Court Opinion

ID: 4598549
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:21:31.450988+00
Date Added: 2024-06-11T07:59:28.293048
License: Public Domain

FIRST NATIONAL BANK AND ROBERT R. ELLIS, JR., EXECUTORS, ESTATE OF R. R. ELLIS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.First Nat'l Bank v. CommissionerDocket No. 67967.United States Board of Tax Appeals34 B.T.A. 631; 1936 BTA LEXIS 674; May 27, 1936, Promulgated *674  1.  Corporation A entered into an agreement with corporation B and the holders of substantially all of its stock to acquire the business and a portion of the assets of B and for the immediate liquidation of that corporation.  Consideration for the transfer was to be cash and stock in corporation A. The real estate of B was to be transferred to a new corporation, the stock of which was to be distributed to the stockholders of B.  The petitioners' decedent, a stockholder in corporation B, was to receive and did receive $250,000 in cash from the assets of corporation B, surrendering at the same time a sufficient number of shares at the exchange price agreed upon to equal that sum.  The remainder of the assets were transferred to corporation A for stock and cash as provided in the agreement and the liquidation of B was concluded immediately thereafter by the surrender of the remainder of its stock outstanding.  The organization of the realty company and the payment of the $250,000 in cash occurred in the taxable year, while the transfer of the remaining assets to corporation A for stock and cash and the dissolution of corporation B occurred in the succeeding year.  Held, that the*675  gain or loss realized or sustained by petitioners' decedent must be computed upon the disposition of his stock as a unit rather than the disposition of the stock in two blocks separately.  2.  Petitioners' decedent and another stockholder, who by the terms of a previous contract were equal in the management and control of corporation B, entered into a contract between themselves as individuals whereby the said stockholder agreed to pay to petitioners' decedent the sum of $50,000 upon the completion of the transaction between corporation A and corporation B.  The said stockholder agreed to pay the sum in cash to induce petitioners' decedent to agree to the transaction between A and B.  In September of the taxable year the petitioners' decedent demanded payment, contending that his part of the contract had been performed and that the money was then due and payable.  After considerable discussion and negotiations the said stockholder delivered to petitioners' decedent his promissory note for $50,000, payable on January 31 of the succeeding year.  Attached to the note was a new agreement between the parties reciting the dispute over the terms of the previous agreement and stating that*676  the note was given in settlement thereof.  The note was immediately discounted at a bank for $49,241.67.  Held, that the note was income to the petitioners' decedent in the year received.  F. E. Hagler, Esq., for the petitioners.  Nathan Gammon, Esq., for the respondent.  TURNER *632  This proceeding involves a deficiency in income tax for the year 1929, in the amount of $22,890.39.  The deficiency results from certain additions by the respondent to the income reported by R. R. Ellis, the petitioners' decedent, on his return.  The amounts in dispute were received by Ellis by reason of the liquidation of the Van Vleet-Ellis Corporation, of which Ellis was a stockholder.  It is the contention of the petitioners that the amounts in question were received under a plan of reorganization, that the reorganization was not consummated until January 31, 1930, and that none of the amounts received by Ellis in connection therewith was income to him in the year 1929.  *633  FINDINGS OF FACT.  The Van Vleet-Ellis Corporation was organized in 1928 and acquired the assets and business of the Van Vleet-Mansfield Drug Co., of which McKay Van Vleet and*677  members of his family were the principal stockholders, and the assets and business of the Hessig-Ellis Drug Co. and Hessig-Ellis Drug Co. of Arkansas, of which R. R. Ellis was the principal stockholder.  Its capital stock was divided into 50,000 shares of common stock.  Van Vleet and members of his family owned a majority of the stock and Ellis owned 15,905 shares.  In organizing the Van Vleet-Ellis Corporation, Ellis and Van Vleet had entered into a contract whereby Ellis was to be chairman of the board of directors and Van Vleet was to be president.  They were each to receive a salary of $25,000 per year.  Van Vleet was to vote his stock and that of his family so that he and Ellis would be of equal power in the management of the corporation.  On May 6, 1929, the Van Vleet-Ellis Corporation, with Ellis, Van Vleet, and other stockholders, granted to McKesson & Robbins, Inc., a Maryland corporation, hereinafter referred to as McKesson, an option to acquire all of the assets and business or all of the capital stock of the Van Vleet-Ellis Corporation in return for McKesson stock and cash.  It developed that McKesson did not desire to acquire the real estate owned by the Van Vleet-Ellis*678  Corporation.  Neither did it propose to continue the employment of Ellis in the business.  On May 16, 1929, a contract was entered into between Ellis and Van Vleet individually, wherein it was provided among other things that, upon the election of McKesson to exercise the option agreement and the closing of the transfer agreement pursuant thereto, Van Vleet should be obligated to pay Ellis the sum of $50,000 in cash.  The agreement concluded with a paragraph reading as follows: This contract is executed by the parties hereto upon the assumption that the herein mentioned option agreement will be exercised and carried out and the sale consummated to McKesson & Robbins, Inc., and in the event this does not occur, this agreement shall be of no force nor effect, and all contracts heretofore executed between the parties hereto or the corporations herein mentioned shall remain in full force and effect.  The agreement of May 16 was entered into by Van Vleet for the purpose of procuring the favorable vote of Ellis with reference to the McKesson transaction.  At some time prior to August 31, 1929, the Van Vleet-Ellis Corporation was advised of the intention on the part of McKesson to*679  exercise the option and on that date a communication, signed by the Van Vleet-Ellis Corporation and the holders of substantially all of its outstanding stock, setting forth in detail the terms and conditions *634  of the proposed transaction was directed to McKesson.  The acceptance of the proposal by McKesson on the same date is noted on the instrument.  A plan for the disposition of all the assets of the Van Vleet-Ellis Corporation and for its complete and final liquidation had been worked out.  The stockholders of the Van Vleet-Ellis Corporation were to surrender their stock at a rate per share equal to book value, as of June 30, 1929, which had been determined and agreed upon, and which was approximately $31.72 per share.  They were also to receive an additional amount equal to 6 percent on the book value from June 30, 1929, to the date of closing.  For the purposes of the exchange McKesson common stock was valued at $40 per share and the preferred at $52 per share.  It was agreed that the real estate of the Van Vleet-Ellis Corporation was to be transferred to a corporation to be organized for the purpose of holding it, the stock of which was to be issued to the stockholders*680  of the Van Vleet-Ellis Corporation, share for share.  The remaining assets were to be transferred to McKesson for stock in that corporation, except that $250,000 in cash was to be paid from the assets to Ellis prior to the transfer, and 7,880.91 shares of stock were to be surrendered by Ellis upon payment to him of the $250,000 in cash.  The book value of the 7,880.91 shares at June 30, 1929, was $250,000.  The agreement recited that the payment of this amount to Ellis would operate to reduce the assets to be transferred to McKesson.  By the terms of the agreement of August 31, 1929, certificates representing all of the outstanding stock of the Van Vleet-Ellis Corporation, except 7,880.91 shares which were to be applied against the $250,000 in cash to be paid to Ellis, were to be deposited immediately with the Guaranty Trust Co. of New York as depositary, to be held pending the final closing.  The certificates were to be endorsed in blank or to have attached stock powers duly executed in blank.  The agreement also required the deposit of an instrument irrevocably authorizing and instructing the depositary to carry out the transfer of the assets to McKesson for cash and stock as prescribed, *681  and after distribution of the cash and stock so received to surrender the stock of the Van Vleet-Ellis Corporation for cancellation and dissolution of the corporation.  By the terms of the agreement the closing thereunder was to take place at the principal offices of the depositary not earlier than January 15, 1930, nor later than January 31, 1930.  It was agreed that the Van Vleet-Ellis Corporation should make no distributions from profits nor changes in the financial set-up of the corporation pending the closing.  For the assets to be transferred to McKesson, that corporation was to deliver to the depositary in payment therefor 28,517 shares of its common stock, 2,476 shares of preference stock, series A, a fixed sum of $24,260.02 in cash, and an additional sum equal to 6 percent per *635  annum on $1,293,692.02 from June 30, 1929, to the date of closing, less a sum equal to dividends accrued to that date on the 2,476 shares of preference stock.  The sum of $1,293,692.02 represented the book value of the Van Vleet-Ellis Corporation stock as of June 30, 1929, less the $250,000 paid in cash to Ellis and two other amounts carried on the books of Van Vleet-Ellis Corporation as*682  accounts receivable from stockholders of the old Hessig-Ellis companies.  The transfer agreement also provided that any obligation or liability on the part of McKesson was subject to the following conditions precedent: (a) the correctness and fulfillment of all representations and warranties; (b) the performance of and compliance with all agreements and conditions; (c) the completion, with approval by McKesson's counsel, of all corporate and other proceedings to effect the transfer and conveyance contemplated; and (d) the delivery of a written statement by Price Waterhouse & Co. to the effect that an examination of the books and records of the Van Vleet-Ellis Corporation disclosed compliance with the terms and conditions prescribed by the agreement with reference to the operation of the business from June 30, 1929.  The transfer agreement further provided that Van Vleet should be employed by McKesson for a period of five years from the date of closing at a salary of $25,000.  No provision, however, was made for the employment of Ellis.  It was also provided that neither Van Vleet nor Ellis should engage in the wholesale or retail drug business in the territory covered by the operations*683  of the Van Vleet-Ellis Corporation for a period of five years.  On September 16, 1929, Ellis surrendered 7,880.91 shares of his stock in the Van Vleet-Ellis Corporation and received therefor the sum of $253,166.75, being the $250,000 in cash agreed upon and an additional sum equaling 6 percent on $250,000 from June 30, 1929, to the date of payment.  He was then ready to submit his resignation as chairman of the board of directors of the Van Vleet-Ellis Corporation and insisted that the $50,000 covered by the agreement between him and Van Vleet was then due and payable.  It was Van Vleet's contention that the amount was not to be paid until the closing under the transfer agreement between McKesson and the Van Vleet-Ellis Corporation.  After some discussion, however, Van Vleet, on September 21, 1929, delivered to Ellis his promissory note for the sum of $50,000, without interest, payable January 31, 1930.  Attached to the note was the following statement signed by both parties: THIS MEMORANDUM OF AGREEMENT, between Robert R. Ellis, party of the first part, and McKay Van Vleet, party of the second part, WITNESSETH: WHEREAS, as heretofore to-wit, under date of May 16, 1929, the parties*684  hereto entered into a contract, under section five of which party of the second part *636  agreed to pay to Robert R. Ellis the sum of Fifty Thousand ($50,000) Dollars in cash, under the terms of said section, and WHEREAS, the said Robert R. Ellis is about to tender his resignation as Chairman of the Board, and as Director of the Van Vleet Ellis Corporation, and said option has been exercised by McKesson & Robbins, Inc., and a difference of opinion has arisen between the parties hereto as to when the said Fifty Thousand ($50,000) Dollars is payable, Now, THEREFORE, in consideration of the premises, and to settle such difference of opinion, the said McKay Van Vleet has exercised and delivered to Robert R. Ellis his promissory note for the sum of Fifty Thousand ($50,000) Dollars, payable January 31, 1930, without interest before maturity, and in settlement of that section of said contract.  IN WITNESS WHEREOF, the parties hereto have signed their names this 21st day of September, 1929.  Shortly thereafter Ellis discounted the note at a bank and received therefor the sum of $49,241.67.  The note was presented for payment on the due date and was paid by Van Vleet.  Separate*685  and apart from the written agreement of August 31, 1929, McKesson had agreed that the $250,000 in cash required by the Van Vleet-Ellis Corporation for payment to Ellis might be procured by the sale of the assets of the Little Rock branch of the Van Vleet-Ellis Corporation to the McKesson-Lincoln Co., a subsidiary of McKesson operating in Little Rock.  The $250,000 paid to Ellis on September 16, 1929, was procured, however, through the negotiation of a loan to the Van Vleet-Ellis Corporation by a Memphis bank.  Subsequently, on October 1, 1929, the Van Vleet-Ellis Corporation did transfer the assets of its Little Rock branch to the McKesson-Lincoln Co., free and clear of all liabilities and encumbrances, for $106,395.44 in cash and $430,000 in demand notes of the McKesson-Lincoln Co.  A sufficient amount of the proceeds from this sale was applied in satisfaction of the $250,000 bank loan previously described.  In accordance with the terms of the transfer agreement which provided for the elimination of the real estate from assets to be acquired by McKesson, a new corporation, known as the Chemical Realty Co., secured a charter dated September 24, 1929.  The charter was accepted and*686  officers elected on December 14, 1929.  The Van Vleet-Ellis Corporation, by two deeds, transferred all of its real estate to the Chemical Realty Co. under date of December 2, 1929.  One of these deeds was acknowledged on that date and the other on December 14, 1929.  Both were filed and recorded on January 2, 1930.  The stock of the Chemical Realty Co. was issued to the stockholders of the Van Vleet-Ellis Corporation on the basis of their original stockholdings in that corporation, Ellis receiving 15,905 shares.  At special meetings of directors and stockholders of the Van Vleet-Ellis Corporation held on January 25, 1930, all of the acts done and *637  to be done in carrying out the terms of the agreement of August 31, 1929, were considered and approved.  All examinations, inspections, and preliminary steps were concluded by January 31, 1930, and on that date the transfers between McKesson and the Van Vleet-Ellis Corporation contemplated by the agreement of August 31, 1929, took place.  All of the assets of the Van Vleet-Ellis Corporation, except those eliminated under the terms of the agreement, were transferred to McKesson, and the stock and cash paid to the depositary*687  by McKesson were distributed to the stockholders of the Van Vleet-Ellis Corporation.  Ellis received a check for $7,854.36, and at his direction the 5,578 shares of McKesson common stock to which he was entitled were delivered, 1,000 shares to the First National Bank of Chicago, and 4,578 shares to the First National Bank of Memphis, Tennessee.  The Van Vleet-Ellis Corporation was dissolved on February 10, 1930.  The 15,905 shares of common stock of Van Vleet-Ellis Corporation disposed of by Ellis in accordance with the terms of the agreement of August 31, 1929, had a cost basis to him in the amount of $576,116.33, or $36.22 per share.  The fair market value per share of the common stock of McKesson & Robbins, Inc., on the dates designated, was as follows: May 6, 1929$55.00June 30, 192951.00August 31, 192946.00September 15, 192946.00January 31, 193033.50R. R. Ellis died on May 23, 1930.  Thereafter, the deficiency herein was determined upon the examination of his return for the calendar year 1929, and this proceeding was instituted by the executors of his estate.  OPINION.  TURNER: It is the position of the petitioners that the payment*688  of $50,000 by Van Vleet to Ellis, the surrender by Ellis of 7,880.91 shares of Van Vleet-Ellis Corporation stock, the receipt by him of $253,166.75, the transfer by Van Vleet-Ellis Corporation of its real estate to the Chemical Realty Co. and the distribution of stock of the latter corporation, and finally the transfer of the remaining assets to McKesson & Robbins, Inc., for stock and cash and the distribution in liquidation to the stockholders of the Van Vleet-Ellis Corporation were steps in a reorganization or merger of the Van Vleet-Ellis Corporation with McKesson & Robbins, Inc., consummated on January 31, 1930, and that there was no closed nor completed transaction during the year 1929 from which Ellis realized *638  taxable gain.  On the other hand, it is the contention of the respondent that the payment of the $50,000 to Ellis by Van Vleet, the disposition of 7,880.91 shares of Van Vleet-Ellis Corporation stock by Ellis, and the organization of the Chemical Realty Co. and its acquisition of real estate from the Van Vleet-Ellis Corporation were completed transactions in 1929, distinct and separate from the transaction whereby McKesson & Robbins, Inc., acquired all other*689  assets of the Van Vleet-Ellis Corporation and that Ellis realized taxable gain therefrom in 1929.  In the alternative, it is the contention of the respondent that if the transfers referred to were but steps in a single transaction, the transaction was completed on September 16, 1929, and any gain derived therefrom by Ellis was realized and is taxable to him in 1929.  In , the general rule was stated from 13 C.J. 561, § 525, to the effect that "a contract is entire when by its terms, nature and purpose it contemplates and intends that each and all of its parts and the consideration shall be common to the other and interdependent." Considering the agreement and the supporting facts in the instant case in the light of the language just quoted, there is no doubt in our minds that the disposition by Ellis of his 15,905 shares of stock in Van Vleet-Ellis Corporation was one transaction rather than two.  From the time the option was given on May 6, 1929, there was never any thought in the minds of the parties but that if the plan went through it should go through in toto and each and every*690  stockholder of the Van Vleet-Ellis Corporation would surrender his entire holdings therein for cash, stock in the realty company, and stock in McKesson & Robbins, Inc.  There was no thought or intention on the part of Ellis, Van Vleet, the Van Vleet-Ellis Corporation, or McKesson & Robbins, Inc., that Ellis or any other stockholder would dispose of or surrender any portion of their holdings except as a step in the disposition of their entire holdings and the complete liquidation of Van Vleet-Ellis Corporation.  The conditions of management and ownership of the Van Vleet-Ellis Corporation were such that it would not be reasonable to assume that a transaction would have been entered into by either Ellis or Van Vleet that did not provide for the disposition of the entire holdings of one or both.  There was never any thought or agreement for partial liquidation.  Cf. , affirming . It is true one step in the transaction took the form of a surrender by Ellis of 7,880.91 shares of his stock prior to the final transfer of assets to McKesson.  The evidence indicates, however, that the negotiations were originally*691  based on an understanding that McKesson was to acquire the drug business and assets, except real estate, of Van Vleet-Ellis *639  Corporation and that the stockholders of the Van Vleet-Ellis Corporation were to receive cash and McKesson stock at a rate equal to the book value of their stock in the Van Vleet-Ellis Corporation.  The evidence also shows that, by reason of the failure on the part of McKesson to assume the employment contract of Ellis with the Van Vleet-Ellis Corporation and as an inducement to him, it had been agreed that he was to receive a substantial part of the consideration for his stock in cash.  It is obvious that the 7,880.91 shares set off against the $250,000 in cash was arrived at, not because of an independent and original agreement between Ellis and the Van Vleet-Ellis Corporation for the surrender and redemption of that particular number of shares or only a part of his shares, but because that number of shares at the rate agreed upon for the surrender render of all the Van Vleet-Ellis Corporation stock in the transaction as a whole equaled $250,000, which amount it had been agreed Ellis was to receive in cash.  *692  Considering all the facts and circumstances, we think there is no doubt that Ellis disposed of his 15,905 shars of Van Vleet-Ellis Corporation stock as a unit and the gain or loss to him must be computed on the basis of one transaction.  ;; ; ; cf. . We are further of the opinion that the altermative contention of the respondent is not sustained by the facts.  The plan outlined in the agreement fixed the time for its final consummation as not earlier than January 15 nor later than January 31, 1930.  It also appears from the agreement that liability on the part of McKesson was subject to certain conditions precedent and that these conditions were met in January 1930 and at the time of closing, when McKesson paid to the depositary the stock and cash required of it under the contract.  The facts do show, however, that Ellis did receive*693  a substantial portion of the consideration for his stock during the year 1929.  It is also apparent that the consideration paid over in 1929 was received by Ellis as his own, with full confidence that all conditions would be met and the transaction would be completed as provided in the agreement.  He is accordingly taxable in 1929 if and to the extent that the consideration received in 1929 exceeded $576,116.33, the basis for his stock.  The facts show that he received in that year $253,166.75 in cash and 15,905 shares of stock in the Chemical Realty Co.  It is the Commissioner's contention that the Chemical Realty Co. stock had a fair market value of $19.33 per share.  Even though *640  this value be conceded, it is apparent that the cash, plus the stock at that value, did not equal the cost to Ellis of his stock in the Van Vleet-Ellis Corporation, and Ellis realized no taxable gain in 1929 from the disposition of the stock.  Having determined that Ellis realized no gain in 1929 in connection with the surrender of his stock in the Van Vleet-Ellis Corporation and the liquidation of that company, it is not necessary to consider and determine whether or not the acquisition by*694 McKesson of the business and a portion of the assets of the Van Vleet-Ellis Corporation, consummated in 1930, constituted a reorganization within the meaning of the statute, since the reorganization provisions have to do only with the recognition and not the realization of gain.  We do not have the year 1930 before us.  With reference to the item of $49,241.67 realized by Ellis on the note paid to him by Van Vleet under date of September 21, 1929, the respondent is sustained.  This payment was made by Van Vleet individually for himself and other members of his family who were stockholders of the Van Vleet-Ellis Corporation.  It was no part of the agreement between the Van Vleet-Ellis Corporation and McKesson & Robbins, Inc.  It represented the price that Van Vleet and other stockholders were willing to pay to Ellis in order to obtain a favorable vote from him with reference to the McKesson transaction, and, while it is true that the agreement was occasioned by the option granted to McKesson by the Van Vleet-Ellis Corporation, neither of these corporations was a party to the agreement, nor obligated by it.  It was a side transaction between two of the stockholders of the Van Vleet-Ellis*695  Corporation.  While it is true that the language of the agreement of May 16, 1929, supports the contention that the money was not to be paid until the closing by the two corporations, the intent of the language was the subject matter of a dispute between the parties at the time Ellis received the sum of $253,166.75 and submitted his resignation as chairman of the board of directors.  It was his contention that the money was then due and owing, and after some discussion between the parties and their counsel the note for $50,000, payable on January 31, 1930, was executed by Van Vleet and delivered to Ellis and a new agreement setting forth the purposes for the payment was attached to the note.  The note was an ordinary note payable on a given date in the future and the language of the new agreement indicates that the note was then and there given in satisfaction of the obligation of Van Vleet and for the performance of acts done and to be done by Ellis.  It was income to Ellis when received.  . Reviewed by the Board.  Decision will be entered under Rule 50.