Petition for Review of Decision of the United States Board of Tax Appeals.
Before SPARKS, MAJOR, and TREANOR, Circuit Judges.
This is a petition for review of a decision of the United States Board of Tax Appeals, entered March 21, 1938, denying a deficiency of $40,913.31 as determined by the Commissioner in respondent's income tax for 1933.
The facts, as found by the board, and not in dispute, are as follows: In 1926, respondent purchased from or through Robert D. Lay at a cost of $100,000, 5,000 shares of the capital stock of the Oakridge Cemetery Corporation. October 30, 1931, the same shares of stock were sold to the John Griffiths Investment trust for $7,500. November 16, 1931, the stock was repurchased from said investment trust for $7,000, and again sold to the same trust on December 30, 1931 for $7,000. For the year 1931, respondent, in his income tax return, claimed and was allowed a deduction of $92,500 as a loss from these transactions.
Respondent, about January 1, 1933, discovered that Lay had defrauded him in the transaction in 1926, wherein the shares of stock in question were purchased. He consulted and employed Harry Markheim, an attorney, who investigated and commenced negotiations to effect a settlement. On January 9, 1933, respondent was advised by his counsel that Lay would probably make a settlement in the next two or three days. At that time he was also informed that his claim against Lay consisted of a cause of action involving a breach of trust in the nature of a tort claim and that it would be essential for him to reacquire the stock in order to unite the ownership of the stock with the claim. During this same conversation, respondent was advised by his counsel that he might effect a postponement of the time of paying, as well as limit the amount of income taxes on the profit which would result from a settlement and return of the stock to Lay bt organizing an investment company to which he would sell the stock and cause of action on an installment basis, permitting the investment corporation to make the settlement with Lay. Respondent had theretofore given thought to the formation of such an investment corporation and on January 9, 1933, instructed his counsel to organize the same.
As a result, arrangements were made by telephone through the instrumentality of the Corporation Trust Company for the organization of the G.W.G. Corporation, which was effected, on the following day, under the laws of Delaware, with three of Markheim's associates as directors. Respondent paid $1,000 for all the capital stock of the corporation. A formal meeting was held in Delaware at 9 A.M. on the morning of the 10th, and a meeting in the office of Markheim in Chicago at 10 the same morning. On the afternoon of that day, markheim was definitely advised that Lay was going to pay.The directors of the corporation, on January 10th, approved a proposition made by the taxpayer and entered into a written agreement.*fn1 On this day, also, respondent purchased the stock from the John Griffiths Investment Trust, paying $8,000 therefor, and received a certificate endorsed in blank.
On January 11, 1933, the directors of the G.W.G. Corporation approved the sale of the corporation stock to Lay for $100,000 and authorized respondent "either in his own name or in the name of the corporation" to do whatever might be necessary or desirable to consummate the sale. Respondent, as treasurer of the corporation, was also authorized to invest the proceeds of the sale in a manner consistent with the corporate purposes as stated in the charter.
There were matters in dispute between respondent and Lay other than the stock in question, which were all included in a settlement made on January 11, 1933. At that time, respondent received the sum of $180,000 from Lay in the form of two checks, one in the sum of $100,000 and the other in the sum of $80,000. The former was in settlement of the claim arising from the sale of the 5,000 shares of stock of Oakridge Cemetery Corporation, and the latter in settlement of claims concerning other stocks and notes not here material. Respondent, at the time of the making of said settlement, signed and acknowledged an instrument which recited that in consideration of the sum of $180,000 paid to him by Lay, he sold and transferred to Lay various certificates of stock and promissory notes, including the stock here involved, and on behalf of himself, his heirs, administrators and assigns, released and discharged Lay from all actions, causes of action, suits, claims and demands which respondent or his assigns might have against Lay. Lay had no knowledge concerning the formation of the G.W.G. Corporation or any agreement or transactions between the respondent and such corporation. The $100,000 check received by respondent from Lay was endorsed by respondent, and on January 12, 1933, deposited in the bank to the credit of the G.W.G. Corporation.
January 18, 1933, the directors of the trust approved a report made by respondent as its treasurer, showing the sale of stock to Lay for $100,000. The minutes of that meeting stated that the sale had been made pursuant to authority vested in respondent by the Board and approved the payment of $14,566.08, representing expenses incurred in connection with the sale. In accordance with the terms of the agreement between respondent and the G.W.G. Corporation, respondent received in March, 1933, $1,000 and $1,125, and in December, 1933, received from the Corporation $1,243.13 on account of interest on the unpaid portion of the purchase price. The G.W.G. Corporation was licensed to do business in Illinois on February 11, 1933, and invested in various stocks other than those here involved.
Respondent, in his income tax return for the year 1933, reported no income on account of the transaction with Lay, but included in his report installment payments and interest which he received from the G.W.G. Corporation.
The position of the Commissioner as disclosed in his deficiency letter to respondent is:
"The alleged assignment of this stock" (5000 shares of the stock of Oakridge Cemetery Corporation) "to G.W.G. Corporation * * * " "has been ignored and the transaction" (a succeeding sale to Robert D. Lay) "treated as a sale by you for your own account."
It is the theory of respondent, sustained by the Board (six members dissenting), that by reason of the agreement between respondent and the G.W.G. Corporation, all the claim and interest of the former was transferred to the latter, and inasmuch as they are separate entities for the purposes of taxation, the profit realized from the transaction with Lay was that of the corporation, and, hence, respondent is not chargeable therewith. Notwithstanding the argument by respondent, not disputed by the petitioner, that the sale of the stock to the corporation was free from fraud; that the transaction was in no way concealed and therefore not illegal, we are presented with a situation in which the taxpayer and his counsel intentionally formulated a contrivance for the sole purpose of enabling the taxpayer to avoid the payment of tax. Authorities are called to our attention where such a purpose has been given judicial sanction. One of the leading cases is that of Gregory v. Helvering, 293 U.S. 465, 55 S. Ct. 266, 79 ...