. W.F. Mahaffey of Sulphur¦/34.¦ ¦ ¦ ¦Springs, Texas. Mrs. W.F. Mahaffey is the mother of B.O. ¦ ¦ ¦ ¦ ¦Mahaffey. Motive was love and affection ¦ ¦ ¦ +----+---------------------------------------------------------+----+---------¦ ¦ ¦Age of Mrs. W.F. Mahaffey at date of gift 76 years. 4% ¦ ¦ ¦ ¦ ¦annuity or present value of $1.00 due at the end of each ¦ ¦$6,976.87¦ ¦ ¦year during the life of Mrs. Mahaffey at age of 76 ¦ ¦ ¦ ¦ ¦years—$4.65125X$1,500.00 per year ¦ ¦ ¦ +----+---------------------------------------------------------+----+---------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
The petitioner's mother filed an information return of gifts for 1934 which contained the following respecting the gift:
+-----------------------------------------------------------------------------+ ¦Item¦Description of property constituting gift ¦Date¦Approximate¦ ¦ ¦ ¦of ¦ ¦ +----+-------------------------------------------------------+----+-----------¦ ¦No. ¦ ¦gift¦value at ¦ ¦ ¦ ¦ ¦date ¦ +----+-------------------------------------------------------+----+-----------¦ ¦ ¦ ¦ ¦of gift ¦ +----+-------------------------------------------------------+----+-----------¦ ¦ ¦ ¦ ¦ ¦ +----+-------------------------------------------------------+----+-----------¦ ¦ ¦Life Dividend Income from 250 Shares of Delk Investment¦1/17¦ ¦ ¦ ¦Corporation 6% Cumulative Preferred Stock Held in Trust¦/34 ¦$6,976.87 ¦ ¦ ¦by B.O. Mahaffey ¦ ¦ ¦ +----+-------------------------------------------------------+----+-----------¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
On June 24, 1936, the petitioner and the Mesco Corporation, a Delaware corporation, sometimes hereinafter referred to as Mesco, executed an instrument reading as follows:
CONTRACT OF SALE
THIS AGREEMENT, Made this 24th day of June, 1936, by and between B. O. MAHAFFEY, of St. Louis, Missouri, as Party of the First Part, hereinafter called ‘SELLER‘, and THE MESCO CORPORATION, of St. Louis, Missouri, as Party of the Second Part, hereinafter called ‘BUYER‘.
For the sum of ONE DOLLAR ($1.00), and other valuable considerations herein expressed and determinable, SELLER hereby SELLS to BUYER, and BUYER hereby PURCHASES from SELLER, all the right, title and interest in and to FIFTEEN HUNDRED (1,500) shares of DELK INVESTMENT CORPORATION 6% Preferred Stock as remains at the death of said SELLER— IN other words, said stock is hereby SOLD to said BUYER subject to the SELLER'S life interest therein— being the right to receive all the income therefrom during SELLER'S life— which said life interest is excepted from this sale and retained by said SELLER.
The balance due on the purchase price of the interest in said stock hereby SOLD shall be computed and determined in accordance with the fair value of said stock as of this day and date, adjusted and considered in the light of the aforesaid life estate retained by SELLER.
The 1,500 shares of Delk stock mentioned in the foregoing instrument included the 250 shares of stock represented by certificate No. 64 described above.
Pursuant to the terms of the instrument executed by petitioner and Mesco on June 24, 1936, the petitioner on the same day delivered to Delk certificate No. 64 (for 250 shares) after having executed an assignment thereon as follows:
FOR VALUE RECEIVED, I hereby sell, assign and transfer unto Mrs. W. F. Mahaffey for life; then to Birch O. Mahaffey for life; with remainder to THE MESCO CORPORATION 450--being all of the -- Shares of the Preferred Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ___________ Attorney with full power of substitution in the premises.
Dated June 24th, 1963.
Birch O. Mahaffey trustee
For certificate No. 64 Delk, on August 5, 1936, issued certificate No. 69 for 250 shares of its preferred stock. The certificate reads in part as follows:
THIS IS TO CERTIFY THAT MRS. W.F. MAHAFFEY for life; then to BIRCH O. MAHAFFEY for life; with remainder to the MESCO CORPORATION is the owner of TWO HUNDRED AND FIFTY shares * * *
On June 8, 1937, the petitioner and Mesco executed an instrument reading as follows:
APPROVAL
WHEREAS, by contract dated June 24, 1936, B. O. MAHAFFEY, of St. Louis, Missouri, SOLD to THE MESCO CORPORATION, of St. Louis, Missouri, a certain remainder interest in ONE THOUSAND FIVE HUNDRED (1,500) shares of DELK INVESTMENT CORPORATION SIX PERCENT. (6%) PREFERRED STOCK: and,
WHEREAS, the purchase price for the interest so sold was to be computed in accordance with the fair value of said stock as of June 24, 1936, adjusted and considered in the light of the life estate retained by B. O. MAHAFFEY in said stock; and,
WHEREAS, a determination of said purchase price has been made in accordance with the provisions of the aforesaid contract, and the parties hereto are desirous of evidencing and setting forth their approval thereof in writing,
NOW, THEREFORE, BE IT KNOWN BY THESE PRESENTS, That the undersigned parties hereby respectively APPROVE, AGREE UPON, AND CONSENT TO, the sum of SIXTY-ONE THOUSAND THREE HUNDRED NINETY-FOUR DOLLARS AND FORTY CENTS ($61,394.40) as being the fair value as of June 24, 1936, for the aforesaid interest in said stock sold by the said B. O. MAHAFFEY to THE MESCO CORPORATION as above mentioned— said value having been determined actuarially on the basis of the present worth of ONE DOLLAR ($1.00) at Six Percent. (6%) per annum, payable quarterly on an expectancy of the life tenant, B. O. MAHAFFEY, equal to 14,93 years.
So as to confirm, make further evident and amplify, the original mutual intent of the parties hereto in regard to the sale of the aforesaid remainder interest in said stock, IT IS EXPRESSLY AGREED by and between them that B. O. MAHAFFEY, the life tenant, during his lifetime has, and shall have, the exclusive right TO SELL, CONVEY, ASSIGN, PLEDGE, TRANSFER, EXCHANGE, OR OTHERWISE DISPOSE OF the aforesaid stock, and TO TAKE, RECEIVE, HOLD AND MANAGE the proceeds or other property derived therefrom, as a converted form of said original stock, with full power, right and privilege in said life tenant to invest and reinvest said proceeds, or anything received in place of said original stock, or the proceeds thereof, in any other securities or investment which he may approve as proper— always, however, subject to, and with due regard for the life and remainder interest of the parties hereto, respectively, in and to said original PREFERRED STOCK, or the converted form thereof; that is to say, during the lifetime of said life tenant he shall be entitled to receive and have all the income derived from said stock, or any converted form thereof and at the death of said life tenant, the same shall pass ABSOLUTELY to THE MESCO CORPORATION, its successors or assigns, as the owner of said remainder interest therein.
For the interest in the 1,500 shares of Delk preferred stock which he transferred to Mesco the petitioner received $61,394.40. His cost basis for the interest in 500 shares acquired in 1923 was $12,588.08 and in 1,000 shares acquired in 1934 was $45,896, or a total of $58,484.08.
During the taxable years 1936 through 1938 the petitioner's daughters, as beneficiaries of a trust, were the beneficial stockholders of Mesco, the petitioner holding in trust for them all of the stock of said corporation except qualifying shares.
In determining the capital gain or capital loss on the interest in the 1,500 shares of Delk preferred stock transferred in 1936 to Mesco the respondent segregated the transfer into two parts. On one part he determined a recognizable capital gain of $2,363.02. On the other he determined a capital loss of $3,973.60, which he held was not allowable.
In determining the deficiencies involved herein the respondent has included in the taxable income of the petitioner the dividend income paid directly by Delk during those years to Mrs. W. F. Mahaffey on 250 shares of its preferred stock.
OPINION.
TURNER, Judge:
The petitioner contends that by the instrument of January 17, 1934, he made a gift to his mother of a life interest in 250 shares of preferred stock in Delk by transferring said shares to himself in trust and that the respondent erred in determining that the dividends on the said shares paid to his mother during the taxable years were taxable income to him. The respondent contends that the petitioner merely assigned to his mother the income which might thereafter be derived from said shares of stock, of which the petitioner continued to be the owner and over which he continued to exercise dominion and control.
The instrument of January 17, 1934, is captioned an assignment of dividend income from stocks. It recites the petitioner's desire to set aside the shares for the purpose of ‘assigning and transferring‘ to his mother for the term of her life ‘all dividend income‘ which might be derived therefrom; that the petitioner thereby assigned, transferred, and delivered to his mother for the term of her life all dividend income which might be derived from said shares during the term of her life and that from that date hence he was holding the shares in trust ‘for the purpose of accomplishing the dividend income assignment above mentioned.‘ Nowhere in the instrument do we find any declaration of a gift or any intention to make a gift of a life interest in the shares as distinguished from the dividend income therefrom. All that the instrument covers or purports to cover is the ‘dividend income‘ which might be derived from said shares. Nor did petitioner by the instrument purport to constitute himself the trustee of a life estate for the mother in the shares. The only trust purported to be established by the instrument was for the purpose of accomplishing the assignment to the mother of the dividend income that might be derived from the shares during her lifetime.
The contract of sale executed by petitioner and Mesco on June 24, 1936, further tends to refute the claims of petitioner. The contract recites that petitioner as ‘SELLER hereby SELLS to BUYER (Mesco), and BUYER hereby PURCHASES from SELLER, all the right, title and interest in and to FIFTEEN HUNDRED (1500) shares of Delk * * * Preferred Stock as remains at the death of said SELLER—IN other words said stock is hereby SOLD to said BUYER subject to the SELLER'S life interest therein— being the right to receive all the income therefrom during SELLER'S LIFE— WHICH said life interest is excepted from this sale and retained by said SELLER.‘ If, as petitioner contends, he was trustee for his mother with respect to the 250 shares of stock under consideration and she had a life interest therein, as distinguished from the dividend income therefrom, it is not borne out by the foregoing recitals. By said recitals the petitioner expressly sold the 1,500 shares (including the 250), retaining therein an interest based on his life and not on the life of himself and his mother. No intimation whatever is contained in the instrument that his mother had a life interest in 250 or any other number of the shares and that such an interest also was being retained. An examination of the instrument of amplification and approval executed by petitioner and Mesco on June 8, 1937, likewise fails to indicate that petitioner's mother had a life interest in any portion of the 1,500 shares. In this instrument the interest acquired by Mesco in the 1,500 shares is referred to as ‘a certain remainder interest,‘ and the interest retained by petitioner as ‘the life estate,‘ the petitioner being referred to as ‘the life tenant.‘ The instrument recites that the amount of $61,394.40 paid petitioner for the interest acquired by Mesco was ‘determined actuarially on the basis of * * * an expectancy of the life tenant, B. O. MAHAFFEY, equal to 14.93 years.‘ The instrument further provides that at the death of petitioner the 1,500 shares or any converted form thereof ‘shall pass ABSOLUTELY to THE MESCO CORPORATION, its successors or assigns, as the owner of said remainder interest therein.‘ That provision does not indicate that the petitioner's mother had a life interest in any of the shares, but on the contrary indicates that she did not. It is true that the assignment on stock certificate No. 64 executed by petitioner on June 24, 1936, and the recital contained on stock certificate No. 69, which was issued on August 5, 1936, indicate a life interest in the petitioner's mother in 250 shares, but these are in conflict with the provisions of the contract of June 24, 1936, between petitioner and Mesco and the approval and amplification thereof executed by them on June 8, 1937.
The respondent has determined that the dividends paid directly to the petitioner's mother during the years 1936 through 1938 on 250 shares of Delk preferred stock were taxable to petitioner. The petitioner seeks to avoid liability on the ground that as a result of a trust created by him she had a life interest in the shares and that the dividends were therefore not taxable to him. The burden was on the petitioner to show that he had created a trust giving his mother a life interest in the stock, and from our consideration of the evidence we think the conclusion must go against him. From the evidence we conclude that the most the petitioner did was to assign to his mother the dividend income that might be derived from the 250 shares during her lifetime, and we sustain the respondent on this issue. Cf. Helvering v. Eubank, 311 U.S. 122; Helvering v. Horst, 311 U.S. 112; Harrison v. Schaffner, 312 U.S. 579.
The remaining issue is as to the proper application of section 24(a)(6) of the Revenue Act of 1936
to the sale by the petitioner of certain interests in the 1,500 shares of Delk preferred stock to Mesco. The issue arises by reason of the fact that petitioner's two daughters owned all of the stock of Mesco. The 1,500 shares of Delk stock were acquired by petitioner in two lots, 500 shares in 1923 and 1.000 shares in 1934, the cost of the interest sold being $12,588.08 for the 500 share lot and $45,896 for the 1,000 share lot. The petitioner received from Mesco $61,394.40, realizing thereby a gain of $2,910.32 on the 1,500 shares as a unit. Applying capital gain and loss provisions of the statute, however, the respondent determined that a capital loss of $3,973.60 had been sustained on one lot and that recognizable capital gain in the amount of $2,363.02 had been realized on the other. The capital loss of $3,973.60 he determined not deductible because of provisions of section 24(a)(6). The petitioner contends that the capital gains and losses on the two lots should be balanced one against the other and that the correct result on the sale of the 1,500 shares of Mesco was a capital loss of $1,610.58, which it is admitted is not allowable as a deduction because of the applicability of section 24(a)(6). The petitioner concedes that in principle Lakeside Irrigation Co., 41 B.T.A. 892, supports the determination of the respondent, but urges that this case should be distinguished for the reason that in Lakeside Irrigation Co. the block of stock sold was made up of stock of four different corporations, while here the stock sold was the stock of one corporation. The position of the petitioner is in our opinion untenable. He makes no objection to the separate treatment of the two lots of stock for the purpose of determining the amount of the capital loss as to one and the recognizable capital gain as to the other, but, the loss as to the one and the recognizable capital gain as to the other having been determined, he seeks to forget that there are two lots for all other purposes. The statute not only makes no provision for such treatment, but in our opinion clearly provides the contrary. Lakeside Irrigation Co., supra; affd., 128 Fed.(2d) 418; certiorari denied, 317 U.S. 666. The determination of the respondent as to this issue is accordingly sustained.
SEC. 24. ITEMS NOT DEDUCTIBLE.(a) GENERAL RULE.— In computing net income no deduction shall in any case be allowed in respect of—(6) Loss from sales or exchanges or property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 56 per centum in value of the outstanding stock. For the purpose of this paragraph— (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole of half blood), spouse, ancestors, and lineal descendents.
Decision will be entered under Rule 50.