*1 593, 18 S. Ct. County, 170 U. S. Mercer 1156; Quinlan v. Green L. Ed. Ct. County, 205 U. S. City of New York D’Esterre v. L. Ed. Dillon F. II, (5th Corp. Ed.) vol. Munic. below is affirmed. judgment OF
BOTHWELL v. COMMISSIONER REVENUE.
INTERNAL
DARBY v. SAME. 1146, 1147. Nos. Appeals, Tenth
Circuit Court Circuit. April 10, 1935. Goodner, Geo. E. H. of Washington, D.
C.,
petitioners.
Asst,
Carlos, Sp.
Helen R.
Atty.
to the
Wideman,
(Frank
Gen.
Atty. Gen.,
Asst.
J.
Asst,
Key, Sp.
Gen.,
and Sewall
Atty.
brief),
for the United States.
PHILLIPS,
Before
McDERMOTT, and
Judges.
Circuit
PHILLIPS,
Judge.
Corporation,
The Brazos Oil
hereinafter
called the
corporation,
organ-
ized in 1918with
an authorized
shares.
shares of such
stock were issued and outstanding on June
28, 1922. It owned all of
Corporation,
Brazos River Oil
hereinafter
called the subsidiary.
corporations
The two
prospered,
had not
and in 1922 their officials
approached Darby,
experienced
and suc-
operator,
cess ful oil
with a
to inducing
view
accept
him
management
corporations. Darby
unwilling
corporations
assume
acquire
without an
a substantial
parent corporation,
block of the stock of the
position
in order that he
be in a
share in
benefits which would inure to
management,
it be successful.
Negotiations
Darby resulted in the
execution concur-
*2
declared,
quired
one
before dividends could be
June.28,1922,
on
rently of two contracts
$500,000.
Darby
The reduction
was increased to
corporation and
parent
the
between
of the
to
$2.56
sub-
the
him and
and"the other
sidiary.1
figure
the latter
share was made because
nearly represented
the
the value of
corporation
parent
The contract with
June,
stock-in
gen-
its
serve as
Darby should
provided thát
At
years
original
the time'the
contracts
with-
of five
manager for a term
eral
made, group owning
majority
of
corporation
parent
salary, and that
out
outstanding
parent corporation
stock of the
into a
subsidiary to enter
would cause
agreement
voting
creating
entered into an
general
its
Darby to
act
contract with
years.
agree-
trust for a term of five
salary
term at
the same
manager also for
trustees,
voting
of
five
$12,000 year.
of
Darby
two,
which
Bothwell
Darby should
That
provided:
It further
that
vote
con-
should be valid unless
181,000shares
the'option
curred in
of the
four-fifths
trustees.
corpora-
parent
capital
of the
of the
During
1924,inclusive,
1922to
30, 1927, at
prior
tion at
June
the
by
profits,
earned no net
Direc-
share,
of
its Board
which
$2.56
prospering
weré
and the stock
the fair value
tors
determined
had
parent corporation
of the
selling for
26,
that in the
of
stock on
June
$8.00
about
a share.
personal repre-
his
Darby’s
death
event
December, 1927,
within
might
Darby
exercise
and Bothwell
sentative
three months
thereafter,
as-
options
and that
exercised their
purchased
op-
Darby’s might
$2.00
stock at
9,943
Darby
share.
sold
signee of
thereafter;
$138,818.28,
shares at a net
five months
tion within
that,
181,000
exception of.
and Bothwell sold
prof-
shares at a net
with
$100,180.
might be is-
it of
shares,
which
shares
Individual income
tax
upon the recommendation
employees
prepared
turns
1928were
sued to
for Darby and
ap-
manager
Darby
with
general
Bothwell
accountants and filed. It was
Directors, no stock
stated in
proval of the Board
such returns that the stocks sold
be issued were
should
and the
corporation
profits
above
option, and
capital gains subject
expiration
to a
prior
un-
be distributed
provisions
12já%
should
tax of
under the
sec-
791,
no dividends
future
$300,000
accumulated
tion
811,
of 1928
had
til
exer-
been
option had
2101).
until
earnings or
cised.
The commissioner -heldthat in éach case
subsidiary provid-
with
ordinary
gain, subject
the
the normal tax and
to both
as its
serve
Darby should
surtax,
proposed
an
salary
annual
years at
for five
manager
Darby
$17,-
against
additional assessment
$12,000.
465.14,
$10,141.89.
against
Bothwell of
negligence penalty
proposed
A
was also
had been
Prior
June
based
to re-
the oil busi-
failure
Bothwell
associated
acquisition
date
assistance
Bothwell’s
desired
ness,
stock.
of such
m the
em-
should
Bothwell
agreed
petition
Each
filed a
for redetermination
subsidi-
ployed
Appeals.
with the Board of Tax
Bothwell’s
in-
annually. To
$10,000
salary of
ary
petition
by’s February
at
filed
October
and Dar-
accept this
duce
Darby agreed
1931. Both
share
profits
that the
derived from the fore-
40,000 shares.
option to
going
transactions were
gains, and
therefore not
to normal tax and sur-
into
entered
supplemental
tax.
employ-
terms of
on March
Both-
Amended
extended
ment were
June
$12,000year-
and Bothwell
set
November
well’s
out, first,
stock was reduced
option price on
ly, the
sales
surplus re-
second,
reserve
and the
stock was
if it was
York,
respectively,
shortly
of New
of the two
after
.names
changed
Corpo
contracts Were
Petroleum
executed.
Corporation
ration and
Petroleum
not,
quoting
127 N. E.
of it was
West v. Blake
way, 2
Man. &
the cost
G.
751. Sometimes
services and
value resulting disability
the fair market
has been
computed
characterized
December, 1927,
Nei- as
share.
sometimes
as a waiver.
*3
part
any
Enough
present
label counts for little.
for
Darby nor Bothwell
ther
services, purposes
disability
compensation for
has its
of the stock as
roots
principle
nearly
a
1927.
ultimate than either
his tax return for
principle
waiver or
that no one
commissioner,
answers to
permitted
found
claim
petitions,
up
such amended
inequity
advantage
his own
or take
of his
estopped
making
Bothwell were
and
Tull,
wrong.
Realty
Imperator
own
Co. v.
claim,
their fail-
because of
the alternative
supra.
may
A suit
not be built on an omis
report
part
the stock value as
ure
sion induced
him who sues.”
services,
compensation for
in their returns
negligence penalty of
Askin &
for 1927. A
Marine Co. v. Commissioner
(C.
against Darby.
2)
776, 778,
A.
(2d)
asserted
C.
66 F.
also
the court
said:
the contentions of
board sustained
“While
commissioner must
commissioner,
investi-
neg-
also asserted the
gate
satisfy
returns
himself of their cor-
ligence penalty against Darby.
law,
may
rectness
fact and
and Bothwell now concede
expense
not
govern-
benefit at the
reporting
erred in
the income as
oath;
by misrepresenting
facts under
gain, but assert that the difference between by succeeding
having
the commissioner
option price
and the fair market value accept
representations
truth;
as the
it,
they acquired
stock at the time
by claiming
later
that what it
was a reward for their services.
con
found
false had
holding
tend the board erred in
the commissioner refused to
faith
determining
cost basis for
gain
or loss
Liberty
sworn return. Commissioner v.
transactions,
option price
was the
(C.
Bank Trust
A.)
&
Co.
C.