Fidelity-Philadelphia Trust Co. v. Commissioner

FIDELITY-PHILADELPHIA TRUST CO., EXECUTOR, ESTATE OF ISAAC WASSERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fidelity-Philadelphia Trust Co. v. Commissioner

Docket No. 27597.

United States Board of Tax Appeals

16 B.T.A. 1214; 1929 BTA LEXIS 2426;

June 28, 1929, Promulgated

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">*2426 1. Dividends paid on shares of stock in 1922 held not taxable to decedent, who conveyed the stock to his son as a gift in 1919.

2. A gift from father to son of shares of corporate stock, where transfer was made in the stock book of the corporation with clear intent to convey title, was not voided by the subsequent acts of the donor in receiving dividends paid thereon.

Jesse I. Miller, Esq., for the petitioner.

J. E. Mather, Esq. and J. A. Lyons, Esq., for the respondent.

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SMITH

">*1214 This proceeding involves a deficiency in income tax of the estate of Isaac Wasserman, deceased, for the calendar year 1922 in the amount of $26,884.77. The proposed additional assessment results from the inclusion by respondent in decedent's income for the year 1922 of an item of $54,666.67, representing dividends paid in that year on 83 shares of stock of the Philadelphia Tapestry Mills. The question at issue is whether the dividends were the income of the decedent or his son, who, the petitioner contends, received the stock in question as a gift from the decedent prior to the time the dividend was declared and paid.

">*1215 FINDINGS OF FACT.

">*2427 The petitioner is executor under the will of Isaac Wasserman, who died in the year 1923, leaving an estate valued by the respondent at $2,132,320. About 40 years prior to his death, Isaac Wasserman, with two of his brothers, began a small textile business in the City of Philadelphia. At the time of his death the business had grown to be one of the largest art loom and tapestry manufacturing concerns in the United States. The business was incorporated prior to the year 1918. One corporation, known as the Philadelphia Pile Fabric Mills, manufactured plushes and imitation furs. Another corporation, known as the Philadelphia Tapestry Mills, manufactured upholstery fabrics for furniture and art objects. A subsidiary of the Philadelphia Tapestry Mills, the Art Loom Rug Mill, manufactured woven seamless rugs. During the year 1925 these three corporations were reorganized and consolidated as the Art Loom Corporation, the stock of which is now listed on the New York Stock Exchange.

The decedent, Issac Wasserman, had two sons, Herbert and Charles, whom he was anxious to have succeed him in the business, which he had spent most of his life in developing. The elder son, Herbert, ">*2428 shared his father's wishes in this respect and in due time came to be intrusted with the management of a branch office in New York City and part ownership in the business. The younger son, Charles, was of different bent. His was not the urge of industry and thrift. The tasks which his father set him amidst the dust and grime of the looms repelled him. Sports, automobiles, convivialities, were his chief interests in life. Upon the entry of the United States in the World War Charles left the mills and enlisted in the Navy. In 1919, after the close of the war, he returned to Philadelphia and his father again insisted that he go back into the business. It was proposed that he go to New York and work with his brother, Herbert, which he finally agreed to do.

In July, 1919, Isaac Wasserman, to stimulate Charles' interest in the business, gave him 50 shares of the 100 shares which he held of the stock of the Philadelphia Pile Fabric Mills. Previously, in 1915, he had given Herbert, the elder son, 100 shares of this stock. The 50 shares of stock were duly transferred to Charles on the stock record book of the corporation, and no question pertaining to its ownership has been raised">*2429 in this proceeding.

In August, 1919, Herbert Wasserman died.

On September 12, 1919, Isaac Wasserman surrendered his original certificate for 250 shares of stock of the Philadelphia Tapestry Mills and caused to be issued in lieu thereof, on the same date, one certificate to himself for 167 shares and one certificate to Charles Wasserman for 83 shares. Entries of such transactions appear on the stock ">*1216 book of the company. The certificate for 83 shares issued to Charles Wasserman was put in an envelope and placed in the company's vault. For fear that it might endanger the morale of the employees, many of whom had been with the company for a long time and had not been permitted to participate in its ownership, Isaac Wasserman did not want it to become known generally that the stock had been issued to Charles Wasserman.

It was the practice of the Philadelphia Tapestry Mills to credit all dividends declared by it direct to the "stockholders' account" in the bills payable ledger. Dividends were declared by the company during each of the years 1920 to 1922, inclusive, and the amounts thereof payable on 250 shares of stock were credited to Isaac Wasserman in the stockholders' ">*2430 account above referred to as follows:

1920	$50,000
December 28, 1921	57,500
January 19, 1922	12,000
April 26, 1922	44,000

The name of Charles Wasserman was not carried in the stockholders' account in the corporation ledgers during the years 1920 to 1922, inclusive. The 250 shares of stock on which the dividends above shown were paid were the same shares of stock originally held by Isaac Wasserman and included the 83 shares that were issued to Charles Wasserman in 1919.

In December, 1922, the Philadelphia Tapestry Mills declared a 2,400 per cent stock dividend and the proper number of additional shares was duly issued to all the stockholders. Isaac Wasserman received certificate No. 23 for 4,008 additional shares, representing a 2,400 per cent dividend on 167 shares, and Charles Wasserman received certificate No. 24 for 1,992 shares representing a 2,400 per cent dividend on 83 shares.

Charles Wasserman did not ever receive any part of the dividends paid by the Philadelphia Tapestry Mills in the year 1920. On March 20, 1922, Isaac Wasserman gave to Charles Wasserman his personal check for $19,166.66, which was the equivalent of one-third of the 1921">*2431 dividends on 250 shares of the Philadelphia Tapestry Mills stock. On June 14, 1922, he gave to Charles his personal check for $54,666.67, which was the equivalent of one-third of the 1922 dividends on 250 shares of the stock. Both of these checks were deposited by Charles in his own bank account at the Fidelity Trust Co. Thereafter, on or about June 15, 1922, Isaac Wasserman, after having talked with Charles Wasserman about investing the funds then in his, Charles', bank account, placed an order with the National City Co. for five $10,000 denomination Federal Farm Loan bonds. Thereafter, ">*1217 Isaac Wasserman and Charles Wasserman went together to the office of the National City Co. and secured the bonds, Charles Wasserman giving the said National City Co. his personal check for $50,281.25 in payment for said bonds, plus accrued interest. The check given by Charles Wasserman was drawn on the Fidelity Trust Co. and was paid out of a portion of the proceeds of the $54,666.67 received by check from Isaac Wasserman on June 14, 1922. The books and records of the National City Co. do not show any account in the name of Charles Wasserman during the years 1920 to 1922, inclusive.

">*2432 The above mentioned bonds, after being delivered to Isaac and Charles Wasserman, were presently placed in the former's safe-deposit box at the Fidelity Trust Co., where they remained up to the time of Isaac Wasserman's death. They were placed in Isaac Wasserman's safe-deposit box with the knowledge and consent of Charles Wasserman. The latter had a safe-deposit box of his own at the Fidelity Trust Co. at that time, in which he had other bonds, but it was not large enough to accommodate the additional Federal Farm Loan bonds.

In his tax return for the year 1920 Isaac Wasserman reported as his income the entire amount of the $50,000 of dividends received by him on the Philadelphia Tapestry Mills stock in that year. In his returns for 1921 and 1922 he reported as his income only two-thirds of the dividends received by him on the Philadelphia Tapestry Mills stock, and Charles Wasserman reported in his tax returns for those years one-third of such dividends, or the amounts of the checks given to him by Isaac Wasserman in those years as above shown.

Early in the year 1924 a revenue agent made an examination of Isaac Wasserman's tax returns for the years 1920, 1921, and 1922, ">*2433 and in his report recommended that the income reported in the returns filed by Isaac Wasserman for the years 1921 and 1922 be increased by the respective amounts of $19,166.67 and $54,666.67, which amounts had been reported in the returns of Charles Wasserman for those years. At the time the agent made the examination, Joseph Wasserman, president of the Philadelphia Tapestry Mills, who had custody of the company's books, was in Europe and the stock book showing the issuance of the 83 shares of stock to Charles Wasserman was not shown to him. In June, 1924, after the return of Joseph Wasserman, a conference was had at the office of the revenue agent in charge at Philadelphia, when the stock book referred to was produced, and thereafter the examining agent made another report, stating:

* * * At a hearing held in this office on June 14th, 1924, evidence was presented to show that these shares of stock were transferred to the taxpayer's son, Charles Wasserman, on Sept. 12th, 1919, and that these dividends were income to him accordingly.

">*1218 Thereafter, the respondent determined that the said amounts of $19,166.67 and $54,666.67 were the income of Charles Wasserman in the">*2434 years 1921 and 1922 and that one-third of the amount of the $50,000 dividend on the Philadelphia Tapestry Mills stock reported by Isaac Wasserman as his income in his return for 1920 was income of Charles Wasserman and should be included in his income for that year.

Isaac Wasserman died testate August 30, 1923. He left the bulk of his estate in trust during the life of his wife, the remainder to be divided among his three children, Charles and two daughters. Clause 4(e) of the will provided that upon the death of his wife there should be conveyed to his son, Charles:

* * * One-third of the principal or corpus of the said trust estate remaining after deducting the foregoing legacies and the value of my stock in the Philadelphia Tapestry Mills and the Philadelphia Pile Fabric Mills, the said value to be ascertained by taking the book value thereof as shown by the closing of the books of said corporations next preceding the date of my death, my son, Charles K. Wasserman, having the right to take on account of his said share any or all of the stock in either or both of the above named corporations which may then be a part of the trust estate at the book value thereof as shown at">*2435 the time of said closing of the books. (I make this deduction because my said son has already received his share of my investment in these stocks.)

Shortly after his father's death it was suggested to Charles Wasserman by his uncle, Samuel Jeitels, that he claim the Federal Farm Loan bonds then in his father's safe-deposit box at the Fidelity Trust Co. Charles replied that he would wait until the estate was straightened out and settled and would then claim the bonds. In the year 1926, after the estate had been settled, Charles requested the Fidelity Trust Co. to deliver the bonds to him, but was advised by the company that his request came too late; that the estate had been closed and that under the Pennsylvania law he could not then recover the bonds. Charles then consulted his own attorney, Owen J. Roberts, who advised him that he could not at that time recover the bonds. Thereafter, and up to the present time, all of the bonds have remained among the assets of Isaac Wasserman's estate.

On March 4, 1927, the petitioner herein, the Fidelity-Philadelphia Trust Co., executor of the estate of Isaac Wasserman, received notice from the respondent of a proposed additional assessment">*2436 on the income-tax return of Isaac Wasserman for the year 1922 in the amount of $26,884.77 which notice states in part as follows:

The evidence submitted with the Revenue Agent's supplemental report indicates that Isaac Wasserman received and enjoyed the full dividends on the 250 shares of stock of the Philadelphia Tapestry Mills and securities were puchased by Mr. Isaac Wasserman with part of the proceeds of these dividends. Mr. Isaac Wasserman's claim that one-third of the dividends belonged to Charles K. Wasserman has been disallowed, inasmuch as the evidence fails to substantiate this contention.

">*1219 OPINION.

SMITH: Primarily, the question at issue goes to the ownership of the dividends declared and paid in 1922 on the 83 shares of stock of the Philadelphia Tapestry Mills. The respondent contends that the dividends were the property of Isaac Wasserman and are taxable to him in the year when paid. The petitioner contends that they were the property of Charles Wasserman and were properly reported as his income in the year in question.

It is a well recognized rule of law that the dividends paid on stock of a corporation are the property of the legal owner of">*2437 the stock and are taxable as the income of such owner in the year when paid. In our opinion the facts set forth above clearly establish that Isaac Wasserman made a complete gift to Charles Wasserman of the 83 shares of stock of the Philadelphia Tapestry Mills in question during the year 1919, and that Charles Wasserman had absolute ownership of the stock at the time the dividends were paid in the year 1922.

Isaac Wasserman had worked for many years in building up an industry worthy of his pride. He realized that he was nearing the end of his career and, as was reasonable and natural, he wanted his sons to carry on his life work. The younger of his sons, Charles, had shown little inclination to gratify his father's wishes in this respect. He took no interest in the business and would work only at the insistence of his father. To add to the father's anxiety death deprived him of the solace of his elder son. Finally, despairing of sterner methods, he decided to try to gain Charles' interest by giving him a part ownership in the business. This he did by having issued to him a substantial part of his stock in each of the corporations. Large dividends were later paid on the Philadelphia">*2438 Tapestry Mills stock and these dividends for 1922, amounting to over $54,000, on the 83 shares of stock issued to Charles Wasserman, are the amounts here in controversy.

We think that they were clearly the income of Charles Wasserman and not the income of Isaac Wasserman. Under the laws of the State of Pennsylvania, the transfer of shares of stock upon the books of a corporation conveys legal title to the transferee. See ; . The fact that Isaac Wasserman caused the dividends on both his and Charles' stock to be paid to him, and that he later paid Charles his part by his personal check, is not controlling of the question of the ownership of the dividends. If the stock was Charles', as it unquestionably was, so were the dividends at and from the time they were declared and paid by the company. In the absence of any agreement to the contrary, ">*1220 there can be no question but that dividends paid on shares of stock constitute income to the legal owner of such stock.

The subsequent events, while no more than corroborative in effect, are not inconsistent with this view. It was no more than a reasonable">*2439 exercise of the duty that the father owed the son for Isaac Wasserman to advise and assist Charles, inexperienced as he was in business matters, in investing his money. The acts of the father in ordering the bonds in his own name and keeping them in his own safe-deposit box were done with the full knowledge and consent of the son. Nor do we believe that the fact that a substantial part of the dividends in question in the form of the Federal Farm Loan bonds finally found their way into the estate of Isaac Wasserman in any sense repudiates their prior ownership by Charles Wasserman.

It is our opinion that no additional tax is due from the petitioner for the taxable year before us.

Judgment will be entered for the petitioner.