Petition for Review of Decision of United States Board of Tax Appeals.
Before EVANS, SPARKS, and MINTON, Circuit Judges.
The Commissioner of Internal Revenue determined a deficiency in the income tax of 1936 against the Petitioner, Fay Harvey Moore. The Board Tax Appeals, two members dissenting, upheld the assessment by the Commissioner, and this appeal was taken from the order of the Tax Board.
The Petitioner owned four thousand shares of stock in the Ajax Hand Brake Company. One George M. DeGuire desired to purchase this stock. An agreement was reached on December 31, 1935, and reduced to writing, whereby the Petitioner agreed to sell said stock to DeGuire for $96,000, of which $43,904 was to be paid in cash and $52,096 was to be evidenced by four notes executed by DeGuire dated December 31, 1935: One for$17,365, due on or before December 31, 1936; two for $8,682 each, due on or before December31, 1937; and the fourth for $17,367, due on or before December31, 1938, each of said notes bear interest from date at the rate of five per cent per annum, payable semiannually. In order to secure the payment of these notes, the Petitioner agreed to and did deliver the four thousand shares of did deliver the four thousand shares of stock, endorsed in blank, to one Bakke, the agent of DeGuire, for surrender to the Ajax Company, and received in exchange one certificate for 1,332 shares; two certificates for 667 shares each; and one for 1,334 shares. The Petitioner agreed to and did endorse these certificates in blank, and affix the necessary transfer tax stamps, and then attached the certificate for 1,332 shares to the first note, a certificate for 667 shares to each the second and third notes, and the certificate for 1,334 shares to the fourth note.
These notes and stock certificates attached were then deposited with the Harris Trust and Savings Bank of Chicago, to be held by it in escrow, to be delivered to DeGuire as and when he paid the notes and all interest due by the tender of a certified of cashier's check. If the notes were paid on or before due date, the notes and stock certificates attached thereto were to be delivered to DeGuire. If DeGuire failed to pay any note when due, the stock was to be delivered to the Petitioner was to have to DeGuire. The Petitioner was to have the right to vote the stock for the directors nominated by DeGuire, and to vote the stock with other restrictions.
The agreement contained this important provision: "All dividens which may be paid during the life of this agreement, on the stock of the Ajax Hand Brake Company agreed hereby to be sold, shall be credited by the recipient thereof upon the principal and interest of the next one of said notes thereafter to become due."
It was further agreed that DeGuire should not be personally liable on the notes or under the agreement to pay the balance of the purchase price of the stock, and the only remedy for his failure to pay the notes was for the Petitioner to take back the stock. DeGuire paid the cash payment stipulated in the contract of $43,904.
After this agreement was entered into, the Ajax Company declared and paid a dividend on the stock in question in the sum of $7 per share, or $28,000. The check for the dividend was payable to the Petitioner, as she was the owner of record of the shares of stock . The check was then turned over to DeGuire, who had it certified and sent it by letter to the Harris Trust and Savings Bank in which he stated:
"Attached hereto find checks in payment of principal and interest."
The check was applied to the payment of the notes, then forwarded to the Petitioner by the Bank as payment received on the stock pursuant to the agreement, and then the Petitioner endorsed the check and deposited it to her account. This check paid the first and second notes, and released the stock certificate for 1,332 shares and one for 667 shares, which were attached to the respective notes.The certificates of stock were then turned in to the Ajax Company, and it issued new certificates to Helen A. DeGuire.
On June 27, 1936, DeGuire wrote a letter to the Harris Trust and Savings Bank, which contained his understanding of the nature of the transaction between the parties: "With reference to Escrow Agreement No. 6489 dated January 16, 1936, between the writer, Mrs. Moore. Mr. Bosworth and your bank, in connection with certain notes which you are holding for collection and against which stock of the Ajax Hand Brake Company is pledged as Collateral."
The Respondent contends that this transaction was no sale, that it was an option to purchase granted to DeGuire; that Petitioner remained the owner of the stock at the time the dividend was declared, and was therefore owner of the dividend as such and properly taxed therefor as income.
The Petitioner contends there was a sale and the stock was held to secure the balance of the purchase price, and the title passed to DeGuire; that even if title had not passed, the beneficial interest of the stock was ...