113 F.2d 611 | 7th Cir. | 1940
This cause is presented by a petition of taxpayers to review the determination of an income tax deficiency. There are three companion petitions involving the same questions of fact and law. The four causes were consolidated for hearing before the Board of Tax Appeals and have been consolidated here on stipulation that the decision in this cause shall apply to, and be determinative of, the other three. In the course of this opinion petitioner and the three other individuals whose causes have been consolidated will be referred to as the Associates or the Taxpayer.
The transactions out of which the tax claims arose related to the affairs of the Checker Taxi Company, an Illinois corporation, which supervises the operation of a fleet of approximately 2,200 taxicabs in the City of Chicago. The Taxi Company stock was owned by the drivers of the cabs, although the stock certificates were retained in the possession of the company. For several years prior to 1931 a New Jersey corporation and its subsidiary, a Delaware corporation, had sought to gain control of the Taxi Company. These corporations were engaged in the manufacture of taxicabs and sought control of the Taxi Company in order to compel the drivers to buy cabs exclusively from them. The Checker Taxi Company did not furnish cabs to its drivers. The manufacturing corporations proposed to the Associates, who were in control of the affairs of the Taxi Company, that they assist the corporations in buying up the stock of the Taxi Company. As. compensation for their services the Associates were to receive one-half of. the stock purchased., The Associates accepted the proposition and as the stock was bought up new certificates were issued in the name of the president of one of the manufacturing corporations and one of the Associates named Roach. When more than one-half of the stock had been purchased the manufacturing corporations declined to purchase any more stock; and they, thereupon, informed the Associates that they wished -to have as many men on the board of directors as the Associates did. The Associates refused to resign or to procure resignation of other members or to disturb the existing management. The manufacturing corporations thereupon proposed that the Associates resign and also procure resignation of all other directors so that the manufacturing corporations could obtain complete control. The corporations offered to pay the Associates $400,000 for bringing about such change in the management.
The manufacturing corporations advised the Associates that in order to secure the $400,000 for payment to the Associates it would be necessary for the corporation to hypothecate two-thirds of the stock for a loan. The Associates refused permission to the corporations to use any part of the stock belonging to the Associates and the corporations then offered to buy all of the stock of the Associates for $437,500. The Associates agreed and the stock was hypothecated for the loan of $400,000 and when the corporations paid to the Associates that sum, the Associates expended $143,166.50 to secure resignations of other officers and employees. .
The $400,000 was paid in cash on May 14, 1931, and on the same day a written “memorandum of agreement” was executed between the parties, an escrow agreement was made, and certain notes representing the $437,500 for the purchase of the stock of the Associates were executed.
There were six promissory notes, without interest; these notes fell due at intervals of six months. The first five notes to fall due were each for the principal sum of $75,000 and the principal of the last one to fall due was $62,500. These notes, together with 23,100 shares of the Checker Taxi Company stock, were deposited under an escrow agreement which will be noted more in detail in the course of this opinion.
The first note for $75,000 of the series of six notes became due and payable in November, 1931. It was paid and the Associates included the payment in their 1931 returns. The seCond note for $75,000 which became due May 14, 1932, was not paid; and by the terms of the escrow agreement the total amount then remaining unpaid, namely $362,500, became due and payable. The Associates were unable to collect the unpaid notes and the escrowee failed to find a purchaser for the collateral stock.
The primary question presented by the taxpaj-er, and which, if decided in his favor, renders all other questions immaterial, is stated by taxpayer as follows: Were the five unpaid notes (representing $362,500 of the total sum of $437,500) which were deposited in escrow on May 14, 1931, income received by the petitioner and his three associate taxpayers in that year, within the meaning of Section 42 of the Revenue Act of 1928, 26 U.S.C.A.Int.Rev.Acts, page 363, Arts, 331 and 332 of Regulation 74?
It is petitioner’s contention that the notes were not received, in fact or law, in 1931; or if received, did not constitute income. Consequently, no income was received in 1931 on account of the notes, except the $75,000 which was received during 1931 in payment of the note which fell due during that year.
As a general proposition a promise to pay in the future is not treated as income of the promisee at the time of the receipt of the promise; and this is true even though the promise may be in the form of a written instrument. This is in harmony with the statements of the Supreme Court of the United States respecting the nature of “income.” That Court has referred to income as * * * a gain, a profit, something of exchangeable value * * * received * * * by =:= * * (taxpayer).”
In Pinellas Ice Co. v. Commissioner
“The ‘vendor’ agreed ‘to sell,’ and ‘the purchaser’ agreed ‘to purchase,’ certain described property for a definite sum of money. Part of this sum was paid in cash; for the balance the purchaser executed
In Schlemmer v. United States
“It [the note] did not change the substance of the debt — not being endorsed or secured — and although it was more readily disposable, that single incident was scarcely enough. There must be more than difference in the mere form of property to justify a charge of income. * * * But we need not stand on that; in any case since it was not taken as payment, it could not be treated as cash; the old debt remained, the note was no more than added security.”
Respondent stresses the decision of this Court in Commissioner v. Moir.
Do the unquestioned material facts relating to the use of the notes in question support a conclusion of law that the delivery of the notes to the escrowee in 1931 constituted a receipt of income in the amount of the face value of the notes ?
We understand that the decisions, which have held that the receipt of notes constitutes a receipt of income, rest ultimately upon the factual conclusion that for purposes of the payee, the notes are for all practical purposes equivalent to cash. In no practical sense can a promissory note be said to have cash equivalency for the payee if the payee cannot exercise a power of sale or, at least, the power to pledge the note as security for a loan. In the instant case the payee not only did not have actual control or custody of the notes, but under the escrow agreement he was without legal power to obtain possession of the notes or in any manner utilize them for business purposes. The notes were delivered by the makers to the escrowee at the same time that 23,100 shares of stock were delivered on behalf of the taxpayer-associates. It is clear from the escrow agreement that the escrowee represented both the vendors and the purchaser. Under the escrow arrangement he represented the makers of the notes in respect to the custody of the notes and was under a duty not to deliver the notes to the payees. He was required “to receive payment on each note as it became due and to deliver the proceeds thereof to the petitioners,” etc. As each note was paid the escrowee was required to deliver a proportionate part of the collateral stock to the vendee-maker of the notes.
Even in case of default in payment of the notes there is no provision for delivery of the notes to the payees. In case of default in payment of any one of the notes at its maturity date, and a continuance of default for a period of thirty days after a demand in writing, “each and all of said notes, would become due and payable.” In such case the escrowee was directed to sell the collateral “in behalf” of the Associates. The escrowee was “further directed to bid
We are of the opinion that by the terms of the escrow agreement the notes in question were merely formal evidences of the indebtedness of the makers; that they were not intended to he, and did not at any time become, available to the payees as an equivalent of cash in any practical business or commercial sense. They were merely part of the arrangement devised for the purpose of protecting the vendors and vendee by insuring that the vendee would obtain actual possession and control of that part of the collateral stock which, under the escrow agreement, was allocated to the notes which the vendee should pay; and to assure to the Associates the proceeds of all the notes which the vendee might pay, and in case of failure to pay any of the notes, to keep available for the Associates the chance of recouping from any collateral security which remained in the hands of the escrowee.
Under our construction of the escrow agreement the escrowee did not receive and hold the notes as the representative of the Associates hut as the representative of the maker. Consequently, the delivery of the notes to the escrowee did not constitute a receipt of the notes by the named payees. But even if the delivery constituted a technical receipt of the notes, such notes did_ not constitute income, within the meaning of income as that term has been defined by the United States Supreme Court.
The finding of facts, made by the Board require the conclusion of law that the delivery of the notes to the escrowee under the escrow agreement did not constitute a receipt of income by the petitioner for the taxable year of 1931. One of the notes for $75,000 matured during the taxable year of 1931 and was paid. This of course constituted income for the. taxable year of 1931, and was included in the taxpayer’s return. But it was error for the Board to hold that the remaining sum of $362,500 represented by the five unpaid notes should he treated as income received during the taxable year of 1931. To that extent the decision of the Board is reversed and the cause is remanded to the Board with instructions to re-compute the deficiency in the tax for the taxable year 1931 by excluding from income the $362,500 represent-er by the escrowed notes.
Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 193, 64 L.Ed. 521, 9 A.L.R. 1570.
“Tlie real question is, whether cash can he realized; has the equivalent of cash been received?” Paul & Mertens, Law of Federal Income Taxation, Sec. 10.05.
“If the taxpayer has the power to obtain the items in cash if he wishes it; if, by agreement, some of his monetary obligations aro discharged by a payment which does not como to him at all; or if he receives some form of commercial obligations regarded as the equivalent of cash, he has been held to bo in the receipt of income.” Magill, When is Income Realized, 46 Harvard Law Review 933-938.
287 U.S. 462, 53 S.Ct. 257, 259, 77 L.Ed. 428.
94 F.2d 77, 78.
7 Cir., 45 F.2d 356, 357.