Comm'r of Internal Revenue

Tax Court of the United States.Oct 13, 1952
19 T.C. 29 (U.S.T.C. 1952)

Docket No. 34073.



Sidney Gelfand and Bernard Weiss, Esq., for the petitioner. Robert R. Blasi, Esq., for the respondent.

Sidney Gelfand and Bernard Weiss, Esq., for the petitioner. Robert R. Blasi, Esq., for the respondent.

Dividend declared and made payable in 1946 by a corporation of which petitioner and another were stockholders but, at petitioner's request, discriminatory, withheld from his possession until the following year, held constructively received by him in the prior year. Avery v. Commissioner, 292 U.S. 210, distinguished.

Respondent determined a deficiency of $18,886.95 in petitioner's income tax liability for 1946. The sole issue presented is whether a dividend declared and made payable in 1946 but received through the mails in 1947 was ‘constructively received‘ by petitioner in 1946 so as to be includible in his gross income for the earlier year.

Some of the facts have been stipulated.


The stipulated facts are hereby found.

Petitioner is an individual who resides in Garden City, Long Island, New York. He maintains his principal office in the Empire State Building, 350 Fifth Avenue, New York City. He filed his Federal income tax return for the year 1946 with the collector of internal revenue for the third district of New York. His tax returns are filed on the cash receipts and disbursement basis.

Frank W. Kunze Company, Inc., was incorporated under the laws of the State of New York on January 23, 1946. Its offices are also located in the Empire State Building. Its issued and outstanding common stock as of December 31, 1946, totaled $100,000 in face amount, of which petitioner owned 50 per cent. The other 50 per cent of the common stock, as well as all of its preferred stock, totaling $150,000 in face amount, was owned by United Merchants and Manufacturers, Inc., a New York corporation with offices at 1412 Broadway, New York City. In 1946, Jacob M. Schwab was president of United Merchants and Manufacturers, Inc., and L. L. Smith was assistant treasurer.

Officers of Frank W. Kunze Company, Inc., on December 31, 1946, were petitioner, president, A. Harry Feldman, treasurer, and Merwin R. Haskel, secretary. They were also directors of the corporation. Feldman and Haskel were also officers of United Merchants and Manufacturers, Inc., and each was president of one of the latter's wholly owned subsidiaries. Checks of Frank W. Kunze Company, Inc., required the signature of any one of its own officers, or that of Schwab or Smith. For Frank W. Kunze Company, Inc., to borrow money from banks, to discount notes, or to issue letters of credit, signatures of two officers or authorized persons were required.

On December 23, 1946, Frank W. Kunze Company, Inc., declared a dividend of $50,000 on its common stock payable December 31, 1946. Two dividend checks of $25,000 each were drawn to the order of the petitioner and United Merchants and Manufacturers, Inc., respectively. Each was signed by A. Harry Feldman, treasurer of the corporation, at the offices of United Merchants and Manufacturers, Inc., during the afternoon of December 31, 1946. Petitioner had left his New York office and gone home about noon of that day. His dividend check was mailed to his home late that afternoon before the close of business. The check was in fact received by petitioner in 1947.

Dividends paid on the common stock of Frank W. Kunze Company, Inc., on June 22, 1949, and June 28, 1951, were also signed by Feldman.

The 1946 dividend was voted by petitioner and Feldman, as directors of the corporation. The delivery of the 1946 dividend check was handled differently for the other stockholder. The other $25,000 check was delivered by hand to the cashier of United Merchants and Manufacturers, Inc., on December 31, 1946. That check was deposited for collection by the payee and paid on the same day. If petitioner had so desired, he could have received his dividend check from Frank W. Kunz Company, Inc., on that day. The only reason that it was mailed to him was because of his specific request that the corporation mail the check and his refusal to accept delivery by any other method, rather than because of any fixed corporate policy which required the corporation to mail all dividends to each of its stockholders, without exception.

Petitioner's dividend was credited to him on December 31, 1946, and on that date it was unconditionally available to him; it was within his power and control and unqualifiedly subject to his demand. The Frank W. Kunze Company considered the entire dividend paid as of that date.

The $25,000 dividend was constructively received by petitioner on December 31, 1946, but was not included in his taxable income reported for the year 1946.


OPPER, Judge:

Ross v. Commissioner (C.A. 1), 169 F.2d 483, which has come to be a leading authority in the presently relevant field of constructive receipt (see, e.g., Hyland v. Commissioner (C.A. 2), 175 F.2d 422) declares:

The doctrine of constructive receipt was, no doubt, conceived by the Treasury in order to prevent a taxpayer from choosing the year in which to return income merely by choosing the year in which to reduce it to possession. Thereby the Treasury may subject income to taxation when the only thing preventing its reduction to possession is the volition of the taxpayer.

Reduced to its simplest terms, petitioner's present argument is that since he, as a director of the declaring corporation, stipulated that he, as a stockholder, was to receive the dividend check set apart for him only through the mail, he as a taxpayer need not report it in his income for the year in which it was made payable. Avery v. Commissioner, 292 U.S. 210, and other cases succeeding it are relied on for the proposition that the policy of the declaring corporation in this respect is controlling.

Accepting as settled that such a restriction adopted by the declaring corporation is generally valid and effective, and even that it may be resorted to by the interested stockholder of a closely held corporation, see, e.g., Hyland v. Commissioner, supra, the necessity is to distinguish between the act of the corporation there involved and that of petitioner as an individual, be it as stockholder or taxpayer.

Even there the court was at pains to note that there was no evidence that the stockholder could sign checks, while this petitioner could.

There is no formal record of the corporate act in declaring the dividend. We do know that petitioner's fellow stockholder— the only other one— not only received its check but banked and collected it before the end of the year in controversy. The most that can be said, then, is that if petitioner's check were to be withheld from him as a result of the corporate action and intention, it would have been a discriminatory act as between him and the other stockholder. This would be illegal and voidable by him as a stockholder under the applicable state law. See, e.g., Godley v. Crandall & Godley Co. (N.Y.), 105 N.E. 818; In re Associated Gas & Electric Co. (C.A. 2), 137 F.2d 607.

That the stockholder's acquiescence may estop him to contest corporate action of which he had prior knowledge, see Richmond Hill Realty Co. v. East Richmond Hill Land Co., 285 N.Y.S. 424, cannot effectively alter this conclusion. Even though the stockholder's knowledge was obtained in his capacity as director, the refusal of the state courts to differentiate between the individual in his several capacities in dealing with the corporate action requires that we do no less. See Blair v. Commissioner, 300 U.S. 5.

It was only the petitioner's own ‘volition‘ which thus stood between him and the receipt and collection of his check. Its availability to him, legally and actually, cannot seriously be questioned. Cf. Charles F. Kahler, 18 T.C. 31. And the corporate intent, upon which the Avery case is bottomed, cannot on this record be shown to interfere except upon some thesis of illegality and discrimination which we cannot properly presume.

See Ross v. Commissioner, supra; Regulations 111, section 29.42-2.

Decision will be entered for the respondent.