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Commissioner of Internal Revenue v. Callner

March 14, 1961


Author: Knoch

Before DUFFY, SCHNACKENBERG and KNOCH, Circuit Judges.

KNOCH, Circuit Judge.

The Commissioner of Internal Revenue has petitioned for review of the Tax Court's decisions that, contrary to the Commissioner's contention, transfer of property to the taxpayers in 1950 was not a taxable dividend distribution.

The facts are largely stipulated and uncontested. The Commissioner asks this Court to review the legal effect of the facts shown by the record and to substitute its judgment for that of the Tax Court.

Sarah Callner and Esta Okrent are included as respondents here only because they filed joint income tax returns with their husbands for the taxable year 1950. We shall refer to the respondents Julius Callner, Morris J. Okrent and Abner E. Kops as the "taxpayers."

In June, 1945, the taxpayers entered into a contract to purchase improved real estate for $45,500, $11,000 to be paid down, and $34,500 to be paid over a seven-year period. In December, 1945, they formally organized the Capitol Lumber Company, a Wisconsin corporation. All three taxpayers were equal and sole stockholders and directors. Mr. Callner was President, Mr. Okrent Vice-President, and Mr. Kops Secretary-Treasurer, from 1945 through 1950.

Earlier in July, 1945, the taxpayers leased the land and buildings which they were acquiring under the aforesaid contract, to Capitol Lumber Company, which was to assume, and pay as rent therefor, all payments due under the land contract, plus certain other charges. It was also agreed that when the land contract payments were completed, the property would be leased to Capitol for five additional years from January 1, 1951, through December 31, 1955.

When Capitol tried to secure a line of bank credit, bank representatives suggested assignment of the taxpayers' interest in the land contract to Capitol. On January 3, 1946, the taxpayers, as directors, ratified the lease described above, and also executed an assignment of the land contract to Capitol. The two wives did not join in this assignment. The Tax Court found that it was the intention of the taxpayers to retain their interests in the premises covered by the land contract and that it was their purpose merely to loan the property to Capitol for credit purposes, and not to convey title to Capitol.

The taxpayers point out that their wives did not join in the assignment and that Capitol could not have secured clear title, as the Commissioner contends it did, because Mrs. Callner and Mrs. Okrent had outstanding dower interests which were never transferred to Capitol. The Commissioner asserts that the two wives had no dower rights because their husbands had no legal or equitable title, merely a contract right to purchase, relying on Olsen v. Ortell, 1953, 264 Wis. 468, 59 N.W. 2d 473 and Inglis v. Fohey, 1908, 136 Wis. 28, 116 N.W. 857.

In the Inglis case, a husband having a contract for purchase of land, on which he had paid nothing, agreed for a consideration to divide it with another, whose right was held to be superior to dower rights. In the Olsen case, a husband had a contractual right based on a purchase contract not signed by his wife. He was in default. The wife was held to be neither a necessary nor a proper party defendant in an action for strict foreclosure of the land contract. However, in Mueller v. Novelty Dye Works, 1956, 273 Wis. 501, 78 N.W. 2d 881 at page 883, the Supreme Court of Wisconsin stated:

"In equity, then, the vendee, at the time the agreement is entered into, becomes the owner of the land; his equitable interest is in the property. The vendor becomes trustee of the legal title for the vendee; his (vendor's) interest is in the purchase money, and he has a lien on the land as security for any unpaid balance of such money." and further (at pages 883-884 of 78 N.W. 2d):

"If the vendor marries after entering into a land contract, his wife obtains no dower in the land."

The Tax Court also found that the taxpayers, who had no knowledge of accountancy or bookkeeping, engaged an accountant, Henry N. Kaufman, to set up and maintain a bookkeeping system for Capitol. Mr. Kaufman testified that he would go to Capitol's office once or twice a month to make entries in its books, and that at the end of each year, he would prepare Capitol's tax returns from the books without discussing the returns with the taxpayers.To his knowledge the taxpayers never looked at the books. His opening entry in Capitol's books shows Capitol to be the owner of the land and buildings under the land contract. He testified that he had had a conversation with Mr. Callner, toward the end of 1945, and:

"I don't remember what was said or done at the time. But my general impression is that they had purchased the land and the building, and I recorded it that way on the books, subject, of ...

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