Case Name: Benedict Crowell, Petitioner, v. Commissioner of Internal Revenue, Respondent; Bascom Little, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Board of Tax Appeals
Jurisdiction: United States
Decision Date: 1930-12-22
Citations: 21 B.T.A. 849
Docket Number: Docket Nos. 38333, 38334
Parties: Benedict Crowell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bascom Little, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Love agrees with this dissent.
Reporter: Reports of the United States Board of Tax Appeals
Volume: 21
Pages: 849–859

Head Matter:
Benedict Crowell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bascom Little, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket Nos. 38333, 38334.
Promulgated December 22, 1930.
I. W. Sharp, Esq., for the petitioners.
Arthur Garnduf, Esq., and A. E. Giesy, Esq., for the respondent.

Opinion:
OPINION.
Smith:
The deficiency notices to the petitioners upon which the petitions are based advised the petitioners that there was being added to the gross income reported by each petitioner $6,000, being the par value of the shares of stock received by them as additional compensation in 1923, since "it is held that the fact that the stock was closely held, and apparently no effort was made to dispose of same at any value, does not prove conclusively that it had no readily realizable market value." The petitioners have sought by these proceedings to prove that the shares of stock received by them in 1923 had no " readily realizable " market value. It is the position of counsel for the petitioners that if the stock had no readily realizable market value in 1923, the petitioners received no income from that source.
At the hearing of these proceedings counsel1 for the petitioners stated:
The only issue in these cases is with reference to $6,000 par value of stock of the Crowell & Little Construction Company received by each of these taxpayers in the year 1928, which they did not regard as taxable income and did not return as income in that year, but which the Commissioner of Internal Revenue has insisted constituted income of $6,000 and he has, therefore, added $6,000 to the income reported by each of them in their returns for the year 1923 and computed an additional tax accordingly.
In his opening statement counsel for the respondent stated, in part:
So, the sole issue before your Honor is a question of fact as to whether this $6,000 par value worth of stock should or should not be included in the taxable income of the petitioners.
The real question in issue in these proceedings is not whether the shares of stock received by the petitioners had a readily realizable market value in 1923, but whether the petitioners derived any income from the receipt of the shares of stock as additional compensation in 1923. As we stated in Edgar M. Carnrick, 21 B. T. A. 12:
phrasing of the notice of deficiency relating to the item in controversy, even if clear, is not the cause of action and does not frame the issues. The petitioner may not, without an expressly pleaded admission or a stipulation, treat the notice as an official acquiescence by the Commissioner in all petitioner's propositions as to this item except those expressly determined adversely to him. It is not the Commissioner's method of determination or computation which is the substance of the proceeding, for the deficiency may be correct despite a weakness in arriving at it or explaining it. Woodside Cotton Mills Co., 13 B. T. A. 266; Jacob F. Brown et al., 18 B. T. A. 859. " It is immaterial whether the Commissioner proceeded upon the wrong theory in determining the deficiencies. In any event the burden was on petitioner to show that the assessment was wrong." Altschul Tobacco Co. v. Commissioner, 42 Fed. (2d) 609 (C. C. A., 5th Cir., July 28, 1930).
The pertinent provision of the applicable taxing statute is section 213 of the Revenue Act of 1921, which provides in part:
That for the purposes of this title ⅜ the term " gross income "—
(a) Includes gains, profits, and income dervied from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid or gains or profits and income derived from any source whatever.
In carrying out the provisions of this section of the statute the respondent has prescribed article 33 of Regulations 62, which provides in part:
Where services are paid for with something other than money, the fair market value, if readily realisable, of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received. Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. (italics ours.)
In his brief, counsel for the petitioners states that the test as to what constitutes "readily realizable market value" is set forth in article 1564 of Regulations 62 in connection with the discussion of the realization of gain or loss on exchange of properties and submits that the test as to liability to account for the receipt of property, other than cash, is the same whether it is received by way of exchange for the property or as compensation for the services. With this proposition we can not agree. Article 1564 of Regulations 62 was prescribed under section 202 of the Revenue Act of 1921, subdivision (c) of which provides in part:
For the purpose of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall he recognized unless the property received in exchange has a readily realizable market value; (italics ours.)
The construction of language similar to the above was before the Circuit Court of Appeals, Eighth Circuit, in Williams v. Commissioner, 44 Fed. (2d) 467. The court there pointed out the difference between a gain or loss computable under the statute and one recognized, under the statute. A gain or loss may be computable under the statute or under particular provisions of the statute and yet may not be recognized for income-tax purposes, that' is to say, required to be taken into account in the computation of the net income under the statute. A gain may be realized upon an exchange of property which is not required to be included in taxable income by reason of the fact that it is not readily realizable. The provision of the statute which relates to the recognition of gain or loss upon the exchange of properties is not present in section 213 of the Act, and it has no application to shares of stock received as compensation for services. The petitioners stress the words " if readily realizable " contained in the first sentence of article 33 of Regulations 62. The third sentence of this article — " Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash," is the regulation which specifically covers the question as to whether the petitioners realized taxable income from the receipt of the shares of stock of the Crowell & Little Construction Co. Under the regulation the petitioners realized taxable income if their employer could have sold the stock and have realized cash with which to pay the petitioners.
The petitioners argue in effect that the Crowell & Little Construction Co. could not have sold its stock in 1923 and realized cash with which to pay the employees their additional compensation. In making such argument they necessarily argue that none of the shares of stock of the petitioner had value in 1923, although the assets of the corporation at the close of 1923 were more than $200,000 in excess of the par value of the stock ($181,400). For one share of stock of a corporation after its'issuance is not to be differentiated from another share. As was said by the Court of Appeals of New York in Caswell v. Putnam, 120 N. Y. 153, 157:
One share of stock is not different in kind or value from every other share of the same issue and company. They are unlike distinct articles of personal property which differ in kind and value, such as a horse, wagon, or harness. The stock has no earmark which distinguishes one share from another, so as to give it any additional value or importance; like grain of a uniform quality, one bushel is of the same kind and value as another.
In Burdett Stryker, 21 B. T. A. 561, we said that, " In bankruptcy proceedings it has also been authoritatively held that shares in the same corporation are not subject to identification one from the other so as to justify the specific reclamation of a particular number of shares deposited as collateral security as against other claimants of equal rank. Richardson v. Shaw, 209 U. S. 365; Gorman v. Littlefield, 229 U. S. 19; Duel v. Hollins, 241 U. S. 523; In re Cawley, 29 Fed. (2d) 593."
With reference to the value of the stock the petitioner, Crowell, testified, in response to a question as to what he would consider a reasonable price for it in 1923;
Should it be offered at a dollar a share I have no doubt we could find somebody to buy it. I do not think there is any doubt about that. You asked about what I would consider a fair value and I would probably appraise it at $75 as a possible selling figure if we could have found a purchaser, but people do not buy into these close corporations.
The petitioner, Little, made the following replies to questions propounded to him by counsel for the respondent:
Q And at that time [1923J you were expecting the stock to continue paying dividends?
A It looked grand; yes.
Q There were employees in major capacities in your company that were desirous of getting more stock?
A Yes.
Q In fact, the boys were always pleased when they could get some?
A Yes.
Q And you would not have had the least difficulty at that time in parceling out small amounts of the stock at $100 a Share to employees?
A At $100 a share — that was stage money, however. We would have had considerable difficulty selling it for $100 a share in cash money. What the boys did was to give their notes for these amounts; they just gave their notes and the stock earned the money.
The respondent has found that the petitioners realized taxable income in 1923 to the extent of the par value of the shares of stock received. The evidence indicates that in 1923 there was a demand for the shares of stock by al'1 of the employees of the corporation. Apparently, the petitioners could have sold their shares of stock to other employees if they had so desired. What difference does it make in determining the value of the shares whether the purchasers were other stockholders of the corporation or the public at large ?
In Charles R. Johnson, 8 B. T. A. 992, we said:
It is well settled that capital stock of a corporation received by an individual as compensation for services rendered is taxable as income only to the extent of its fair market value at the time received. Appeal of William J. Conlen, 1 B. T. A. 472; Appeal of James R. Lister, 3 B. T. A. 475; Appeal of Roscoe E. Aldrich, 3 B. T. A. 911.
In our opinion the evidence does not overcome the presumption of the correctness of the respondent's determination that the shares of stock received by the petitioners in 1923 had a fair market value at the date of receipt equal to their par value. The determinations of the respondent are therefore sustained.
Reviewed by the Boaed.
Judgments will he entered for the respondent.