Lambert v. Commissioner

VICTOR A. LAMBERT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Lambert v. Commissioner

Docket No. 37974.

United States Board of Tax Appeals 20 B.T.A. 443 ; 1930 BTA LEXIS 2124 ; July 31, 1930 , Promulgated *2124 Certain payments made by one stockholder (petitioner) to another stockholder of the same corporation held not to be deductible in determining the income taxable to the petitioner.

Joseph R. Little, Esq., for the petitioner.

John D. Kiley, Esq., for the respondent.

SEAWELL *443 This proceeding involves a deficiency in income tax as determined by the Commissioner for 1923 in the amount of $860.85. Two errors were assigned in the petition, but at the hearing the error with respect to certain entertainment expenses was abandoned. This leaves as the only issue before us the question of whether a certain amount received by the petitioner from the corporation of which he was a stockholder and paid over by him to another stockholder of the same corporation is taxable to the petitioner.

FINDINGS OF FACT.

The petitioner is an individual with his place of residence in New York City, and is an officer and stockholder in Lambert Brothers, Jewelers, Inc.

*444 Prior to the formation of the aforementioned corporation, the business now carried on by it was conducted by a partnership under the name of Lambert Brothers. The names of the *2125 partners and their interests in the partnership were as follows: Per cent August V. Lambert 51 Robert Lissauer 29 Harry Lissauer 20

In 1920, or prior thereto, negotiations and plans were started looking to the formation of a corporation as a continuation of the business then being carried on by the partnership, but which would have Victor A. Lambert, petitioner herein, and son of August V. Lambert mentioned above, as a stockholder in addition to the then members of the partnership. After extended negotiations a contract was entered into on July 30, 1920, to which the partners and petitioner were parties and under which the corporation, Lambert Brothers, Jewelers, Inc., was formed on or about February 1, 1921. With certain limitations not here material it was agreed, under the foregoing contract, that the entire good will, trade names, and leases of the partnership should become the exclusive property of August V. Lambert, with the right on his part to dispose of the same to any member of his immediate family for such consideration as he might desire. The agreement recited that of $1,000,000 in capital stock which was to be issued by the corporation payment *2126 therefor would be made as follows:

One-half or $500,000 (5,000 shares) to members of the partnership on the basis of their then existing interests in the partnership in consideration for their transfer and assignment to the corporation of their respective interests in the partnership as follows: Per cent Shares August V. Lambert 51 2,550 Robert Lissauer 29 1,450 Harry Lissauer 20 1,000 Total 5,000

One-fourth or $250,000 (2,500 shares) to Victor A. Lambert (petitioner) in consideration for his transfer and assignment to the corporation of the good will, trade name and leases of the partnership.

And one-fourth or $250,000 (2,500 shares) to be paid for in cash as follows: Shares August V. Lambert 1,000 Robert Lissauer 500 Harry Lissauer 500 Victor A. Lambert 500 *445 It was then provided that, after the issuance of the stock in the manner provided above, Victor A. Lambert (petitioner) would transfer, assign and set over stock to the members of the partnership as follows: Shares August V. Lambert 450 Robert Lissauer 50 Harry Lissauer 500

The foregoing agreements were carried out and the *2127 stockholdings were accordingly as follows: Per cent Shares August V. Lambert 40 4,000 Robert Lissauer 20 2,000 Harry Lissauer 20 2,000 Victor A. Lambert 20 2,000 Total 10,000

The contract contained a further provision to the effect that a voting trust should be established for a period of five years, to which the stockholders would transfer their stock and receive therefrom voting trust certificates. This provision was likewise carried out.

The contract also provided that:

The party of the fourth part [Victor A. Lambert] agrees that he will pay over and unto the party of the second part [Robert Lissauer] on or before April 1st in each year, beginning April 1st, 1922 and ending April 1st, 1926, an amount equal to the net earnings of four hundred and fifty (450) shares of the capital stock of said corporation in the preceding fiscal year, said net earnings to be computed before declaration of and payment of dividends and the payment of taxes; provided, however, that the total amount of officers' salaries to be deducted for the purpose of arriving at net earnings under the provisions of this paragraph shall be the sum of Forty thousand *2128 ($40,000) Dollars per annum.

A further agreement was entered into between Robert Lissauer and petitioner on October 4, 1920, to the effect that in the event of the death of Robert Lissauer prior to the expiration of the five-year period referred to above the provisions of the agreement of July 30, 1920, with respect to payments by petitioner to Robert Lissauer should become null, void and of no effect nine months after the death of the said Robert Lissauer.

Of the amount received by petitioner in 1923 on account of the voting trust certificates then held by him, petitioner paid to Robert Lissauer $7,257.63 under the agreement of July 30, 1920, referred to above. In preparing his return for 1923 petitioner reported the entire amount received under the voting trust certificates as dividends *446 and then claimed a deduction on account of the amount paid to Robert Lissauer, which deduction was disallowed by the Commissioner.

OPINION.

SEAWELL: In effect what the petitioner here contends is that when amounts were received by him under his voting trust certificates, such amount thereof as he was required to pay over to Robert Lissauer under the contract referred to in *2129 our findings was not taxable to him, but was taxable to Robert Lissauer. On a consideration of the entire record, including the evidence offered in explanation of the inducements leading up to the contract, we are unable to sustain the petitioner's contention. What, in effect, occurred was that a contract was entered into and carried out through which the petitioner (son of the partner who had a controlling interest in the partnership) was permitted to become a stockholder in a corporation which was organized to succeed the partnership. After the corporation was organized and the stock issued, we find that one partner had the same interest in the corporation that he had in the partnership, but that the interests of the petitioner's father and the other partner were decreased 11 per cent and 9 per cent, respectively, and that the petitioner then had an interest of 20 per cent. A provision in the contract under which the petitioner came into the corporation was that for a period of five years the petitioner would pay to the partner whose interest was decreased 9 per cent an amount equal to 4 1/2 per cent of the net earnings of the corporation, such net earnings to be computed before *2130 the declaration and payment of dividends and the payment of taxes. The record is silent as to any relationship, by blood or otherwise, between the partner to whom the payments were to be made and the petitioner. While the contract states that stock was to be issued to the petitioner on account of a paying in on his part of the good will of the partnership, little significance can be attached to this feature, for the reason that the petitioner was not a member of the partnership and was unable to state how he came to own such good will. A reasonable interpretation of the entire situation would seem to be that the partner whose interest in the business was decreased required that some payment be made to him on account of this reduction and that what the petitioner was doing through the payments in question was nothing more than making payments on account of his becoming a stockholder in the corporation.

That the payments were not made to the corporation would not seem to be material. The corporation was not a party to the contract in question and, as far as the corporation was concerned, whatever *447 dividends were declared by the corporation on the stock issued to petitioner *2131 were payable to him. There is nothing in the record to show that the total amounts received by the petitioner from the corporation and reported by him on his return were other than dividends declared and paid in the usual manner. What the petitioner asks is that a deduction be allowed from these amounts because petitioner was required under a contract to make certain payments to another stockholder. We fail to see justification either for excluding any amount from the dividends as received, or for allowing a deduction on account of the payments made. In fact, under the contract, it would seem that the declaration and payment of dividends by the corporation to the petitioner are not necessary before an obligation arises on the part of the petitioner to make the payments in question. What the petitioner was required to pay each year was an amount equal to the net earnings on 450 shares of stock, computed before the declaration and payment of dividends and before the payment of taxes. Ordinarily, such an amount would certainly not be the same as annual dividend payments. If payments should be made in excess of dividends or when no dividends were paid, it would hardly be contended *2132 that the amount paid when not received as a dividend constitutes an allowable deduction, and we think the same reasoning requires the disallowance of a deduction on account of any amount thus paid. The case of , on which petitioner relies, involves an entirely different situation, the decision as to which we do not consider decisive of the issue here presented.

Judgment will be entered for the respondent.