Petitioner for ReHearing — Miller v. Commissioner (No. 675)

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_ Supreme Court of the United States

Octo BER Tern, 1957.

RAYMOND S MILLER and JOSEPHINE MILLER

and

FRANK NOWATZKE and LILLIAN NOW ATZKL f~

Pe titioners

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COMMISSION: OF INTERNAL “REVENUE,

Respondent,

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PETITION FOR REHEARING OF ORDER ON

PETITION FOR WRIT OF CERT:°RARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT. :

ES Se I

Joun J. Dion

One N. LaSalle Street

Chicago 2, Hhois

‘ ! Attorney for Petitioners

: INDEX

Statement ........0:. Sal a te ee cuca Gio Baca SC Red nprelaWN ac aaaN pa vmNea

Heasons for Grartinim Tie Ve Wit 6 cincsesccpuccirccsaccensnscossagesaes

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OnmOistOt Gace a eh os a cancel ack CAD GLRAIAIA

(‘ITATIONS. “Tt

Burke v: Dulaney, 103 U5. 234 .......i005... ie ieaad .

("ASES:

DeGuire v. Pires, 109 Fo 26 Fak tus. sepcsscaicc. acre

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Hulbert v. Commissioner, 227 F. 2d 399 ................

. SOMOS FREE ITRtO8, OO Ue sid ojeiscodanieansian.

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Lilly v. Haynes Co-op. Coal Mining Co., 00) N.D.

yi Map bs Sh BL ess | any ae eee eben siee Bele Sr ene Er ror seen fee

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Moore v. Commissioner, 124 F. 2d 991 ............ ne eB

Mumaw v. Western & Southern L. Ins. Co., 97

Ohio: 3. DE Bree Be ick See te ei uea

MelIsaac v. Hale, 104 Conn. 374, 132 Atl. 916 ....... -

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Nolan v. American Telephone & Telegraph Co.,

d26 LL App. 528, 61 Petes WET RT as ccs asevaneceaasnyonss pean

Northern Trust Co. of Chicago v. United States,

ee I o'er Gn alee: Gea ine ener re pepe tree Sve 1,8

Phelps v. Comntissioner, 247 F.2d 156. we

Shinsaku Nagano v. MeGrath, 1S, F.2d (98 .......0.0+.

TPeatord v. Commissioner, 246 F. 20673 ue.

Vermont Transit Ce. v. Commissioner, 218 F. 2d.

BGS ici SP aR een RTE NC rene Fea EON iy RM

Villeri v. Commissioner, 133 F. 2d 905. ................

Ware-v, cities, 128 US: Be0: wicca. ce Sah ee

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| iN THE

SUPREME COURT OF THE UNITED STATES

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Ocroper Term, 199%.

No. 675

a

RAYMOND S. MILLER and JOSEPHINE MILLER

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“

and

PRANK NOWATZKI and LILLIAN NOWATZIS1,

Petitioners,

us.

COMMISSIONER OF INTERNAL REVENUE,

. | Respondent.

a ee ee ee

PETITION FOR REHEARING OF ORDER ON PETI.

TION FOR WRIT OF CERTJORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT.

Rayinond S. Miller, losephine Maller, Krank Nowatzki

and Lillian Nowatzki, petitioners, filed herein their petition

for writ of cewioraii to the United States Court of Appeals

for the Seventh Cireuit. This petition was denied on Feb-

ruary 3, 190%. ¢

Petitioners new respectfully request rehearing of, the

order denying the pet-tion for certiorari on grounds of

cubstantial and controlling effect sét forth herein

e

. soutes A inias

ss STATEMENT.

The Tax Courf of the United States held a dividend

taxable as ordinary income to the seller of stock, since he

owned and controlled the shares at the time the dividend

was declared, and the dividend was made payable to and

paid to him (Joint Appendix, page 30). °

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in that opinion (Joint Appendix, page 40), Judge Tiet-

jens stated that the agreement for the sale of stock was

dated July 29, 1950; that the dividend was declared the

same day, made payable on August 4, 1950, out of the

earned surplus of the corporation, to the shareholder > of

reeftd on July 28, 1950.

That Court stated that the reasoning in cases cited was

helpful (Joint Appendix, page 43). Based on these deci-

sions, the Judge of the Tax 'Court found that there had

been no intention to make a transfer of ownership of the

stock prior to the declaration of the dividend: that the

seller executed an assigninent and transter of the shares

on August 4, 1950, bearing out that it was not intended

that ownership of shares be passed upon execution of

agreement of sale; that the parties did noi consider the

transacfion consummated at the time the agreement of sale

was executed because of the holding of the special meeting

Of the powcd of direttors of the Corporatio ty Give Coii-

seyy to the sale; and that Something more thaw the mere

execution of tge agreement was to be dane before the agree-

ment would become effective, there being a gprovision that

as a condition precedent to the agreement's heéoming

effective, the seller and the corporatien had to furnish

huvers with acertified balance sheet of the business as of

July O41, 1950. :

rom the Tax q ourt decision (Joint Appendin, pace +>).

Wwe ‘quote:

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“The inference we draw from the ciretimstances of the S

_ agreement {hat we have dwelt upon is that it was not the

intention of the parties that ownership of the stock in

question should pass upon exedution of the agreement and

that beneficial ownership was not in the buyers when, the

‘dividend was declared. In our view these cireumetances

point up the difference between this case and Moore vy.

Commissioner, supra. One ground for the Court’s decision

in Maore,es we have pointed out, was that at the time the

dividend was declared, the stock being: sold was completely

beyond the seller’s control and nothing further remained, ae

for her to do to divest herself of title to the shares. Here’

it is appdrent that Such was not the case? here the seller:

himself made a formal Assignment, of the shates: to the

buyers. six days after the agree ment was exee uted and the

dividend declared. The most plausible inference to be

drawn from this, we think, is that th® seller had ownerslip

and control of the shares when the dividend was declared ;

this being so, thexdividend that was apes pavable to

him (as record owner of the shares on July 28, 1950) and

that was actually -_ to him, should pipe oa he inc dase “d

in 4iis income in the year. received. .

‘The fact that fhe parties in one part of their agreement

included the dividend as part of the purchase price of the

shares does not necessarily alter the tay conseauences of

its payment. In andther part of the agreement it was pro--

vided ‘that the dividend in question was 10 be paid to the

seller and was to ‘apply on or reduce said sale price (ot

the stock) in such amount.’ This, we think, is the essence

of the transaction: — the corporation Had a substantial

earned surplus accumukition at the time; such surplus was

available to the thén stockholder (the seller): a dividend

from the surplus was declared on the same day that the

hoe

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agreement to sell Was entered inté a while tlie Be

“was still in control of the corporation; this dividend was

specifically made payable to stockholders of record the

day before the date of the agreement (again, the seller);

and the dividend was so pm, and according to the agree:

duent, the amount of the dividend reduced the sale pric of

the stock. On these iacts, the dividend was the seller's and

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was properly taxable to himn.

e ‘In addition to what has been said above in distinguish.

ing the case before us from those relied on hy the Se Her,

we point out that those cases involved sitnations where the

stock soid was either plac ‘ed in escrow or heli Fas collateral |

by thie seller until the purchase price, partot which was to

he paid from issih: subsequently declared and at a

time when the purchaser was in control of the stock, was?

paid. The dividends subsequently paid were held taxable

to the purchaser. ilere the dividend was deviared on the

: | » to the

person who owned the shares on the day priov to the date:

of the agreement. “he two situations call for different tax

same day as the sales agreement, made pawvabl

consequences.” '

Fr e &

Reference is made to the decision of the United States

Court of Appeals for-the Seventh Ciremt (Appendix, page

wn). In Which J udge Finnegan states’:

vhat the dividend was vaxable to the seller was the

chief contention of the Commissioner who, as he usserts

through his brief, ‘bemg charged with the dutw of collect-

ing the revenue is oecasionaliy required to take meonsist-

ent positions in order to conform vo his duty, Phe present

consolidated proceeding presents such a problem. The

(‘ommissioner believes the Tax Court was correct and

would not have appealed in the case of the buyers had not

aM hae

the seller filed a petition for review,’ In short, we are told

this ‘dividend was inexorably incom€ to sotheone.’ Accord-

ingly, the Comunissioner filed a protective appeal against

the buyers Raymond S. Miller, Josephine Miller, Fran’:

Nowatzki, Lillian Nowatzki when (Clarence W. and Emina

Miller took their appeals.” | «

o > e

Before the United States Court of Appeals for the

Seventh Circuit, the Brief for the Cammissioner contains

a statement as follows:

‘SA the time. of the dividend the seller had legal title to

the shares, his name was on the eorporate books as owner,

-and he possessed the power to vote, without limitation,

40,000 of the 46,700 shares outstanding of the corporation.

In addition, he was in full coatrol of the management and

policies of the corporation. Indeed, he had possession and

eantrol of the shares themselves. Moreover, at the time of

the dividend the seller had no right to sue for the purchase

price, and the buyers, under the contract, were under no

present obligation te pay the balance of the contract price.

The seller was also the party who was to bear any liabili

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ties arigmg from the’ownership of the shares.

this evidence the. Pax Court, following this Court's

the dividend taxable income to the seller, as the party in

possession of the legal title and beneficial ownership of the

shares at the time of the dividend.

“The Commissioner believes the decisions of the ‘Tax

Court were correct. The dividend, however, was income

to someone, “ec. either the seller or buyers of the shares. -

Therefore, if this Court should reverse the ‘Tax Court's

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decision against the seller, it should find in favor of the

Cominissioner on his protective appeal against the buvers®’

Propositions of law relied upon by the Coinmissioner in

said brief are as follows:

“1. There is no sale of shares of stock where there is

ro transfer of the shares on the books of the corporation

and no delivery of the shares to the puyery, and under the |

contract to sell the buyers are not ae a a the balance

of the purchase price,

| Shinsaku Nagano v. MeCrgth, U7 F.2d 753 CCL.

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Nolan ve American Telephone”

o2b TL Appesls, G1 NEL S76,

Telegraph Co.,

"2. A parte bound to perform a conditesn precedent

found in «a contract cannot sue on the contract without

proof that he hasspextormed the condition,

Burke vy. Dulaney, 105 US. 254.

Ware v. Allen, 128 US. 540.

Jénes vy. United States, 96 1S. 24.

“ Lilly ve Haynes Co-op. Coal Mining Co., 54 ND.

4695, 196 NW. 556. “:

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HMECLESUUC NV. LLC, LU A

“OEE. dd-te Lede cktd. S81.

Mumaw vy. Western d& Southern 1. Ins. Co. 97

Ohio 1, 119 N.BE. 132.

‘

ee’?

o. Where there exists an executory contract tor the

sale of shares of stoek, a dividend declared thereon is in-

come to the owner of dhe shares; the owner of the share-

for tax purposes is the party possessing the more substan:

tin] attributes of ownership at the time of the dividend.

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« Sree

Northern Trust Co. of Chicago v. United States,

193 BY 2d 127 (CLA. 7th), certiorari denied, 243

U.S. 956. |

Moore vy. Commissioner, 124, F. 2d 991 (CLAS 7th).

DeGiuire v. Higgins, P59 F. Od 921 C.A. 2d).

“4. The intenfion of the parties is the controlling factor

and such intent may be inferNd from the acacia a

agreement and from the surrounding circumstances.

Vermont Transit Co. v. Commissioner, 218 F. 2d

Z 41658 1 eS 2d). -

“OS. Among the circumstances to consider in a determi-

nation of which party possessed the more substantial attri-

butes of ownership in the shares at the time of the dividend

are:

The right to vote the stock; ‘

| The right of control over officers, polic iesg and manag

ment of the corporation; |

Whether or not the shares were out of the seller's con-

trol (ae., endorsed in blank and delivered to the buyer or

to an escrow agent on behalf of the buyer) during the time

of the dividend ;

Whether or not ‘the seller was hound by the contract to

eredit the dividend in satisfaction of the buyer's obligation

to pay the purchase price.

Northern Trust Co. af Chicada v. Unite | States

195 PL 2d 127 CCLA, 7th), certiorar: denied, 545

U.S. 906. , .

Moore v. Commissioner, 124 BF. 2d 991 (CLA. 7th).

Detiuire Vv. Higgs, 159 F. 2d 921 (CLA. 2d).

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“6. No single circumstance is controlling. The inei-

dence of tax falls upon the party who possesses the more

substantial attributes of ownership at the time of the

dividend. |

Hulbert v. Commissioner, 227 F. 2a 399 (CA. 7th).

Northern Tiusi Co. of Chicago v. United States,

193 F. 2d 127 (CLA. 7th) certiorari denied, 545

U.S. 956. |

Moore vy. Commissioner, 124 F. 2d 991 (CLA. 4th).

DeGuuire v. Higgins, 159 F. 2d 921 (C.A. 2d).

-The Commissioner in the argument in said briet states:

cee © The seller had full control of the stock, had the

right to vote the stock as he saw fit, and had control of

the management, policies and officers of the corporation ;

indeed, he had all this and legal title as well.”

In commeating upon the dividend, the Commissioner in

his brief concludes that July 28, 1950, ts the crucial date

and, after citing decisions, ruakes comments :

‘Indeed, under [llinois law the buyers here could not be

heard to sav that the dividend was theirs. Since the buyers

and the seller as well, agreed that the dividend be that of

shareholders of record as of July 2s, i950, neither couid

therefore, subsequently take a different position when it

appeared more favorable to do so,

Aside from this, even if the crucial date was July 29,

1850, the result would be the same, for the essential e:r-

cumstances remained the same.

Qn the matter of the condition precedent, the Comumis-

~joner in said brief states:

?

gy .

“Tt may do well to point out at this time that we here

arrive at a juncture between this case and cases like North-

ern Trust Co, of Chicago, Here the buyers were not bound

to pay the balance of the purchase price at the time of the

lividend.” 3 :

Again as. to whether seller or buvers received the divi-

dend, the Commissioner, in said brief, states:

To the extent that the earned surplus was represented

by cash not needed by the corporation for the future con-

duet of its business, it would have been senseless for the

buyers to pay value therefore in the form of additional

consideration for the shares of stock, and then to be taxed

with a dividend when the eash was withdrawn from the

corporation since, as we noted, the surplus represented

earnings created when the seller was in controi of the

corporztion. it was iiuch more realistic to do as the par-

ties evidently did, namely, have the surplus cash paid as

x dividend to the seller (whose efforts helped the corpora-

tion create the earnings) and thereby reduce the value of

the shares and the purchase price to be paid by the buyers.

The provisions of thevagreement and the surrounding cir-

cumstances reinforce the conelusion that this is what the

lans that +)

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parties pURtE THC Tis deh iS 5S what they cli 2

saree

et nhike cases like Northern Trust Co. of Chicago and

DeGuire, here we have an agreement whieh makes. the

application of the dividend in reduction of the purchase

price depend wholly upen the depletion of assets of the

corporauion in the form of a dividend, ete., fo the sellers”

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In commentinggupon Villers v. Commessioner, Too FE. 2d

O05 (CLA. 3th! the Commissioner, ii, said brief, states:

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“Ft would, likewise, be necessary to overcome the gen

eral rale that the one who controls the source of ineome j

taxable on the income though the income is ¢iven to an

other under an existing contract.”

‘

In summary of the argument im said brief, the Camus

sioner states:

Here, at the time of Che dividend the: seller POSSESS

all the rights attributable to the ownership of stock, a

well as the liabilities that ownership of stock brings. More

over, it was the seller who, in addition, received the eco

nome benefit of the dividend. Tle received in return al

the essential rights previously noted, and retained the

right to the continucd remipt of his salary as presiden

of the corporation, The dividend checks were his to dis

pose of as he saw fit.

“The inescapable conclusion ino this case is that the

vreater number of attributes of ownership, at the time o

the dividend, were in the seller. Vhat is, comparing bene

fitial rights we cannot avoid the conclusion that of the

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two, it was the seller who had many inore as to the share:

than the buvers. It would seem he had all.”

REASONS FOR GRANTING THE WRIT.

1. Confusion has arisen under the decisions involving

beneficial ownership of stock at the tiie of declaration of

dividends and this Court showd clarify the position fo:

the Commissioner and for taxpayers.

=

» There is contliet between this decision on whieh writ

of eertiorari is requested and decisions of the United

States Supreme Court and of tfie Lnited States Court of!

Appeals in other cireuits, as shown in the Brief of the

Commissioner fied in the Umited States Court of Appeals

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for the Seventh Cireuit (a) in that there had been no sale

“of shares, no transfer of shares, no delivery of shares and

no obligation on buyers to pay the balanee of the purchas-

price at the time of the declaration of the dividend: (+)

in that the party bound te perfomn the condition preceden

found in the contract could not sue on the contract without

proof that he had performned the condition: (¢) in that it

disregards heldings that the party to be taxed shall he the

party possessing the more substantial attributes of owner.

ship at the time: antl ¢d) in that it does not seek to estal

lish the intention of the parties as provided) hy decisions.

o Noe consideration is given to the condition precedent,

Which is in confiet with many decisions of the United

States Supreme Court. That a condition precedent should

be considered hias been recomnized by the Seventh Cireuit.

In the case of John NK. Teajord v. Commisstoner, 246 F.2d

73 (7th Cir), the appeal presented the qnestion of when

a sale transaction was considered consummated for tax

purposes, Agreement for eale of the partnership interes’

provided **The partnership * * * shall eentinue until th.

First National Bank in St. Louis, Missouri, shall in it

uncontrolled discretion consent to the dissolution of the

partnership, or until all ef the indebtedness of said part

nership tes Said Kirst National Bank in St) Lais. shall

have been paid.” In that case. Judge Finnegan Stated

“From the documents of record and the testimony i

clearly appears that the sale date was postponed tuntil th

Bank consented * *

3. The decision is m conthet with the general rule that

me

the one who controls the soureé of imeorme is taxable oy

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that imeome, even tifouch the tneonmfe as assigned te an

other, as the Commissioner points out in his Brief Tiled

the Circuit Court of Appeal-. The seller withdrew th:

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anon oS Pe NP rats : ca

rps: Of Tie corporeanon tUltretotore earned end he

. evga lie ia x¢ ‘] ess re yee *

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8 Tae seller of stock may gereive a divgeend i@thibr

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b t Msp? ty oy) creyy “* en + i; i “F Nee ‘ “4

Man a Capita. pain. CA decision of the tmited States Court

Appeals (tie (ir. Phelps vo Commixsioner, 247 F. 2d

; Mt, enocermmed. 2 sitflation ec eeihee related automobile,

agency cOrooratigns having “a trmst as as are ek ler adopi

ae pian, whereby the tr ust viabagee he elimina MA by haviny

ch corporation redeown spares of the trust and alsa re

deem shares held hy foitind mache alin order

“to eomppty Ay ith a manuf’ neturer’s policy, All compo¥ations

had had snecessful operations and had paid no djvidends,

Yet, at the ti me of the distributiogs in redemption, the

accu nulate de earnings and prefits oY each cor poration were

Hi ONCOESS of, the total amount dist:Muted. dt was held ‘hat

the distribution was equivalent to distribution cf-taxable

dividends, for federal income tax purpcses.

| Spee ee ~ : ,

“ CONCLUSION. \

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[tis cespectigiiv requested that this Honorable Court

\ revonsider petition Tor writ of certiorari, .

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JOHN J. Dirtos *

One North taSalle Street

Chie: yO a Minot ;

Attor ney for Peiitions Ps

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‘CERTIFICATE. -

hie er Om oped

i certifies that-this petition Js presented

in good faith and not for delay. It is restriej4d to the rule

soverning gigunds specified: on petition for Yehearing.

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Joun J. Dito >

| One North LaSalle Street

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v Chicago 2, Hlinois a

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