Court Opinion

ID: 4626049
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:24.35355+00
Date Added: 2024-06-11T07:56:48.767231
License: Public Domain

CARLING DINKLER, EXECUTOR OF THE ESTATE OF L. J. DINKLER, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Dinkler v. CommissionerDocket No. 32388.United States Board of Tax Appeals22 B.T.A. 329; 1931 BTA LEXIS 2139; February 24, 1931, Promulgated *2139  1.  Where notes were given in consideration for the purchase of stock under a contract containing a contingency on the happening of which the makers would be relieved of payment and there was a reasonable probability of its happening generally known in the community, held, that the notes affected by such contingency did not have a fair market value when received.  2.  Held, further, that certain of the notes were not affected by such contingency.  Bertram S. Boley, Esq., for the petitioner.  L. W. Creason, Esq., for the respondent.  TRAMMELL*329  This is a proceeding for the redetermination of a deficiency in income tax for 1924 in the amount of $10,397.80.  The sole issue to be decided is whether certain notes received by the petitioner in 1924 as part payment for the sale of the capital stock of the Kimball House Operating Company had a fair market value when received.  FINDINGS OF FACT.  The decedent, L. J. Dinkler, on July 1, 1924, owned the entire capital stock of the Kimball House Operating Company.  That company leased and operated the Kimball House Hotel in Atlanta, Ga.  The sole assets of that corporation were two leases*2140  on the Kimball House Hotel.  Lease No. 1 ran for a period of nine years and six months from July 1, 1915, to December 31, 1924, at a monthly rental of $2,900 per month, payable on the first day of each month.  Lease No. 2 ran for a period of five years, commencing January 1, 1925, and ending December 31, 1929, for a rental of $3,500 per month, payable on the first day of each month.  Both leases contained a provision which gave the lessor the right to cancel the former lease upon six months' notice and the latter lease upon *330  twelve months' notice if a public improvement in the nature of a viaduct or bridge should be made abutting the property occupied by the Kimball House Hotel.  Article 21 of the second lease provided as follows: It is further agreed that should a public improvement be authorized by the city in the nature of a viaduct or bridge across the railroad tracks at Pryor Street, or in the nature of a plaza or bridge along Wall Street, in the city of Atlanta, then in such event the lessor shall have the right, at its option, to cancel this lease upon one (1) years notice to said lessee, or its assigns, or either of them.  Notice by registered mail at its last*2141  known address shall be sufficient notice.  On July 1, 1924, the decedent entered into a contract with one E. G. Jacobs and one E. W. Maynard for the sale of the entire capital stock of the Kimball House Operating Company for $55,000.  The terms of the contract provided that $10,000 should be paid in cash, the receipt whereof was acknowledged, and the remaining $45,000 to be paid in the future and evidenced by notes payable as follows: $10,000, January 1, 1925; $5,000, April 1, 1925; $30,000 in monthly notes of $1,000 each, the first falling due August 10, 1924, and one each month in succession thereafter.  As collateral security for the said notes, said Jacobs and Maynard redelivered to Dinkler the entire capital stock of the said Kimball House Operating Company as well as the leasehold contracts owned by the said company.  The contract of sale dated July 1, 1924, provided in paragraph 12 as follows: It is agreed that should The H. I. Kimball House Company, the lessor of the Kimball House, exercise its option to cancel the lease upon one year's notice to the lessee, by reason of the erection of a public improvement by the City of Atlanta in the nature of a viaduct or bridge across*2142  the railroad tracks on Pryor Street, or in the nature of a plaza or bridge along Wall Street in the City of Atlanta, then the parties of the second part shall be relieved from the payment of any of the monthly notes of One Thousand ($1,000) Dollars each remaining unpaid at the time of the vacating of the Kimball House by the Kimball House Operating Company, lessee, pursuant to such notice from The H. I. Kimball House Company, lessor.  During the year 1924 the decedent collected $15,000 of the amount provided in the contract, that is, $10,000 representing the cash payment, and $5,000 representing five of the $1,000 notes maturing August to December, 1924.  The amount of $15,000 collected by the decedent in 1924 was returned by him as income for that year.  All sums collected after that year have been returned by the decedent in his income tax returns for the years in which the sums were collected.  No notice to cancel either of the leases was ever given.  Each of the notes was paid by the makers at or about the dates they were due.  Maynard was a practicing attorney in Macon, Ga., and had been practicing his profession since 1904.  If it could have been sold under favorable conditions, *2143  his own gross estate, consisting generally of *331  real estate, in 1924 was approximately $40,000 and his net worth was between $15,000 and $20,000.  He raised the $10,000 in cash to make the payment on the contract of sale of stock in question on a few days' notice.  In 1924 Jacobs was operating the Terminal Hotel in Macon, Ga., and had an interest in two peach orchards, one farm, owned dividend paying stocks in the Fourth National Bank, Macon Savings Bank and in Coleman & Miller Pay Drug Store, all of which, however, was pledged as security.  He was an officer and director in the Macon Savings Bank.  Prior to 1924 he had had an interest in the Central City Hotel in Macon and in the Plaza Hotel in Augusta, but had disposed of them before 1924.  In 1924 he was a married man with two dependent children and reported in his income tax return for that year a gross income of $11,895.54.  His gross income was made up as follows: From a peach orchard$4,157.66Salary2,480.00Unidentified income1,621.88Dividends from stock in the Fourth National Bank, the Coleman and Miller Pay Drug Store, The Macon Savings Bank and other sources2,071.00From Palmetto Farm1,565.0011,895.54*2144  The orchard and farm were mortgaged and Jacobs later discovered that his equity had no value.  During the years 1924 and 1925 Jacobs was president of the Kimball House Operating Company, which company continued in the operation of the Kimball House Property as late as October, 1929, but not under either of the leases here involved.  During 1926 the lease was canceled and a new one made.  When Jacobs and Maynard purchased the stock they were relying on profits from operating the hotel to make their payments.  At the time Jacobs and Maynard bought the stock of the Kimball House Operating Company they had taken into consideration the possibility of a public improvement in the form of a viaduct being made adjacent to the Kimball House Property and thought they could stave off such improvement long enough to pay off their notes and make some money by the operation of the hotel.  Maynard, who was an attorney, felt reasonably certain that he could defeat it.  In 1926 he filed objections to the verification of the bonds necessary for the construction of the improvement and later settled with the city of Atlanta for $25,000 in consideration of the withdrawal of all his objections.  Construction*2145  of the viaduct did not begin until 1927 and the Kimball House operating Company did not vacate the hotel until 1929.  *332  Prior to July 1, 1924, and as early as July, 1923, the city of Atlanta had by proper corporate resolution requested the General Assembly of Georgia to amend a resolution then pending with reference to a viaduct over Pryor Street and Central Avenue by adding thereto the following: "The right, power, permission and authority herein granted the City of Atlanta is granted with the provision that the consent of the Georgia Public Service Commission and also the Nashville, Chattanooga & St. Louis Railway Company, lessee of the Western & Atlantic Railroad, shall be first given in writing to the City of Atlanta." On June 27, 1924, certain citizens and taxpayers of the city of Atlanta directly affected by the proposed Pryor Street-Central Avenue viaduct asked that the action of the general council in recommending the building of the viaduct be rescinded and that legislative action be withheld until further investigation might be made of other means of ridding the city of the grade crossings.  It was resolved by the mayor and the general council of the city of*2146  Atlanta as early as January 7, 1924, that steps be immediately taken to condemn sufficient property so that Edgewood Avenue and Exchange Place might be widened.  That resolution referred to the fact that there were in the course of construction very great improvements in the neighborhood of Edgewood Avenue and Exchange Place and Pryor Street.  This resolution, however, does not specifically refer to any viaduct on Pryor Street and Central Avenue, the property adjacent to the Kimball House Hotel.  On February 16, 1925, a resolution was passed by the general council of the city of Atlanta that a committee be appointed, partly from the general council and partly from the citizens of Atlanta, to consider ways and means of erecting viaducts at Pryor Street and Central Avenue and to urge the legislature to grant the necessary authority.  Prior to this resolution, however, and during 1924, it was well known that such steps were in contemplation in order to remove certain railroad and grade crossings in the city.  In the summer of 1925 the legislature passed a bill authorizing the improvements in question.  On August 17, 1925, there was a resolution passed by the general council to the effect*2147  that the city ask the county commissioners to appropriate a portion of the costs toward the building of the city viaducts.  OPINION.  TRAMMELL: The question is, Did the notes received by Dinkler have a fair market value at the time received?  At the end of 1924 no notice of cancellation of the lease had been given and in any event the makers were to be relieved from payment only of such portion *333  of the monthly notes of $1,000 as might remain unpaid if and when the Kimball House Operating Company lessee should vacate the premises pursuant to notice given by the lessor.  We must consider the conditions and circumstances at the time the notes were received, those facts known to exist or which were reasonably anticipated at that time, as well as the financial standing of the makers of the notes.  The notes were not offered in evidence, but there was testimony to the effect that no one was asked to endorse them.  From this testimony we think it necessarily follows as a conclusion that they were not endorsed by any one.  The Commissioner determined that the face value of the notes was their fair market value, they bearing interest at 7 per cent.  A witness in behalf of*2148  the petitioner, experienced in handling notes and securities, testified that such a contingency clause which would relieve the maker of the obligation to pay would destroy the market value of the notes, or impair their marketability.  It is a generally accepted rule of law that a transfer of a debt will carry with it the security and operate as an equitable assignment thereof.  See ; . This being true, any purchaser of the notes would have had notice of the contingency provision in the sale contract and the leases and it would have been necessary for any purchaser to have considered the probability of the happening of the contingency.  If this contingency had a reasonable probability of happening, it would clearly have destroyed the value of any notes payable after such time when such contingency was likely to happen, regardless of the financial ability of the makers of the notes.  The makers of the notes undoubtedly thought that they could postpone the construction of the viaduct for such length of time as to enable them to make some money on their transaction. *2149  In this they were undoubtedly taking a chance.  We are impressed with the testimony of the witness for the petitioner, however, that those engaged in the business of dealing in securities and promissory notes would not consider that such notes would have a market value.  It was not definitely known when these notes were taken that more than twelve of the $1,000 notes would ever be a legal demand upon the makers.  The petitioner contends in his brief that eighteen of the notes were affected by the contingency and does not contend that the remaining $1,000 notes were so affected.  It is difficult to say that a note has a fair market value when any one taking it would have to take a gambling chance on whether it would be paid or even payable.  It was well known in Atlanta that the viaduct was in contemplation and would undoubtedly be put in at some time.  There was some question as to when this would happen and there was no assurance *334  when the transaction was closed in 1924 that definite steps in this direction would not have been taken much earlier than the summer of 1925.  The contingency, however, related to the $1,000 notes only and not to the $10,000 note payable in January, *2150  1925, and the $5,000 note which was due and payable on April 1, 1925.  In other words, eighteen of the $1,000 notes were impaired in their marketability and value by the contingency to the extent that they had no market value when received.  With respect to all the other notes, amounting to $27,000, we think that the testimony is insufficient to show that their market value was less than their face value when received.  The market value of notes may be affected by other factors than the actual value of assets of the makers.  The makers were apparently men of standing in their community.  They had their own business or profession aside from the operation of the Kimball House.  They expected to make enough money from the Kimball House alone to pay the notes.  It is also to be observed that all the notes were paid, and, considering all the testimony, we think that the petitioner has failed to show that the notes not affected by the contingency did not have a market value equal to their face.  We are not advised in this case as to the cost or other basis of the stock which was sold.  It was alleged in the petition and admitted in the answer that the stock in question was sold by L. *2151  J. Dinkler, Rosa G. Dinkler and Carling Dinkler and the contract of sale offered in evidence shows that it was signed by those persons.  There is an allegation in the petition that certain shares of stock were given by L. J. Dinkler to Rosa G. Dinkler and Carling Dinkler, but no testimony was offered to support this allegation and the proposed findings of fact by the petitioner state "petitioner owned the entire capital stock of the Kimball Operating Company," which proposed finding we have adopted except for the change of the word "decedent" in place of the word "petitioner," the petitioner having died after the filing of the petition.  For all that the testimony discloses, Rosa G. Dinkler and Carling L. Dinkler may have simply had stock in their name as qualifying shares, the stock really belonging to the decedent.  In view of these facts we have found that this stock was sold by the decedent and that he received the consideration therefor.  From the evidence in the case, it is our opinion that the notes received by the decedent in 1924 constituted taxable income in that year to the decedent to the extent of $27,000.  Reviewed by the Board.  Judgment will be entered under*2152  Rule 50.