Schneider v. Commissioner

1926 BTA LEXIS 2528 | B.T.A. | 1926

Lead Opinion

OPINION.

Marquette:

The decision in these appeals rests upon the construction which must be given to the contracts, which are identical in terms, entered into between the respective taxpayers on the one part and Seidenberg & Co. on the other part. The taxpayers insist that, under the terms and intent thereof, they each became the owner of 1,500 shares of the capital stock of the American Cigar Co. in 1916, when the said contracts were executed, and that the value of said shares was income to them at that time. They further contend that the dividends payable and paid to them under the terms of the contracts constituted dividends as to them, as distinguished from compensation for their services. The Commissioner held that under the contracts the respective taxpayers each became the owner of 300 shares of said stock in each of the years in question which was income to them in the years of its receipt to the extent of its fair market value, and that dividends received by them on undelivered stock constituted compensation and were not dividends within the meaning of the statute.

In the construction of a contract, the primary object is to ascertain the intention of the parties as expressed therein, and the problem is not what separate parts or clauses mean but what the parties intended by the contract when considered as an entirety, for the separate parts of a contract have but little weight when compared with the contract taken as a whole. O’Brien v. Miller, 168 U. S. 281; United States v. Utah, Nevada & California Stage Co., 199 U. S. 414. And it follows that one part of a contract may affect the construction of a different part; in other words, the general intent controls special intent. A. Leschen & Sons Rope Co. v. Mayflower G. M. & R. Co., 173 Fed. 855; 35 L. R. A. (N. S.) 1. In the light of these rules of construction, we must ascertain what the parties intended by their agreement.

The evidence discloses that for some years prior to 1916 the taxpayers had been employed by Seidenberg & Co., a subsidiary of the American Cigar Co., and that at that time they were each vice presidents in both corporations. They determined to sever their connection with these corporations and to engage in competitive business on their own account. This intention was communicated to the president of the corporation, who was told by them that their determination would be carried out unless the corporation saw fit to give them $150,000 each. Negotiations were carried on between the parties which culminated in the contract of March 1, 1916.

The contract provided for the services of the taxpayers for a period of five years, they to be continued in no lesser official positions, without reduction of regular salary, and with like bonuses as other vice presidents, for which they agreed to give their services and to cooperate with the officers of the corporations to the best interests of the business. The second clause of the contract gives rise to the contentions hereinabove set forth. The opening sentence thereof is as follows:

As an inducement to the foregoing covenant by party of the second part, and in lieu of additional salary to him for said five years’ service * * * party of the first part hereby conditionally assigns to party of the second part an equitable ownership in fifteen hundred (1,500) shares of the common stock of American Cigar Co. * * * this to be equitably acquired by party of the first part.

The conditions of these equitable assignments were that the taxpayers were entitled to receive and enjoy all thereof and to have the dividends declared thereon. On March 1 of each year, commencing with the year 1917, there was to be transferred and delivered to each of them one-fifth of the 1,500 shares until certificates for the whole 1,500 shares were delivered, and death or a breach of the obligation entered into excused further deliveries. Deliveries of stock were to be absolute but, in case of death or breach of obligation, the right of the taxpayers to further dividends on the undelivered stock was to cease and the equitable assignment as to the undelivered stock would become null and void. The obligation of the corporation to pay dividends to the taxpayers on the undelivered stock extended to any distributions of money, property, stock, or rights pertaining to the common stock, and applied to all stock undelivered at the time the rights accrued. The clause concludes as follows:

The right preserved to party of the first part to decline to make further deliveries upon the voluntary and definite refusal of party of the second part to carry out his obligation set forth in the next preceding paragraph hereof, is intended only as collateral security to party of the first part, and is by no means intended to permit or authorize party of the second part to disregard the obligation set out in the next preceding paragraph hereof, with only the penalty of thereby forfeiting his right to the then undelivered stock.

What did the parties intend by these provisions of the contract? To us it seems clear that, in exchange for their services and their agreement to remain with the cprporation for five years, they were each to receive 1,500 shares of stock of the American Cigar Co., payable one-fifth each year, and that in the meantime they were to have the beneficial ownership during that period of the undelivered stock; that is, they had the right to all dividends and other increment of the undelivered stock, provided they did not die or breach the agreement, and, as to these rights, the conditions of the contract constituted conditions subsequent, while, with relation to the delivery of the stock, they constituted conditions precedent. Performance of the agreements was the quid, pro quo to the delivery of the absolute title to the stock, for the contract provides by its own terms that death or a breach should excuse further deliveries. The right to receive dividends or other increment of the stock is an incident of stock ownership — but is there any doubt that an owner of stock may, by agreement, separate this incident from his ownership and vest it in another without thereby making that other a stockholder ? We think not; and as we view this contract that is exactly what was intended. Seidenberg & Co. had acquired an . equitable interest in the stock and this equitable interest was transferred to the taxpayers with the further agreement on the part of the company to transfer to each of them the title to 300 shares each year as the agreement was performed. Until the stock was delivered to them, they had no title thereto and there was a possibility that through death or breach of agreement they would never acquire title. Nor do we think the fact that the right reserved to the company to decline to make further deliveries in case of breach was intended as collateral security changes the intent of the agreement. This clause was undoubtedly inserted for the benefit of Seidenberg & Co. and was intended to prevent the taxpayers from breaching the agreement with no penalty other than to excuse further deliveries of stock.

Upon consideration of the entire agreement, we are of opinion that the taxpayers became owners of the stock of the American Cigar Co. only as the stock was delivered to them each year, and that, as to the undelivered stock, they were not stockholders of the American Cigar Co. in respect thereof. Appeal of Roscoe H. Aldrich, 3 B. T. A. 911. This construction of the agreement conforms with the practical construction placed thereon by the parties themselves, for in making their returns the taxpayers returned as income in each year the shares received by them, and we think this fact is entitled to considerable weight.

Were the dividends declared on the undelivered stock dividends to the taxpayers, or did they constitute income in the nature of compensation? We have held that as to the undelivered stock the taxpayers were not stockholders of the American Cigar Co. Section 201 (a) of the Revenue Acts of 1918 and 1921 defines a dividend as “ any distribution made by a corporation * * * to its shareholders or members * * * out of its earnings or profits * * We held in Appeal of Roscoe H. Aldrich, supra, that a distribution to one other than a stockholder did not constitute the distribution a dividend as to him, and that in such circumstance it was subject to both the normal and surtax rates. That ruling is controlling here and has the further support of the agreement itself, wherein it is provided that the payments are to be “ in lieu of ” additional compensation. The amounts received by the taxpayers from dividends declared on undelivered stock constituted income to them subject to the normal tax and were not taxable as dividends.

The taxpayers have alleged error on the part of the Commissioner in his determination of the market value of the stock received under the contracts. No evidence was offered at the hearing bearing on the question of the fair market value of the stock in the respective years under consideration. The values thereof, as determined by the Commissioner, must stand.