Bettendorf v. Commissioner

*959 The Commissioner determined deficiencies in the petitioner's income taxes for the calendar years and in the amounts as follows:

These proceedings were consolidated. The petitioner alleges that the respondent erred (a) in disallowing a deduction of $5,000 taken in the year 1923 as a loss on stock; and (b) in charging his income with the dividends that were paid to Catherine Bettendorf in the years*2551 and amounts as follows:

FINDINGS OF FACT.

The petitioner is an individual residing in Bettendorf, Scott County, Iowa.

The Bettendorf Axle Co. was organized in 1894 by the petitioner and his brother, W. P. Bettendorf. The latter died June 3, 1910, and the petitioner as administrator made distribution of his brother's estate in June, 1911. Catherine Bettendorf, as an heir of W. P. Bettendorf, received stock in the Bettendorf Axle Co. and other corporations.

*960 For some years a cousin of the petitioner had been living with Catherine Bettendorf and had been employed in the Bettendorf factory; the cousin had not been legally adopted. The petitioner and Catherine Bettendorf discussed the possibility of claims by the cousin upon her estate after her death, and subsequent to such conversations the following contract was executed:

WHEREAS, Catherine Bettendorf, of Bettendorf, Iowa, has sold, transferred and delivered to Joseph W. Bettendorf, of Bettendorf, Iowa, the following shares of stock and other personal property, viz., [Here appears a list of stocks*2552 including stock in the Bettendorf Axle Company].

AND, WHEREAS, as a part consideration for such sale and transfer said Joseph W. Bettendorf is to pay to Catherine Bettendorf and M. Bettendorf the certain amounts as hereinafter stated and at the time hereinafter specified. Therefore,

KNOW ALL MEN BY THESE PRESENTS, That Joseph W. Bettendorf does hereby agree by and with Catherine Bettendorf that during the life of Catherine Bettendorf the said Joseph W. Bettendorf will pay to Catherine Bettendorf, or her assigns, all earnings and dividends paid to him on any or all of the shares of stock, hereinbefore mentioned, except a stock dividend, which if declared shall be and remain the property of said Joseph W. Bettendorf. The said earnings so receive by said Joseph W. Bettendorf shall be paid to Catherine Bettendorf, or her assigns, as soon after their receipt by Joseph W. Bettendorf as is practicable.

Upon the death of Catherine, should her husband, M. Bettendorf be surviving, said Joseph W. Bettendorf hereby agrees to pay one-half of the earnings and dividends received by him, as hereinbefore stated, to said M. Bettendorf, or his assigns, during his natural life.

Upon the*2553 death of both Catherine Bettendorf and M. Bettendorf there shall be no further obligation on the part of Joseph W. Bettendorf to make such payment.

It is agreed that if at any time there should be issued by any of the companies or corporations, the stock of which is included in the above and foregoing list, a stock dividend, or a dividend of stock, that such stock dividend shall become and forever remain the property of said Joseph W. Bettendorf and said Catherine Bettendorf shall have no interest therein further than to receive and have paid to her, or her assigns, such earnings or dividends as may be paid thereon.

In the event that Joseph W. Bettendorf shall sell or otherwise dispose of any of the stocks included in the above and foregoing list of stocks (including the liquidation of any company of corporation whether voluntary or involuntary) said Joseph W. Bettendorf agrees to pay as often as practicable, and at least quarterly, to whom it is hereinbefore provided, earnings or dividends shall be paid, a sum equal to the rate of interest paid by savings banks on savings deposits in the City of Davenport, Scott County, Iowa, provided, however, that if the proceeds of the sale*2554 of any stock or stocks shall be invested by said Joseph W. Bettendorf in any other stocks, bonds, or in any other manner than in the savings account, the earnings arising from such sum or sums so invested shall be paid as hereinbefore provided, to said Catherine Bettendorf, or her assigns, or one-half thereof to M. Bettendorf as hereinbefore provided.

The agreement to pay earnings, dividends, income or interest, as hereinbefore provided to Catherine Bettendorf or M. Bettendorf is a part consideration for *961 the sale and transfer of the aforesaid stocks to said Joseph W. Bettendort by Catherine Bettendorf, and this contract shall be binding upon the heirs and assigns of said Joseph W. Bettendorf.

In Witness Whereof said Joseph W. Bettendorf has hereunto set his hand this 26th day of September, A.D. 1911.

(Signed) JOSEPH W. BETTENDORF.

CATHERINE BETTENDORF.

Catherine Bettendorf delivered the stocks listed in the above instrument to the petitioner and he had them transferred to his name upon the books of the serveral corporations. Thereafter there was no conversion or sale of any of the stocks mentioned above except an exchange of the Bettendorf Axle Co. stock*2555 for the stock of its sucessor the Bettendorf Company as of January 1, 1913.

The petitioner received the dividends on these stocks and then paid his mother an equivalent amount in accordance with his agreement of September 26, 1911. During the years under consideration the dividends were as follows:

The petitioner made out the annual income-tax returns of Catherine Bettendorf until her death on June 26, 1926. He was appointed and qualified as her executor. For the years 1922 to 1926, both inclusive, he prepared her returns, and included therein as her income the amounts set forth above.

OPINION.

MURDOCK: The respondent disallowed the deduction of $5,000 as a loss on stock during the taxable year 1923 and based his action upon the ground that the loss was actually sustained in a prior taxable year. There is no evidence in the record as to this issue and it has apparently been abandoned. We approve the determination of the Commissioner as to this disallowance. Gilbert W. Lee, 8 B.T.A. A. 951; *2556 ; ; Volker v.United States,U.S. Dist. Ct., W. Dist Mo., decided Nov. 20, 1929.

The petitioner claims that the dividends on the stocks enumerated in the contract of September 26, 1911, were the taxable income of Catherine Bettendorf and were returned as such, and that the action of the Commissioner in including such dividends in his income was wrongful. The respondent based his action upon the express terms of the contract of September 26, 1911.

*962 The instrument signed by Catherine Bettendorf on September 26, 1911, conveyed the personalty described therein to the petitioner. Catherine Bettendorf, the mother of the petitioner, having inherited from her deceased son certain shares of stock, most of which were in in the Bettendorf Axle Co., discussed the disposition of such stock after her death with the petitioner. Although there had been no legal adoption of the cousin of the petitioner who had been living in the home of the petitioner's mother, both the petitioner and his mother felt that there might be some claim by the cousin upon her estate and to avoid such claim and*2557 to assure the petitioner that he would receive the stocks listed in the contract, the shares of stock were conveyed and actually delivered to him on September 26, 1911. The transfer was complete both as to the written instrument and the manual delivery of the stock certificates. The petitioner then had the stocks transferred to his name on the books of the several corporations, thereby placing such stocks under his absolute control. Thereafter, dividends were paid to the petitioner, since he was the stockholder of record, and he in turn paid his mother an amount equal to the amount of the dividends.

The instrument stipulates that "As a part consideration * * * J. W. Bettendorf is to pay to Catherine Bettendorf and M. Bettendorf the certain amounts as hereinafter stated and at the time hereinafter specified." The instrument then sets forth that the petitioner "will pay to Catherine Bettendorf * * * all earnings * * * paid to him on any or all of the shares of stock * * * as soon after their receipt by J. W. Bettendorf as is practicable." Upon the death of Catherine Bettendorf one-half of such earnings were to be paid to M. Bettendorf; there was no direction as to the other half, *2558 but the presumption is that the petitioner was to retain that half. The "obligation * * * to make such payment" ceased upon the death of both Catherine Bettendorf and M. Bettendorf. The instrument further permits the petitioner to convert or sell any or all of the stocks and in lieu of dividends on such stocks sold or converted, he was to pay "a sum equal to the rate of interest paid by savings banks on savings deposits in * * * Davenport * * * Iowa."

The only conclusion that we can reach regarding the income from the shares of stock conveyed to the petitioner by Catherine Bettendorf is that even though he paid this income over to his mother, he was first the receipient of that income and it is taxable as his income. In a similar case, , we said:

The petitioner was himself the stockholder and continued to own the stock. Notwithstanding the request to do so, he refused to give it to his son because he wanted to control its disposition, an important attribute of ownership. His *963 direct purpose was to augment his son's income for his part in the success of the corporation - not to make the son a stockholder, but to let him*2559 benefit, through the petitioner, by its earnings. The son received no dividends, because between him and the corporation there was no such relation as entitled him to a dividend. Only stockholders were entitled to dividends, and even although the amount was the same, his right to it was not derived from any of the considerations which apply to stockholders, but from a separate agreement with one other than the corporation. As between him and the corporation he had not even that inchoate interest in earnings which a stockholder has before dividend declared. All of the attributes and incidents of a stockholder were continued in the petitioner.

The significance and importance of this is clear when it is remembered that the individual stockholder taxpayer is freed from normal tax upon his dividends. This is upon the theory that, after all, the incidence of the corporation income tax is ultimately upon the stockholders, and Congress has to this extent lightened their tax burden. But it is hardly arguable that this legislative intent carried beyond the stockholders to anyone who might be collaterally or indirectly interested in the corporation's earnings. It is the stockholder*2560 who gets the dividend and he alone who may have the normal-tax credit.

See also ; ; ; ; ; ; certiorari denied, ; ; ; ; affd., ; certiorari denied, ; ; affd., .

Judgment will be entered for the respondent.