Docket Nos. 36661, 36793-36797, 36799, 36800, 36805, 36807, 37042, 37758. | B.T.A. | Mar 27, 1934
Lead Opinion
OPINION.
The Commissioner determined deficiencies in income taxes of the respective petitioners for the year 1923 as follows:
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The proceedings have been consolidated. The parties have stipulated most of the facts, although the testimony of several witnesses and certain documentary evidence also were introduced. Some of the issues raised by the pleadings are disposed of by the agreed facts and require no discussion. The principal question remaining for consideration is whether, under the provisions of section 202 of the Eevenue Act of 1921, any gain shall be recognized on an exchange by the petitioners in 1923 of common stock of the Bassick Co. for cash, bonds, and promissory notes in amounts admitted to be the equivalent of
Edgar W. Bassick (hereinafter referred to as Bassick) and the other petitioners were in 1922 and 1923 holders of common stock of the Bassick Co. Its outstanding capital stock consisted of $1,274,000 of preferred stock and 30,364 common shares, each having a par value of $100. The common shares owned by the petitioners had a basis of cost to them of $90 per share, except that 118 of the shares owned by Bassick had a total cost basis to him of $4,580. In 1922 and 1923 the Bassick Manufacturing Co. had outstanding capital stock consisting of 15,000 common no par value shares. The Bassick Co. owned 10,000 and D. F. Fessler and C. I. Overton owned 5,000 of these shares. In 1922 Bassick entered into negotiations with the Central Securities Co. (hereinafter referred to as the bankers) for the organization of a new corporation to acquire the 5,000 shares of Bassick Manufacturing Co. stock owned by Fessler and Overton and not less than 90 percent of the common shares of the Bassick Co. They agreed that the new corporation should acquire the 5,000 shares of the Bassick Manufacturing Co. from' the bankers, who were to purchase them from Fessler and Overton, and that it should acquire the shares of the Bassick Co. from or through the efforts of Bassick, at a price of $131.75 per share, payable at the option of the Bassick Co. stockholders either all in cash, or one half in cash and one half in no par value common stock of the new corporation at $20 per share, which stock was to be stamped, or otherwise made subject to an agreement that it could not be marketed except through the bankers for a limited period, and with certain price restrictions, the details of which were later to be definitely fixed. Bassick procured from the holders of 95 percent of the common stock of the Bassick Co., including these petitioners, agreements to transfer their shares to the new corporation at a price of $131.75 per share, in which they indicated their preference for payment in cash in full, or one half in cash and one half in stock. He also procured for the bankers an option to purchase the 5,000 shares of the Bassick Manufacturing Co. Thereafter, on January 27, 1923, Bassick and the bankers entered into a contract in which they agreed: (1) That Bassick should organize a corporation in Delaware with an authorized capital stock consisting of preferred stock of the par value of $5,000,000, and 200,000 shares of common stock without par value;
On February 7, 1923, Bassick organized the Bassick-Alemite Corporation (hereinafter referred to as the Alemite Co.) under the laws of Delaware, with an authorized capital stock consisting of preferred shares of the par value of $5,000,000, and 200,000 common shares without par value. On February 13, 1923, the Alemite Co. was authorized by its directors and stockholders to enter into a contract with Bassick for the acquisition from him and the other owners of 30,358 shares of the common stock of the Bassick Co. in
On February 14, 1923, Bassick, on. behalf of himself and other stockholders of the Alemite Co., entered into an agreement with the bankers and the Central Trust Co., whereby, in consideration of the purchase by the bankers from Bassick and such stockholders of certain shares of Alemite stock, the latter agreed to deposit certificates for 32,499 other shares of said stock issued in their names with the Central Trust Co., to be held by the latter as trustee for the term of the agreement, so that the said shares should not be sold, offered for sale, or otherwise placed on the market.
The agreement provided that the trustee should issue and deliver to each stockholder or depositor receipts or certificates for the aggregate number of shares of Alemite stock belonging to him, in the following form, and that each person, by his acceptance of such receipt, should be bound by the agreement.
No.- Shares-
BasSICK-ALHMITE CORPORATION
Receipt for Common Stock deposited under agreement of February 14, 1923.
The undersigned hereby certifies that it has received from---a certificate or certificates representing_shares, without any nominal or par value, of the common capital stock of BassIck-Axemite Corporation, which said certificate or certificates are deposited with the undersigned under the provisions of an agreement with respect to said certificates, dated February 14, 1923, executed by and between the undersigned and E. W. Bassick, for and on behalf of himself and other depositors, and Central Securities Company, to which reference is hereby made, and which is hereby made a part hereof as'*168 Cully as .though set forth at length. The said certificates so deposited are by the terms of said agreement deliverable, upon the surrender of this receipt, to said_or his legal representatives on January 1, 1924, or on such earlier date as may be fixed by the Central Securities Company, one' of the parties to said agreement; it being hereby agreed and understood that'neither this receipt nor the common stock certificate or certificates represented hereby, nor the right to receive said common stock certificate or certificates under the provisions of. said agreement, nor any right or interest therein, or in respect thereto, shall be assignable except by operation of law.
Dated
Central Tbust Company of Illinois
By
Assistant Secretary.
The agreement provided that on January 1,1924, or on such earlier date as might be fixed by the bankers, the stock certificates should be delivered to the depositors or their legal representatives upon surrender of the receipts; and it contained the following provision:
* » * It is expressly understood and agreed that such receipts so issued, as aforesaid, shall inure only to (.he benefit of the respective Depositors and (heir legal representatives, it being especially understood and agreed that no Depositor shall have any right to assign said common stock, certificates, or any interest therein, or his right to receive the same under the provisions of this agreement, and that all rights therein or in respect thereto shall be assignable only by operation of law.
As part of the marketing program for the stock to be acquired by them, the bankers had, on December 23,1922, entered into a syndicate agreement with certain individuals providing for the sale by the bankers to the syndicate of so many of the shares of Alemite stock to be acquired by the bankers (not exceeding 125,000) as the aggregate amount of subscriptions would purchase at $20 per share, and that the syndicate managers, at any time prior to January 10, 1924, could sell all or any part of the stock received under the agreement at any price not under $20 per share.
On February 14, 1923, Bassick, individually, and the bankers entered into a “ stock trust agreement ” which provided for the assignment and transfer to certain individuals, as trustees, of 100,001 shares of the common stock of the Alemite Co., which stock was to be held and voted by the trustees until termination of the trust on February 1, 1928, or such earlier date as might be set by the trustees or other designated persons. The agreement provided that the trustees should issue to persons designated by Bassick and the bankers “ stock trust certificates” setting forth the number of shares.of stock to which the holder would be entitled at the expiration of the agreement, and that, upon its expiration and surrender of the certificates, the trustees should deliver corresponding certificates for shares of
Bassick-Alemite Corpobation
Number Shares
Common Stock Trust Certificate issued under Agreement dated February 1, 1023
This is to certify that on the first day of February, 1928 (or on such earlier date as the Trust Agreement hereinafter mentioned shall be terminated), -will be entitled to receive a certificate or certificates for_ fully paid shares, without any nominal or par value, of the common capital stock of Bassick-Alemite Corporation, and in the meantime to receive payments equal to the cash dividends, if any, collected by the undersigned Trustees or their successors upon a like number of shares of such stock standing upon the books of said Company in the names of said Trustees or their successors (less expenses, if any, incurred by said Trustees under the Trust Agreement hereinafter referred to) : and until after the actual delivery of such stock certificates the said Trustees and their successors shall possess and shall be entitled to exercise all rights of every name and nature in respect of such stock, including the right to vote for any purpose and to consent to any corporate act, it being expressly stipulated that no voting right passes by or under this certificate or by or under any agreement, express or implied. For any stock dividends received by said Trustees or their successors the holder hereof shall receive a stock trust certificate similar in form to this stock trust certificate for his proportionate share thereof. This certificate is issued under and pursuant to the terms of a certain Trust Agreement of date February 1, 1923, entered into by and between Joseph E. Otis, E. W. Bassick and Fred W. Shibley, as Trustees, of the first part, and certain other subscribers to said Agreement, of the second part, a counterpart of which Trust Agreement is lodged with the undersigned agent of said Trustees.
The trust created by said Trust Agreement expires on the first day of February, 1928, or on such earlier date as may be fixed in the manner provided in said Trust Agreement. This certificate is transferable only on the books of the undersigned Trustees by the registered holder, either in person or by attorney duly authorized, according to the rules established for that purpose by said Trustees, and on surrender hereof, and until so transferred the Trustees may treat the registered holder as the owner hereof for all purposes whatsoever, except that delivery of stock certificates hereunder shall not be made without surrender hereof.
Pursuant to agreements authorized by the Alemite Co..on February 13, 1923, Bassick delivered to that company all of the common stock of the Bassick Co. and received therefor 147,500 shares of its' common stock and its notes of the par value of $1,250,000. On February 14, 1923, he deposited the stock and notes so received with the Central Trust Co. with instructions to deliver the notes to the bankers and receive from them United States bonds of the market value of $1,050,000; to deliver 65,000 shares of Alemite stock to the bankers and to collect from them $400,000 in cash and their notes
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The bankers acquired the 5,000 shares of the Bassick Manufacturing Co. at a cost of approximately $701,000, and, pursuant to contracts made on February 15, 1923, the Alemite Co. issued 52,500 of its common shares to the bankers in exchange for the 5,000 shares of the Bassick Manufacturing Co., upon condition that the bankers deposit 50,000 of the Alemite shares under the stock trust agreement of February 14, 1923. All of the foregoing transactions were concluded on or about February 17, 1923. The parties stipulated at the hearing that the notes of the bankers and the Government bonds received were the equivalent of cash.
The petitioners reported no gain from the transaction in their returns for 1923. The Commissioner determined that the petitioners received Alemite stock having a readily realizable market value of $20 per share and computed a profit on the basis of the difference between the amount of cash, bonds, notes, and stock received, and the basis of the Bassick Co. stock ($50 and $55 per share; and $4,580 for 118 of the shares owned by Bassick), and, as the profit so computed exceeded the amount of the cash, bonds, and notes received by each of the petitioners, he determined the taxable gain to be only so much of the profit as was not in excess of the amount of the cash, bonds, and notes received. Sec. 202 (e), Revenue Act of 1921, as amended March 4, 1923.
If the hypothesis, that an exchange by the Bassick group was a separate and independent transaction and that the 147,500 shares and $1,250,000 in notes were received tax-free, were accepted as correct, it would not necessarily establish that the petitioners realized no taxable gain on this transaction in 1923. After acquiring such shares and notes, the Bassick group sold 65,000 shares for $1,300,000 and exchanged the notes for $1,050,000 of bonds. What part of the 65,000 shares and notes was owned and disposed of by each of the respective petitioners is not shown by the record. If the petitioners’ contention were correct, it would merely show that the Commissioner’s method was incorrect, but the record would still fail to show that the deficiencies determined by the Commissioner were incorrect or what the correct deficiencies on this theory would be. F. G. Bishoff, 6 B.T.A. 570" court="B.T.A." date_filed="1927-03-22" href="https://app.midpage.ai/document/bishoff-v-commissioner-4499805?utm_source=webapp" opinion_id="4499805">6 B.T.A. 570; aff'd., 27 Fed. (2d) 91; Louis Friedman, 21 B.T.A. 38" court="B.T.A." date_filed="1930-10-14" href="https://app.midpage.ai/document/friedman-v-commissioner-4491424?utm_source=webapp" opinion_id="4491424">21 B.T.A. 38; Lake Charles Naval Stores, 25 B.T.A. 173" court="B.T.A." date_filed="1932-01-14" href="https://app.midpage.ai/document/lake-charles-naval-stores-v-commissioner-4492368?utm_source=webapp" opinion_id="4492368">25 B.T.A. 173; Saxman Coal & Coke Co. v. Commissioner, 43 Fed. (2d) 556.
The petitioners contend next that the certificates of deposit and the voting trust certificates had no readily realizable market value. The respondent replies that they had a readily realizable market
However, we need not decide that there was no reorganization. The respondent now agrees that the Bassick stock had a cost basis of $90 instead of $50 and $55. A recomputation of the profit on the basis of a corrected cost of $90 and a readily realizable market value of $20 per share for the Alemite stock received in the case of each petitioner, will result in a profit not in excess of the amount of cash, bonds, and notes received, and the gain to be taxed will be the same whether it be computed as in the case of an ordinary exchange, or under the provisions of section 202 (e) on the theory that there was a reorganization.
The petitioners claim that the certificates of deposit and voting trust certificates had no readily realizable market value. They do
The experts testified, however, that the certificates of deposit and the voting trust certificates had no readily realizable market value. They stated that their conclusions were unaffected by the fact that unrestricted stock of the Alemite Co. was being sold on the Chicago Stock Exchange. It might be noted in this connection that the com
These witnesses had had wide experience in stock market operations and in the purchase and sale of stocks. However, they had no actual knowledge of the certificates in question, of the stock represented by them, or of the assets and financial condition of the Alemite Co. Upon a mere reading of a copy of a certificate of deposit they stated that under no circumstances could there be a market or a readily realizable market value for such certificates, because by their very terms they could not be transferred without the consent of the bankers. They also testified that the voting trust certificates had no market value and no readily realizable market value, because a market would have to be created for them, and, while an “ over-the-counter ” market might be created, the expense, time, and uncertainty involved in such an operation, and the arbitrage between the unrestricted stock and the voting trust certificates, would militate against any efforts to create one. These certificates, unlike the certificates of deposit, bore no restrictions upon alienation and by their terms were transferable. They represented an interest in stock which was assigned to trustees to protect the note holders and assure to the bankers control of the Alemite Co. for five years. The trustees during that period enjoyed voting power and all the incidents of ownership, except the right to part of the cash dividends, which were to be paid to the certificate holders. The latter had the right to receive corresponding stock certificates at the expiration of the trust period. This right was at least a right or privilege that is a constituent of ownership which may be taxed to the extent of its value. Burnet v. Wells, 289 U.S. 670" court="SCOTUS" date_filed="1933-05-29" href="https://app.midpage.ai/document/burnet-v-wells-102117?utm_source=webapp" opinion_id="102117">289 U.S. 670; Tex-Penn Oil Co., 28 B.T.A.
Fair market value or readily realizable market value does not necessarily imply that there must be a market on a public exchange. Lyle H. Olson, 24 B.T.A. 702" court="B.T.A." date_filed="1931-11-10" href="https://app.midpage.ai/document/olson-v-commissioner-4492237?utm_source=webapp" opinion_id="4492237">24 B.T.A. 702. Whether a security has a readily realizable market value is a question of fact to be determined from all of the circumstances, Herbert W. Eldredge, 18 B.T.A. 194" court="B.T.A." date_filed="1929-11-12" href="https://app.midpage.ai/document/eldredge-v-commissioner-4489984?utm_source=webapp" opinion_id="4489984">18 B.T.A. 194; and in order to have such value it must be practically the equivalent of cash and capable of easy and prompt realization, Alexander D. Falck, 26 B.T.A. 1859; Edwin W. Eisendrath, 28 B.T.A. 744" court="B.T.A." date_filed="1933-07-26" href="https://app.midpage.ai/document/eisendrath-v-commissioner-4493213?utm_source=webapp" opinion_id="4493213">28 B.T.A. 744; Fesler v. Commissioner, 38 Fed. (2d) 155. The opinions of witnesses on questions of value are to be judged in accordance with the reasoning which is disclosed, H. H. Blumenthal, 21 B.T.A. 901" court="B.T.A." date_filed="1930-12-26" href="https://app.midpage.ai/document/blumenthal-v-commissioner-4491538?utm_source=webapp" opinion_id="4491538">21 B.T.A. 901; and we are not bound to accept them if they are contrary to our best judgment. Joseph S. Wells Assn., 28 B.T.A. 271" court="B.T.A." date_filed="1933-06-06" href="https://app.midpage.ai/document/joseph-s-wells-asso-v-commissioner-4493124?utm_source=webapp" opinion_id="4493124">28 B.T.A. 271, 275; Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893; certiorari denied, 286 U.S. 545" court="SCOTUS" date_filed="1932-04-18" href="https://app.midpage.ai/document/uncasville-mfg-co-v-commissioner-8148992?utm_source=webapp" opinion_id="8148992">286 U.S. 545. The testimony is predicated entirely on considerations which we regarded as insufficient to establish absence of a fair market value in the Henritze case. Furthermore, we find in this record other evidence which in our opinion not only overcomes the conclusions of these witnesses but corroborates the correctness of the respondent’s determination. In the very transaction which gives rise to this controversy the parties thereto dealt with the certificates of deposit and the voting trust certificates as the equivalent of cash to the extent of $20 for each share represented. The Bassick stockholders sold their stock for $131.75 per share, with the option of receiving payment in cash or one half in cash and one half in Alemite stock at $20 per share subject to the provisions of the trust agreements. The total purchase price amounted to $4,000,000, of which $2,350,000 was paid in cash or its equivalent and $1,650,000 in Alemite stock at $20. While the cash was not sufficient to pay all in cash, in the actual distribution some of the stockholders received one half in cash and one half in certificates, some received more than one half in cash and the remainder in certificates, and others received all cash. The amounts distributed to all stockholders is not in evidence, but the stipulation discloses that at least three of the stockholders, not petitioners here, received $131,750 in cash for 1,000 shares. Also, in the contract between the Alemite Co. and Bassick for the acquisition of 30,358 shares of the Bassick Co., the Alemite Co. agreed to accept from Bassick $131.75 per share for each of 604 Bassick shares not delivered, either in cash or in common stock of the Alemite Co. at $20 per share. All the parties knew
There remains only the issue as to the gain taxable in 1923 to petitioner Wilbur F. Burns upon the sale in that year of 3,208 Alemite shares represented by certificates of deposit received in the distribution to the Bassick stockholders. It is stipulated that they were sold to the bankers for $102,656, under a contract dated April 19, 1923, providing for payment of $2,656 in cash upon execution of the contract, and five payments of $20,000 each at stated times in 1924; and that Burns received payment in accordance with the contract. In determining the deficiency the respondent computed a profit on the sale in the amount of $53,956 and included that amount in the income of Burns for 1923. The respondent now concedes that the sale was an installment sale and that, by reason of the retroactive provisions of section 1208 of the Revenue Act of 1926, Burns is entitled to return the profit on the installment basis. The profit should therefore be recomputed on the basis of $20 per share in accordance with section 212 (d).
In connection with the sale in 1923 by Bassick of 2,407 Alemite shares to employees at $20, the parties have stipulated that practically all of the proceeds, or $48,140, was-received by Bassick in 1923, and that, if the transaction affects his personal return, that amount may be considered as having been received in 1923. In determining the deficiency the respondent diminished the cost basis of these shares by the excess of the profit not to be reported on the exchange of his Bassick stock (computed on a basis of $50), and arrived at a cost basis for the Alemite shares of $16.6546, and a resulting profit of $8,052.38, which was included in the return. As the use of the corrected basis of $90 for the Bassick stock and a value of $20 for the Alemite stock received will result in a tax on the entire profit from the first exchange, the basis of the shares sold to employees is $20, and there was no gain from this transaction.
Reviewed by the Board.
Decision will be entered, under Rule 50.
Sec. 202 (e). * * * when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.