Le Blanc v. Commissioner

¡Smith,

dissenting: The facts in this case are simple and undisputed. Stewart A. LeBlanc, son of the petitioner, had been instrumental in creating Mobile Liners, Inc., a Louisiana corporation, for the purpose of conducting a steamship agency at Mobile, Ala. The son had acted as manager of the corporation at Mobile and had been responsible for the company being made the agent of the British Ministry of Shipping for all foreign ships going to Mobile. The son owned only 1 share of the capital stock and his father 24 shares out of a total of 50 shares. The son was receiving a salary of $5,000. He requested his father to sell him his 24 shares in order that he might receive the just rewards of his labor. The father did not wish to part with the legal ownership of the shares but agreed that his son should receive the usufruct of his shares so long as he should remain as manager of the company at Mobile. This agreement was entered into in 1917 and was faithfully carried out. The petitioner in pursuance of the agreement directed Mobile Liners, Inc., to pay over to Stewart A. LeBlanc all of the dividends accruing to him upon his shares of stock. Stewart A. LeBlanc received the dividends direct from the corporation and the petitioner neither received them nor had any ownership of them during the taxable years. The son returned them as a part of his income in his income-tax returns and paid income tax upon them. The father, not having received them and not having any ownership of them, did not return them as a part of his income.

The contract by which the petitioner parted with his interest in the dividends declared was made in New Orleans and was a Louisiana contract and subject to the provisions of the Louisiana law. The Civil Code of Louisiana expressly recognizes the usufruct of property as a property right transferable and otherwise possessing the attributes of distinct property. The code defines a usufruct as:

The right of enjoying a thing, the property of which is vested in another, and to draw from the same all the profit, utility, and advantages which it may produce, provided it be without altering the substance of the thing. (Art. 533.)

The code also contains the following provisions regarding usufructs:

Abt. 535. Perfect usufruct does not transfer to the usufructuary the ownership of the things subject to the unufruct * * *.

Abt. 537. Usufruct is an incorporeal thing because it consists in a right.

Abt. 540. Usufruct may be established by all sorts of titles; by a deed of sale, by a marriage contract, by donation, compromise, exchange, last will, and even by operation of law. * * *

Abt. 541. Usufruct may be established on every description of estates, movable or immovable, corporeal and incorporeal.

Art. 542. Usufruct may be established simply, or to take place at a certain day, or under condition; in a word, under all such modifications as the person who gives such a right may be pleased to annex to it.

*262 Art. 544. All kinds of fruits, natural, cultivated or civil, produced, during the existence of the usufruct, by tbe things subject to it, being to the usu-fructuary.

Art. 545. * * * Civil fruits are rents of real property, tlie interest of money and annuities.

All other kinds of revenue or income derived from property by the operation of the law or private agreement, are civil fruits.

Art. 2477. The tradition or delivery is the transferring of the thing sold into the power and possession of the buyer.

Art. 2481. The tradition of incorporeal rights is to be made either by the delivery of the titles and of the act of transfer, or by the use made by the purchaser, with the consent of the seller.

I dissent from the decision of the Board that the income from the shares of stock standing in the petitioner’s name during the years 1918,1919, and 1920 was income of the petitioner. The decision of the Board proceeds upon the theory that the petitioner had income from the dividends payable upon his shares of stock by reason of the fact that he was the owner of the stock. This, however, is not a proper basis for determining whether the petitioner is liable to income tax in respect of dividends. The criterion laid down by the statute is whether a person derives income from dividends. (Sec. 213(a), Revenue Act of 1918.) As was stated by the Supreme Court in Eisner v. Macomber, 252 U. S. 189 :

* * * A gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital however invested or employed, and coming in, being “ derived ”, — that is, received or drawn try the recipient (the taxpayer) for his separate use, benefit and disposal ;• — that is income derived from property. Nothing else answers the description.

It is not enough that wealth flows from a person’s property in order that he shall be liable to income tax in respect of it. It must be received or drawn by him for his separate use, benefit, and disposal before the tax will attach. The gain or profit must be to the individual charged with tax — not to another.

The principle announced by the Supreme Court in Irwin v. Gavit, 268 U. S. 161 , is applicable here. In that case it was stated:

The Courts below went on the ground that the gift to the plaintiff was a bequest and carried no interest in the corpus of the fund. We do not regard those considerations as conclusivo, as we have said, but if it were material a gift of the income of a fund orddnarily is treated t>y equity as creating an interest in the fund. Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it. The fund is appropriated to the production of the same result whichever form the gift takes. Neither are we troubled by the question where to draw the line. That is the question in pretty much everything worth arguing in the law. (Italics ours.)

*263 Looking to the substance and not merely to the form it is evident that the petitioner derived no income from the dividends paid on his shares of stock in Mobile Liners, Inc., during the years 1918, 1919, and 1920.

I furthermore heartily dissent from the decision of the Board to the effect that Alfred LeBlanc may deduct from his gross income as an ordinary and necessary expense the amount of the dividends paid on his shares of stock by Mobile Liners, Inc., directly to Stewart A. LeBlanc. The statute permits an individual to deduct from his gross income, among other things:

All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *. (Sec. 214(a) (1), Revenue Act of 1018.)

The petitioner was the representative of the Harrison Steamship Lines in Hew Orleans. He was their agent in that city. He also was the agent for certain other steamship companies. He was not, however, the agent of any steamship line in Mobile. The steamship agency in Mobile was owned by Mobile Liners, Inc. That corporation was created for the purpose of acting as such agent. The petitioner was at most a stockholder in that corporation. To hold that the petitioner may deduct from his gross income as a business expense the dividends upon his shares of stock in Mobile Liners, Inc., does violence to the very provisions of the statute. If the dividends on that stock are to be included in the petitioner’s gross income he should be required to pay income tax upon them. There is no provision of the statute which permits the deduction of them from his gross income. In my opinion the statute should not be given a strained and unnatural construction merely for the purpose of reaching a substantially equitable result in the case at bar.