Baumer v. United States

Erwin G. Baumer (the father) (plaintiff) was the sole shareholder of Seven Eighty-Eight Greenwood Avenue Corporation (the corporation). In 1966 the corporation purchased a plot of residential property (the property) for $175,000. Erwin H. Baumer (the son) was given a one-year option to purchase a one-half interest in the property for $88,000 plus interest. The son was given the option based on a moral obligation the father felt he owed the son after the son pursued a business opportunity that the father discouraged. Later that year, the corporation purchased an adjacent piece of property for $25,000. In January 1967, the son’s option was amended to give him the right to purchase a one-half interest in both properties for $100,000 plus interest. The consideration for the son’s new option contract was $10. In January 1967, Pope & Carter Company, Inc. (Pope) was given an option to purchase the properties for $500,000. In December 1968, the son exercised his option and purchased a one-half interest in both properties for approximately $115,000. Later that month, Pope exercised its option to purchase both properties. At the close of the sale, the son received $252,700 for his one-half interest in the properties. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined that when the son exercised his option in 1968, the father received a constructive dividend. The district court held that the option was a constructive dividend and relied on Pope’s exercise price to determine the value of the dividend. The father appealed.