*1016 Where the owner of stock, desiring to make a gift to his children, decided to sell the stock and give them the proceeds, but in order to avoid increasing his tax liability, placed the stock in envelopes and took constructive delivery of same for the donees, thereafter selling the stock and placing the proceeds to their credit, as he had originally intended, held, the gift to his children was not of stock, but of the proceeds from the sale of the stock, and the donor is taxable on the net profit derived from its sale.
*899 This proceeding involves the income tax liability of petitioner, Adolph Weil, for the calendar year 1930. The respondent has asserted a deficiency in income tax for that year in the amount of $19,426.55, and the petitioner brings this proceeding seeking a review of such action by the respondent.
*900 The petitioner raises two issues:
1. Respondent erred in refusing to accept an amended joint income tax return of the petitioner and his wife for the year 1930, filed on or before June 16, 1931. *1017 This contention was abandoned by the petitioner upon the hearing.
2. It is alleged that respondent erred in including, in the petitioner's taxable income for the year 1930, profits derived on the sale of 1,200 shares of the common stock of the Coca-Cola Co., which at the time of the sale, it is alleged, was the property of petitioner's four children.
Some of the facts were stipulated and others presented by oral testimony at the hearing, from which we make the following findings of fact.
FINDINGS OF FACT.
The petitioner, Adolph Weil, is an individual, residing in Montgomery, Alabama, and is a citizen of the United States. During the entire calendar year 1930 he was the father of four minor children, namely, Carol, born February 28, 1912; Adolph, Jr., born February 8, 1915; Helen Jane, born April 19, 1917; and Robert, born November 29, 1919.
Petitioner is a member of the firm of Weil Brothers, cotton merchants, of Montgomery, Alabama, which is a partnership, with offices in several cities of the United States and in Europe. The members of the partnership are as follows:
Isidor Weil - father of petitioner
Emil Weil - brother of Isidor
Adolph Weil - the petitioner
*1018 Leonel Weil - brother of petitioner
Helen W. Loeb - daughter of Isidor, and wife of Lucien Loeb
Alvin Weil - son of Emil
Lucien S. Loeb - son-in-law of Isidor
On or about October 1, 1930, petitioner owned from 2,500 to 2,900 shares of common stock of the Coca-Cola Co. and at about that date he went to his safe-deposit box in a bank in Montgomery and took out eight certificates, representing 800 shares of said stock. In the box he kept separate envelopes bearing the name of each of his four minor children, in which were kept various securities belonging to the children. He placed in each of the envelopes certificates representing 200 shares of the Coca-Cola stock and made a memorandum of the certificate numbers thereof, and when he returned to his office he, or his stenographer at his direction, made typewritten entries on loose leaf sheets of a memorandum book showing the various securities owned by the children. On or about November 1, 1930, the petitioner *901 repeated the same procedure with respect to 400 additional shares of the stock, placing in each envelope a certificate representing 100 shares, and had the appropriate entries made in the memorandum book. *1019 The entries read as follows:
| Entries on sheet showing securities of - | |||
| Helen Jane | Adolph, Jr. | Carol | Robert |
| 200 Coca Cola | 200 Coca Cola - | 200 Coca Cola | 200 Coca Cola |
| 9/10/ 10/1/30 | Cert. 11/12 10/1/30. | 10/1/30 13-14. | 7/8 10/1/30 |
| 100 Coca Cola | 100 Coca Cola | 100 Coca Cola | 100 Coca Cola |
| 1540 11/1/30 | 1539, 11/1/30. | 11/1/30 15. | 16 11/1/30 |
Petitioner testified that the figures immediately to the right of or under the words "Coca Cola" referred to the certificate numbers and that the dates in the right hand column were the dates of the alleged gifts. The envelopes bearing the children's names, in which the securities were placed by petitioner, had been in existence a long time and contained other securities which were the property of the children.
On or about October 9, 1930, petitioner telephoned W. S. Dowdell, manager of the New York office of Weil Brothers, and told him to sell for his children 200 shares each of Coca-Cola common stock; that this was the children's stock; and that he would deliver the stock, and wanted the proceeds placed to the credit of the children on the accounts of Weil Brothers, New York.
On or about*1020 October 9, 1930, W. S. Dowdell gave Fenner & Beane, stock brokers in New York City, an order to sell 200 shares of Coca-Cola common stock for each of the four minor children. Acting pursuant to those instructions, Fenner & Beane, on October 9, 1930, sold 800 shares of the stock, 600 shares at $170 per share, and 200 shares at $170, and, upon instructions of the New York office of Weil Brothers, entered and carried upon their books in the names of each of the four children, the sales and the credits in the following amounts:
| Robert Weil | $33,942 |
| Helen Jane Weil | 33,942 |
| Adolph Weil, Jr | 33,942 |
| Carol Weil | 34,042 |
| --------- | |
| Total | 135,868 |
The sales slips show this stock was sold in the names of the four children.
On October 9, 1930, the petitioner wrote the New York office of Weil Brothers as follows:
*902 OCTOBER 9, 1930.
WEIL BROTHERS,
1407 Cotton Exchange Bldg.,
New York, N.Y.
(Attention Mr. W. S. Dowdell)
GENTLEMEN: I am sending you certificate for 800 shares Coca Cola Company stock, numbers N/Y 7 to 14, inc.
These certificates have been duly endorsed and witnessed and are to be applied against the sales today as explained*1021 to Mr. Dowdell. Please place the proceeds to the credit of the different accounts, as explained to Mr. Dowdell, immediately advising me when you have done so.
Yours very truly,
ADOLPH WEIL.
Petitioner was under the impression that he did not endorse the certificates before placing them in the box, but was uncertain about this matter.
On October 14, 1930, the aforementioned shares of stock were delivered to Fenner & Beane, which firm thereupon turned over $135,868 to the New York office of Weil Brothers. On the same day Fenner & Beane gave a receipt for the stock, reading as follows:
OCTOBER 14, 1930
| Received of Weil Brothers | 800 Coca Cola |
| a/c Robert Weil, certificate | #NY 7/8 33942.00 |
| Helen Jane Weil certificate | #NY 9/10 33942.00 |
| Adolph Weil, Jr. certificate | #NY 11/12 33942.00 |
| Carol Weil certificate | #NY 13/14 34042.00 |
| Pay bearer | 135868.00 |
FENNER & BEANE.
On or about November 10, 1930, petitioner telephoned W. S. Dowdell and told him to sell for his children 100 shares each of Coca-Cola common stock; that this was the children's stock; that he would deliver the stock; and that Dowdell was to credit the proceeds to the children's accounts*1022 on the books of Weil Brothers, New York City.
On or about November 11, 1930, Dowdell gave Orvis Brothers, stock brokers in New York City, an order to sell 400 shares of Coca-Cola common stock, 100 each for the accounts of Robert Weil, Helen Jane Weil, Adolph Weil, Jr., and Carol Weil, respectively. Orvis Brothers on November 11, 1930, sold 200 of said shares (those for the account of Robert and Helen Jane) at $149.50 per share, and 200 shares (those for the account of Carol and Adolph, Jr.), at $153 per share, and on November 14, 1930, gave Weil Brothers a receipt for the 400 shares of stock and paid over to Weil Brothers $60,384. A true copy of the receipt follows:
*903 Nov. 14, 1930.
Received from Weil Brothers, 400 Coca Cola as follows:
| 100 shares (#1539) a/c Adolph Weil, Jr | $15,271.00 |
| 100 shares (#1540) a/c Miss Helen Jane Weil | 14,921.00 |
| 100 shares (#16) a/c Robert Weil | 14,921.00 |
| 100 shares (#15) a/c Miss Carol Weil | 15,271.00 |
| ----------- | |
| Please hand bearer check for | 60,384.00 |
Stamped: Received Orvis Brothers & Co., November 14, 1930 - 2:00 P.M.
The sales slips show that this stock was likewise sold in the names of the four children.
*1023 Weil Brothers - New York Office - on its books credited the aforementioned proceeds, totaling $196,252, to the accounts of the children, as follows:
| Carol Weil | $49,313 |
| Adolph Weil, Jr | 49,213 |
| Helen Jane Weil | 48,863 |
| Robert Weil | 48,863 |
These accounts appeared on the said books as customers' accounts. Interest was credited monthly to these accounts. These moneys, along with others held by the New York office to the credit of the children, were held there in expectation of reinvestment in stocks or other securities bearing a greater interest rate, but, because of continued and further developments of uncertainty in the security market, the petitioner arranged to lend for his children to the partnership, on open account, all their funds so credited, and on February 2, 1931, several months after the stock sale, these funds were transferred to Weil Brothers, Montgomery, and ever since they have been carried on its books as loans from the children to the partnership, against which accounts are charged disbursements made for the children, such as income tax, interest, etc. The private ledger of Weil Brothers, Montgomery, contains accounts for each of the four children*1024 and on February 2, 1931, the following credits, reflecting the transfers from the New York partnership, were made:
| Robert Weil: | 2/2/31 -- | By W. B. Ledger | $49,225.09 |
| Int | 169.55 | ||
| Carol Weil: | 2/2/31 -- | By W. B. Ledger | 61,610.10 |
| Int | 212.21 | ||
| Adolph Weil, Jr.: | 2/2/31 -- | By W. B. Ledger | 61,509.24 |
| Int | 211.87 | ||
| Helen Jane Weil: | 2/2/31 -- | By W. B. Ledger | 61,157.42 |
| Int | 207.32 |
The said accounts show interest credited thereto at various times and credit balances as of January 10, 1934, as follows: Robert, $88,895.53; *904 Carol, $89,897.31; Adolph, Jr., $90,180.72; and Helen Jane, $89,452.42. There has never been anything drawn from these accounts except for disbursements for them, such as income taxes or investments.
Weil Brothers, Montgomery, is in the nature of a parent partnership, with other separate and distinct partnerships bearing the same name and composed of the same partners in New York, Memphis, Dallas, and other places, each of which has a separate manager, who shares in profits but not in losses and responsibilities. Petitioner owns only a fractional interest therein, which is not a majority. The interests*1025 range from 5 to 27 1/2 percent. The partnership has no capital except that each partner has on deposit with the partnership a certain amount on which the partner receives interest. All earnings, over and above the interest, are divided. About October 1 of each year the partnership furnishes its bank a financial statement upon which its line of credit is based. On such statement is listed each partner's assets, and when any partner reduces his assets in any substantial amount he must have the consent of the other partners, for such withdrawal weakens the financial statement and credit of the partnership. When petitioner made the alleged gifts in question to his children he secured the consent of the other members of the partnership, and there was no understanding by the partners that the proceeds would remain on deposit with the partnership. Other persons have made loans to the partnership which are carried in open accounts and on which interest has been paid. No securities owned by the children and none of the loans made by the children to the partnership have ever appeared as assets on the financial statements of the partnership to its banks, the loans having always been included*1026 as liabilities. Interest at the rate of 6 percent per annum is paid to the children on the loans. These funds now carried on the books of Weil Brothers, Montgomery, to the credit of the four children are considered by the partners as irrevocably the properties of the children. The partnership borrows money heavily, running into millions of dollars. These loans are from banks and individuals. It borrows money on cotton, on which banks loan from 85 to 95 percent. The difference, together with the margin required for hedges on the New York Cotton Exchange, must be made up by the partnership from its capital and from its open lines on credits and loans from others.
The petitioner has been making gifts to his children since their birth. On their birthdays he deposits a certain sum, the same every year, to their accounts. As time passed and petitioner accumulated more, he decided to change his estate and to give the children certain amounts until their estates had reached a certain point. The approximate amount of each child's estate at the present time is *905 between $90,000 and $100,000. Carol is now of age and petitioner has turned over to her all her property, managing*1027 it for her under a power of attorney. It is, however, hers to do with as she pleases. Petitioner has carried out this plan of creating separate estates for his children in his will and insurance policies. At the time he made the alleged gift of stock to his children in 1930 he told the executors and trustees of his will about it. He has never taken back from his children anything he has given them. He has never used as collateral any of the stocks or other securities which his memoranda book shows are the property of his children. He did not have the Coca-Cola stock certificates transferred to the children on the books of the corporation, as he expected to sell them and wished to avoid the expense of the transfer when they could be sold by being endorsed in blank. Petitioner has never been appointed guardian of the estates of his children. A part of the proceeds from the sales of Coca-Cola stock has since been reinvested in bonds and stocks, the stocks being in the children's name.
The base to be used in the computation of profit on the sale of the aforementioned 1,200 shares of Coca-Cola common stock is $66,588.80, and the taxable profit is $129,663.20, all of which is*1028 capital gain.
An income tax return for the calendar year 1930 was filed in due course for each of the four children and the profit derived from the sale of the Coca-Cola stock reported therein and tax paid thereon. The Commissioner, upon audit of those returns, determined that the profit was derived by petitioner and should have been reported in his individual return. The Commissioner thereupon determined that the children had overpaid their taxes to the extent of the tax paid on the income derived from the stock transactions, but has not made refund of the overpayments to the children.
The Commissioner, upon audit of the petitioner's 1930 income tax return, included $140,649.38 in his taxable income as capital gain from said stock transactions. It is agreed that if it is found that this income represented petitioner's income and not the income of the children, the inclusion should be $129,663.20 instead of $140,649.38.
From all the facts in the record, we find that petitioner gave to his children the proceeds from the sale of 1,200 shares of Coca-Cola stock, and not the shares.
OPINION.
ADAMS: The petitioner contends that the transactions in question show completed*1029 gifts from petitioner to his children of the Coca-Cola Co. stock before its sale.
*906 The respondent contends that there were no gifts of the Coca-Cola stock, but at most only gifts of the proceeds arising out of the sale of such stock.
From an examination of the authorities we find the essential elements of a bona fide gift inter vivos to be (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; , and authorities there cited. Cf. *1030 ; ; affd. (C.C.A., 6th Cir.), , certiorari denied, .
The respondent argues that the donees, being minors, were incapable of receiving the gift, since no guardian or trustee was appointed to act for them. We do not think these facts are determinative of the question. It is not essential to the validity of the gift inter vivos that the property be delivered to the donee personally. Delivery may be made to a third person, such as a trustee or a guardian for the benefit of the donee, 28 C.J. 639. This seems to be the rule in the State of Alabama. ; Encyclopedic Digest of Alabama Reports, vol. 7, p. 863, and cases there cited. The petitioner here was the natural guardian of the donees, and we think he was capable in such capacity of receiving a gift for them. A gift did not, therefore, fail for lack of acceptance, and a donee capable of taking it.
The important question here is not whether there was a gift by petitioner to his children, *1031 but whether there was a gift of the Coca-Cola stock to them. Was there a clear and unmistakable intention on the part of the donor to give the Coca-Cola stock to his children; to absolutely and irrevocably part with the title, dominion, and control of it at the very time the gift was made, or did he intend all the while to sell the stock and give the proceeds thereof to his children?
In examining this question we think the testimony of petitioner is important. At the hearing he testified as follows:
*907 Q: The certificate of stock was never sent to the Coca-Cola Company for transfer on the books of the corporation?
A: No.
Q: They never were transferred from you to the children?
A: No. The reason for that is I expected to sell them for the children and I avoided the expense of the transfer by endorsing it in blank making them negotiable.
* * *
Q: This gift was made with the intention of selling?
A: Yes.
Q: You told them?
A: Yes.
This testimony clearly demonstrates that it was the purpose and intention of petitioner at the time when and before he put the shares of stock in the envelopes for his children to sell them and give to his children the*1032 benefit of the proceeds from the sale. The testimony of petitioner is characterized by commendable frankness. It is noteworthy that he testified as to his reason for handling this transaction in the way he did, as follows:
Q: Those stocks and bonds have been issued in whose names?
A: The bonds are in anybody's name.
Q: The stocks which you bought?
A: In the children's name. I sold those stocks. You might say, "Why didn't you sell the stocks and take the proceeds and give them to the children?" By selling those stocks, by giving them to the children and letting them sell the stocks, it divided the income tax, which I thought was permissible, and I still think it is.
Petitioner decided to dispose of the stock by first giving it to his children and then selling it. The weakness of his plan was that he at no time intended them to have the stock, but at all times intended to sell it and put the proceeds to their credit. Moreover, he kept within himself the power to control the disposition of the stock.
The transactions examined in the light of petitioner's testimony persuade us that he did not intend making a gift of the stock, nor to divest himself of such title, *1033 dominion, and control of it as was necessary to constitute a good and valid gift of the stock, in praesenti, but that such transfer was but a step in the disposition of the stock for the benefit of his children. , and cases there cited. The motive which actuated the petitioner was two-fold - to increase the estate of his children and to avoid payment of income tax.
It is significant that the transfer to his children of the certificates of stock in question was almost contemporaneous with the sale of the stock. The transaction was not handled in the ordinary and *908 usual business manner. The testimony does not show that the certificates were endorsed when transferred to the envelopes. The required stamps were not affixed to the certificates at that time and petitioner was acting in the dual capacity of donor and trustee, or natural guardian to his children.
Under all the circumstances we conclude that what petitioner intended to give his children and what he gave them was not the stock itself, but the proceeds from the sale of the stock. It follows from this conclusion that the determination of the respondent must*1034 be approved.
Reviewed by the Board.
Decision will be entered under Rule 50.
BLACK, VAN FOSSAN, and LEECH dissent.
TRAMMELL, dissenting: I am unable to agree that the petitioner did not make a completed gift to his children of the stock in question before it was sold. The essential elements of a valid gift inter vivos are set forth in the prevailing opinion. It seems to me that each of these essential elements has been met in this case. The prevailing opinion, itself, answers the only question, in my opinion, as to where there might be doubt, that is, as to delivery by the donor and acceptance of the gift. It is shown that delivery and acceptance meet the legal requirements. Then, as I see it, the prevailing opinion is founded in substance on what it considers an improper motive or purpose on the part of petitioner in making the gift, that is, to reduce his taxes. In other words, the majority opinion in effect holds that an actual gift which meets legal tests will not be recognized if the motive in making it is to reduce taxes. I agree that the petitioner, as the natural guardian of his children, had the right to receive the gift for them, *1035 notwithstanding he was the grantor, or it might well be held that the transaction whereby petitioner transferred the stock to his children amounted to his constituting himself trustee for them. If it was a gift and title passed, it is immaterial that the petitioner acted in behalf of his children in selling the property. It was sold for them and they received all the benefits thereof, as is shown by all the records. Petitioner never at any time received or had the right to receive any of the proceeds of the sales to give to the children. They did not receive them from petitioner. Their accounts were credited directly by the brokers. It is rather difficult to see how it can be said that petitioner gave the proceeds of sales to his children under these circumstances.
In my opinion, too much emphasis has been placed in the prevailing opinion upon the purpose of the petitioner in making a gift to *909 his children. In , the court said:
There was nothing unlawful or even mildly unethical in the motive of petitioner to avoid some portion of the burden of taxation. There is nothing illegal in a gift of shares*1036 of stock by husband to his wife.
There was certainly nothing unethical in the petitioner giving shares of stock to his children for the purpose of reducing the burden of taxation, even though he had in mind at the time that the stock would be sold by or for the children. The question is, Did he make a gift of the stock before it was sold? There was, in my opinion, not only no sale, but no binding obligation or contract to sell entered into before petitioner had effectively and legally given the stock to his children. If there was a completed gift by the petitioner to his children, I see no occasion for the Board to inquire as to the purpose or motive thereof. The only question is whether there was a gift which meets the requirements of the law before the sale so that what the petitioner gave was stock and not the proceeds from the sale thereof, and the question as to why petitioner made a valid gift is beyond the scope of any proper inquiry.
The Circuit Court of Appeals and the Supreme Court, in the case of ; *1037 , upheld as a valid transfer a gift in trust from the donor as an individual to himself as trustee, when as trustee he had complete dominion over the property in that capacity to the same extent as he had as owner before the transfer. I therefore do not think it of any particular significance that the petitioner here did order the sal of the stock after he had given it to his children. It is not necessary that a person designate himself as trustee by the specific use of that word if he declares that he holds property for another. The control and dominion in the capacity as trustee for another is not the retention of control and dominion as owner. The Supreme Court so held in the Duke case and in , where that question was presented. In both those cases the same individual exercised dominion after the transfer as before. This did not affect the validity of the gift.
Upon either the trust theory or the theory of a completed gift, I think the prevailing opinion is in error.
ARUNDELL agrees with this dissent.