1939 BTA LEXIS 969">*969 Petitioner and her husband organized a corporation for the purpose of selling certain stock to it on the installment plan in order to avoid a direct sale which petitioner was obliged to make for cash. The vendee consented to the intervening transfer only upon condition that the new corporation would comply with petitioner's obligation. Petitioner's transfer and the new corporation's transfer for cash both occurred within 24 hours. Held, the creation of the corporation and routing of the transfer through it constituted a scheme or device to avoid the tax consequences of petitioner's obligation and she is not entitled to report the gain on the installment basis. Commissioner v. Griffiths, 103 Fed.:2d) 110, followed.
39 B.T.A. 844">*844 This proceeding involves a deficiency in income tax of $5,610.84 for the year 1933. The question is whether a profit of $45,522.75 resulting from petitioner's sale of 450 shares of class B common stock of the Golo Slipper Co. is taxable in its entirety for the year 1933, or is to be reported on the installment basis as claimed1939 BTA LEXIS 969">*970 by petitioner in her income tax return for the year 1933.
39 B.T.A. 844">*845 FINDINGS OF FACT.
The petitioner resides with her husband, Martin Loewenberg, in Glendale, California, having moved there from Chicago, Illinois, some time during the taxable year. Martin Loewenberg represented the petitioner and handled all of her business transactions for her.
For many years prior to 1933 Martin Loewenberg had been the treasurer and an employee of the Golo Slipper Co., hereinafter referred to as Golo, and had acquired 450 shares of class B common stock in that corporation. His ownership of these shares was subject to the conditions printed on the face of each certificate, which read in part as follows:
All of the said Class B Common Shares shall be issued, acquired, owned and transferred subject to the following conditions, namely:
:a) Neither shares nor any interest therein may be transferred, assigned, pledged, hypothecated or otherwise disposed of at any time by any holder thereof unless such transfer, assignment, pledge, hypothecation or other disposition thereof shall first have been approved by resolution of the Board of Directors or unless there shall have been filed with1939 BTA LEXIS 969">*971 the Corporation a consent thereto, in writing, signed by the then holders of at least seventy-five per cent. :75%) of the outstanding Class A Common Stock.
:b) In either of the following cases, namely, :1) upon the death of the holder of record of said Class B Common Stock and/or (2) if the holder of any of said stock be an employee of said Corporation, then upon the termination, for any cause, of said employment, the Corporation shall have the right, and shall, except as otherwise provided by law, purchase all of the said Class B Common Stock held by said decedent at the time of his death or held by said employee upon the termination of his employment, and such holder, for himself or herself, and his or her legal representatives, shall sell said shares to the Corporation, or its nominee, at a price to be determined as follows: * * *
The omitted portions of the conditions printed on the face of each certificate provided that if the death or termination of employment occurred between January 1 and July 1, the purchase price was to be determined by the book value as it appears from the inventory and balance sheet at the close of the preceding fiscal year, excluding any value for1939 BTA LEXIS 969">*972 good will. The purchase and sale was to be consummated at a time and place to be fixed by the corporation within three months of the termination of employment, or, in case of death, within three months after qualification of the legal representatives of decedent. Upon tendering to any such holder of class B common stock, or his or her legal representatives, the price so determined at the time and place fixed, the corporation was to acquire the entire interest, whether or not the certificate representing the stock was delivered.
Prior to April 28, 1930, Martin Loewenberg had requested the consent of Golo to transfer his 450 shares of class B common stock to the petitioner. The conditions upon which Golo consented to this 39 B.T.A. 844">*846 transfer are contained in a letter dated April 28, 1930, from the petitioner to Golo, which reads as follows:
New York, April 28, 1930.
Golo Slipper Company, Inc.,
129 Duane Street,
New York City.
Gentlemen:
This confirms my understanding and agreement relative to your consent to the transfer by Martin Loewenberg to myself of Certificate No. 43 for 450 shares of Class B stock of Golo Slipper Company, Inc., i.e., that upon the death of1939 BTA LEXIS 969">*973 said Martin Loewenberg and/or the termination, for any cause, of his employment, you shall have the right and shall, except as otherwise provided by law, purchase all of said shares held by me at the time of his death and/or termination of his employment, and I agree for myself to sell such shares to you at the price and in the manner set forth upon the face of the said certificate.
It is understood further that a reference to this letter shall be endorsed upon the certificate of stock and that the sale, transfer or assignment of such stock by me shall in all respects be governed by the terms hereof and/or the terms set forth on the face of the said certificate and/or the Certificate of Incorporation and by-laws of Golo Slipper Company, Inc.
Yours very truly,
£ Signed] MRS. BELLE LOEWENBERG.
We herewith confirm the foregoing understanding.
GOLO SLIPPER COMPANY, INC.
By £ Signed] H. HEILBRUN.
Pursuant to the foregoing agreement and consent, Martin Loewenberg surrendered his certificates, and Golo issued certificate No. 46 for 450 shares of its class B common stock to the petitioner on May 9, 1930.
On January 9, 1933, Martin Loewenberg suffered an attack of1939 BTA LEXIS 969">*974 coronary thrombosis and was in bed for approximately three months. His doctor advised him that he could not continue to work and that he should resign immediately. On March 23, 1933, he resigned as treasurer of Golo and thereafter was not connected with the company in any capacity.
During Martin Loewenberg's illness he and petitioner discussed their business affairs with reference to his state of health. He corresponded with his personal friend, Heilbrun, president of Golo, with whom he had been closely associated for over 25 years, as to the best procedure to follow. Heilbrun consulted with the attorneys and accountants for Golo, and it was finally decided that a corporation should be formed. Petitioner and her husband were especially concerned with minimizing or postponing petitioner's income tax liability on the profit which would result from her agreement to sell her stock to Golo. Martin Loewenberg arranged for the formation of the corporation through Heilbrun, who employed one Grouf, a member of the New York law firm which represented Golo, to organize 39 B.T.A. 844">*847 the new corporation. On or about April 20, 1933, while petitioner and her husband were in New York, Martin1939 BTA LEXIS 969">*975 Loewenberg conferred with Grouf relative to the formation of the corporation. The matter of actual incorporation was entrusted to a Chicago attorney, Frank J. Jacobson, as the corporation was to be organized under the laws of the State of Illinois.
On June 22, 1933, upon the application of three residents of Chicago, Illinois, as subscribers and incorporators, a certificate creating the Malvina Corporation, hereinafter referred to as Malvina, was issued by the Secretary of State of Illinois. Malvina had a total authorized capital stock of $1,000, divided into 100 shares of no par value common stock. Petitioner and her husband each paid in $500 for stock, and in addition Martin Loewenberg paid in $500 as a contribution to capital. The three incorporators constituted the first board of directors of Malvina. The certificate of incorporation enumerates specific powers and general powers pertaining to the conduct and operation of an investment business. Subsequent to the taxable year, in March 1934, the corporate name was changed by amendment to Casa Belmar Corporation.
The minutes of the first meeting of Malvina's board of directors, which was held in Chicago on June 22, 1933, show1939 BTA LEXIS 969">*976 that the subscribers transferred their stock and resigned as directors, and Martin Loewenberg and Belle Loewenberg each became owner of 49 shares and Frank J. Jacobson, two shares, and they became directors. As neither petitioner nor her husband was present, the meeting was adjourned to reconvene in Glendale, California, at 2:30 p.m. Pacific time on June 22, 1933.
The minutes of the adjourned meeting in Glendale show that the directors present were Martin Loewenberg and petitioner. Martin Loewenberg was elected president and treasurer; petitioner, vice president; and Frank J. Jacobson, secretary. The secretary was not present, and petitioner acted as temporary secretary. Martin Loewenberg was also chairman of the meeting and announced that Belle Loewenberg had presented a written offer to sell to Malvina 450 shares of class B common stock of Golo represented by certificate No. 46, for $60,000, payable $1,000 cash, upon obtaining consent of Golo to the transfer, $3,000 by promissory note payable in 15 days, and the balance at the rate of $4,000 per annum, evidenced by promissory notes bearing interest at 6 percent per annum, all notes to be delivered as soon as the necessary1939 BTA LEXIS 969">*977 consent of the board of directors of Golo was obtained; that petitioner on the preceding day had forwarded to Golo her assignment of the stock to Malvina, with a request that Golo consent to the transfer; that the assignment was delivered to him with the understanding that its acceptance was subject to 39 B.T.A. 844">*848 the approval of the board of Malvina at proper meeting. Thereupon, the minutes show that a resolution was adopted accepting petitioner's offer, and the president was authorized to pay her $1,000 and to execute and deliver to her the $3,000 note and 14 other notes, each in the sum of $4,000, with 6 percent interest, as soon as Golo consented to the transfer; that the president then stated he had received a telegram from Golo consenting to the transfer; that a resolution was adopted to pay petitioner the $1,000, and execute and deliver the notes in accordance with the resolution previously adopted at this meeting, and that the directors' meeting of June 22, 1933, was then adjourned to reconvene at 10 o'clock a.m., June 23, 1933.
The telegram from Golo consenting to the transfer of petitioner's shares to Malvina, which according to the minutes of the directors' meeting was1939 BTA LEXIS 969">*978 received on or before June 22, 1933, was actually dated June 23, 1933, and reads as follows:
June 23, 1933.
Martin Loewenberg,
1346 N Columbus Avenue,
Glendale, California.
Grouff shows us copy of assignment you mailed us Directors consent transfer to Malvina condition Golo reserves right to purchase from Malvina same price agreed Mrs. Loewenberg new certificate number fortyseven issued subject such conditions
GOLO SLIPPER COMPANY.
The minutes of the directors' meeting on June 23, 1933, show those present were Martin Loewenberg and petitioner, and that the president stated that the corporation had received the following telegram from Golo:
June 23, 1933.
Malvina Corporation,
care of Martin Loewenberg,
1346 North Columbus Avenue,
Glendale, Calif.
We desire to purchase Golo stock certificate fortyseven. Forward assignment Malvina to Golo immediately We pay you agreed amount less forty dollars Transfer stamps upon receipt assignment Stop Shall we open Malvina account Chasebank with proceeds or shall we deliver check to your attorney Grouff Stop Telegraph that assignment airmailed and choice method of payment
GOLO SLIPPER COMPANY.
The minutes further1939 BTA LEXIS 969">*979 show that the president then stated the agreed selling price for the stock was $60,563.25; and that thereupon a motion was duly made, seconded and unanimously carried, that the corporation sell certificate No. 47 for 450 shares class B common stock to Golo for $60,563.25, less forty odd dollars for United States transfer stamps; and that the president execute and forward a proper assignment to Golo.
39 B.T.A. 844">*849 On or prior to June 23, 1933, Martin Loewenberg, by wire, urged Heilbrun to postpone the date of sale to Golo, but was informed that it could not be changed. The sales by petitioner to Malvina and by Malvina to Golo were consummated on or about June 23, 1933, Malvina receiving $60,522.75 in cash and petitioner receiving cash and notes in accordance with her contract with Malvina. Petitioner has received payment of the notes executed for the stock by Malvina as they matured.
Under the plan as conceived by petitioner and her advisors she was to receive the same price for her stock from Malvina that Golo was to pay Malvina for the stock, which was the book value at the close of the fiscal year preceding Martin Loewenberg's resignation. The exact amount which Golo would1939 BTA LEXIS 969">*980 pay was not definitely known as some question existed as to the propriety of Golo's action in writing off $80,000 of its real estate investment. In fixing the price at which petitioner would sell to Malvina it was decided to use $60,000 as the basis for this transaction, since it was known that Golo would pay Malvina approximately $60,000 in cash. At the time the petitioner fixed this sum as her selling price she knew that under her contract with Golo of April 28, 1930, she would have to accept approximately this sum within 24 or 48 hours unless she transferred the ownership of the stock.
The balance sheet of Malvina at December 31, 1933, shows the following assets and liabilities:
| Assets | |
| Cash | $26,864.85 |
| Investments: | |
| Stocks | 700.00 |
| Bonds | 9,347.50 |
| Mortgage loans | 6,700.00 |
| Real estate: | |
| Land | 3,700.00 |
| Buildings | 9,500.00 |
| Deficit | 2,617.92 |
| Total | 59,430.27 |
| Liabilities | |
| Notes payable | $56,000.00 |
| Accrued interest | 1,680.00 |
| Loans payable | 512.77 |
| Reserve for depreciation | 237.50 |
| Capital stock | 1,000.00 |
| Total | 59,430.27 |
OPINION.
ARNOLD: Martin Loewenberg's resignation automatically determined the period within which petitioner was obliged to1939 BTA LEXIS 969">*981 sell her stock to Golo. Even without the benefit of the exact selling price of her stock, petitioner knew that a sale directly to Golo would result in a substantial profit to her. Through her husband she attempted to devise a plan which would prevent the taxation of this entire gain in the year of sale. In their search for an efficacious plan petitioner and her husband submitted their problem to counsel and accountants, as well as the president of Golo. The result of their efforts was the formation of Malvina, which petitioner now asserts was organized 39 B.T.A. 844">*850 to accomplish a double purpose, namely, protection of herself and her husband in the event of the death of either with respect to probate expenses and proceedings, and the minimizing of her taxes by virtue of the sale to Malvina on the installment basis.
The plan here conceived, that is, a transfer to an intervening entity, has been used before, and its efficacy has been tested in the courts in numerous cases. The success or failure of the taxpayers in the decided cases has turned upon the particular facts involved so that no all embracing rule or principle can be laid down for testing the efforts of this petitioner. 1939 BTA LEXIS 969">*982 But the decided cases have stressed certain factors, in the light of which we may analyze the things done in the instant proceeding. For example, in , the Supreme Court, although recognizing the legal right of a taxpayer to decrease the amount of his taxes by means which the law permits, stressed the fact that the corporation there created had no business or corporate purpose, and was a corporate device, the sole object and accomplishment of which was the transfer of a parcel of corporate shares to the taxpayer.
In , the Fourth Circuit refused to permit a taxpayer to escape tax upon earnings by organizing two corporations owned and controlled by him in anticipation of diverting to them the income he knew he would earn. The court characterized the contracts there involved as "anticipatory arrangements for the deflection of income to be earned. said the court, taxation. cases where the courts resolved the issue upon the substance of the transaction and ignored the form: 1939 BTA LEXIS 969">*983 ; ; ; .
The facts in , more nearly approximate the facts in this proceeding than any other case brought to our attention. Omitting the facts relative to Griffiths' transactions prior to the one in question, it appears that in 1933 he sold certain stock and a claim arising out of the stock to a personally owned corporation on the installment basis. The transaction was handled in this manner upon the advice of counsel that such an arrangement might postpone the time of payment as well as limit the amount of his income taxes on the resulting profit. Griffiths had theretofore considered the organization of an investment corporation, and upon his instructions the corporate vendee was organized and perfected within 24 hours, so that it could receive the cash payment from the sale of the stock. At the time Griffiths authorized the creation of the corporate vendee he knew that 39 B.T.A. 844">*851 the sale1939 BTA LEXIS 969">*984 of the stock and settlement of the claim would probably be made within the next two or three days. In holding Griffiths liable for tax upon the entire profit the language of the court is peculiarly apt to the present question. The court stated:
* * * 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 sale purpose of enabling the taxpayer to avoid the payment of tax. * * *
After quoting from , the court continued:
it would be difficult to find language more aptly describing the present situation. Here, as there, the sole object was the consummation of a preconceived plan not to organize a corporation for a business purpose, but merely as a step in the contrivance to escape taxation. It performed, as was intended from the beginning, no other function, with the possible exception of the subsequent transaction of some business not inconsistent with the1939 BTA LEXIS 969">*985 scheme of which it was a part. If speed in perfecting a plan to evade taxation be a commendable attribute, the taxpayer and his counsel would be entitled to great praise. Within 24 hours after respondent had information that his claim against Lay was to be settled for $100,000, the corporation was organized in Delaware, a meeting of the directors held in Chicago, an agreement made between the corporation and respondent by which the money to be received in conformity with the settlement was to be paid to the corporation, and before the setting of the sum on the following day, the money had actually been received by respondent and deposited in the bank to the credit of the corporation, all for the purpose of enabling respondent to escape payment of tax upon the profit thus derived and which otherwise would have belonged to the Government. * * *
This petitioner, like Griffiths, sold her stock upon the installment basis to a corporation created about 24 hours before the time of sale, with the definite intention and upon the advice of counsel that such an arrangement might postpone or limit the amount of her income taxes. Lie the corporation organized by Griffiths, Malvina was created1939 BTA LEXIS 969">*986 for the stated purpose of an investment company, but this petitioner would further justify the existence of Malvina by attempting to show that other considerations entered into its creation. We are not persuaded by petitioner's argument, nor by the elaborate minutes of Malvina, that such corporation was anything more than a contrivance intentionally created for the sole purpose of enabling the taxpayer to avoid a tax which would otherwise be due the Government.
In our opinion the real purpose in creating Malvina was to route through it the transfer of stock that petitioner had agreed to sell to Golo, and thus deflect from her the tax upon the income she would have received during the taxable year but for the intervening transfer 39 B.T.A. 844">*852 on the installment basis to Malvina. Malvina's receipt of the purchase price of the stock from Golo, investment of the proceeds, and payment of the installment obligations as they matured were but incidental to the real purpose for which it was created. To permit a taxpayer thus to circumvent the tax laws and escape a tax which Congress plainly intended to impose would exalt artifice above reality and deprive the statutory provisions of all1939 BTA LEXIS 969">*987 serious purpose. We, therefore, sustain the respondent's determination.
Reviewed by the Board.
Decision will be entered for the respondent.
VAN FOSSAN, MURDOCK, and LEECH dissent.