Court Opinion

ID: 4499114
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:16:18.240983+00
Date Added: 2024-06-11T15:04:06.442468
License: Public Domain

Leech,
dissenting: The majority opinion concedes that the result it reaches is a “hardship.” I agree. But the deficiency here, substantial as it is, involves only one year. This same “hardship” will necessarily follow the petitioners through the remaining five years of the Pierce contract. I think such a result is wholly unjustified.
Undoubtedly the majority is correct in requiring the firm to deduct as a business expense, in the year of payment, the consideration it paid for canceling the leases. But, in my judgment, the income arising from the sale of its customers’ accounts in that same year should be similarly treated and so included in income. Any other treatment would greatly distort income.
The firm and its predecessors had been engaged extensively in the stock brokerage business for many years in Philadelphia and New York. In January 1935 its capital had become impaired. While yet solvent the firm decided to liquidate. Among its assets the firm possessed good will in the form of customers’ accounts — the result of its “many years” in business. In order to meet its liquidating liabilities, particularly the consideration required to release the firm from its long term leases, it transferred its good will, evidenced by its customers’ accounts, to Pierce in exchange for the Pierce contract. This transfer included an option on several leaseholds of the firm.
I think that the firm’s good will, in the form of its customers’ accounts, was property, that the Pierce contract had a fair market *411value of $480,000 when so received, and that the transaction was therefore taxable. Revenue Act of 1934, secs. Ill (b) and 112 (a). Under sections 113 (a) and 114 (a), the basis of the Pierce contract for the computation of gain or loss on its disposition and exhaustion was its “cost” to the firm. Holmby Corporation, 28 B. T. A. 1092; affd., 83 Fed. (2d) 528; Ambassador Petroleum Co., 28 B. T. A. 868; reversed on another point, 81 Fed. (2d) 474; Countway v. Commissioner, 127 Fed. (2d) 69, reversing 44 B. T. A. 921. That ■“cost” is the fair market value of the accounts exchanged for the contract — $480,000. The Pierce contract was used in its business by the firm throughout the six-year life of the contract. Upon those two premises, in my judgment, the firm is entitled to amortize that “cost” over the life of the contract, and so to the deduction in the taxable year of one-sixth of that basis, or $80,000. Edward G. Swartz, Inc., 25 B. T. A. 1065; Perine Machinery Co., 22 B. T. A. 450.
The majority opinion disallows any such deduction, on the ground that no taxable exchange occurred in 1935. This conclusion is based upon two premises: (1) No property was transferred by the firm to Pierce, nor was its good will in the form of its customers’ accounts conveyed to Pierce, but, instead, Pierce merely employed certain members of the firm for six years to render services in acquiring new accounts for Pierce, and (2) the 1935 transaction was not then closed, since the Pierce contract had no fair market value when received by the firm. Although the majority opinion states that the proceeding was submitted on a stipulation of facts, it includes a “findings of fact”, referred to as “Only those facts necessary for disposition of the issue before us * * upon which its two premises are supported. I think those “findings of fact” omit some of the stipulated facts upon which the first premise must be decided, and practically all of the facts and evidence upon which the second must be based.
The first of these positions is not taken directly even by the respondent. Obviously, though probably of little value, the leasehold options transferred were property. That the firm possessed valuable property in the form of good will, evidenced by its 9,513 customers’ accounts, is hardly open to doubt. See Houston Natural Gas Corporation v. Commissioner, 90 Fed. (2d) 814; Perkins Bros. v. Commissioner, 78 Fed. (2d) 152, and cases therein cited. By the present contract the firm agreed to convey this good will — in the form of its customers’ accounts — to Pierce. It is stipulated that under the contract the firm agreed to “transfer to E. A. Pierce & Co. (hereinafter called Pierce) all accounts of its customers, in consideration of * * * ” Pierce’s promise to pay therefor. Pierce thereupon occupied at least part of the brokerage office space theretofore oc*412cupied by the firm. Whatever may be said about the theoretical impossibility of the firm transferring its customers’ accounts, certainly it could and did convey its good 'will to Pierce. The only tangible evidence of that good will was the firm’s customers’ accounts. The stark fact is that 95 percent of those accounts not only were transferred to Pierce, but remained there throughout the life of the contract. The future payments to be made under that contract were-in no sense compensation for future services. They were payable-not for any effort or services to Pierce by the members of the firm, but for the business Pierce secured by the transfer. The death of every member of the firm, at least after the identification of the “Cassatt accounts”, would not have affected the obligation of Pierce under the contract so long as the firm retained the seat on the New York Stock Exchange to comply with the rules of that body. Under the contract these payments were to be made for the firm’s good will, measured by the actual value of that good will to Pierce.
The second premise of the majority, which is the only point seriously argued by the respondent, is that the transaction in January 3935 was not closed and therefore taxable, since the Pierce contract had no fair market value when then received by the firm.
It reaches this conclusion despite the following facts and evidence-, all of which and more will be found in the stipulation.
At the time of the sale and transfer of its good will in the form of customers’ accounts to Pierce, the firm was a going solvent brokerage business with a history covering many years. It then had 9,518 customers. In the year just closed the firm had realized gross commissions of $439,248.04 from these accounts and, for each of the preceding six years, an average of $843,021.93. Such a sale of the accounts of an established brokerage business was not an unusual thing.
The opinion of E. A. Pierce, senior partner in Pierce, is that the Pierce contract had a fair market value to the firm on the critical date of not less than $500,000. He had been in the stock exchange business for 40 years and, during that period, his firm had made many similar acquisitions of the accounts of brokerage houses. From that experience he expected, on the date of the contract, that at least 90 percent of the business of the firm would be retained by Pierce, that the annual average stock exchange business in general would be at least as good in the following six years as it had been in the preceding six years, that he knew the average gross income received by the firm from its stock exchange business for each of the four preceding years had been $575,000, and that as a consequence he then anticipated that over the ensuing six years the gross commissions to be received by Pierce from the firm customers’ accounts would amount to not less than $3,000,000, of which, under the contract, $750,000 would have *413been payable to the firm. The opinion of Robert K. Cassatt, who had been the senior partner in the firm until his resignation therefrom in February 1935 in connection with the liquidation, is that it had a similar value. He was thoroughly familiar with and in charge of the business of the firm. He also believed on the critical date that the stock exchange business would be as good during the following six years as it had been during the preceding four years and that the income of the firm from the Pierce contract would be no less than $10,000 per month, or an aggregate of $720,000.
Then there is the compelling uncontradicted categorical testimony of the presidents of two Philadelphia banks that those banks, in fact, each loaned the firm $80,000 on the sole security of the Pierce contract. The president of one of the banks who negotiated this loan fixed such fair market value at $480,000. He was familiar with the gross commissions of the firm from its stock exchange business during the four years preceding the execution of the Pierce contract. He corroborated both Pierce and Cassatt as to the stock exchange business to be expected by Pierce during the contract period and the income to the firm therefrom under the contract. The opinion of this banker is substantially corroborated by that of the president of the bank which joined in the loan.
Admittedly, only $275,424.66, as the majority points out, was received by the firm from the Pierce contract. But.that certainly ■does not contradict the existence in January 1935 of any fair market value for the contract. Nor does it discredit or affect the weight to be given the opinions of the witnesses or the loans on the security of that contract. Emphatically is this so when it is noted from the stipulation that the volume of the stock transactions on the New York 'Stock Exchange, which had already decreased from 1,124,800,410 shares in 1929 to 323,845,634 in 1934, continued that decline to ■207,599,749 shares in 1940. Obviously that unparalleled drying up of the stock brokerage business following 1935 could scarcely have been reasonably foreseen at the inception of the contract. See Hickok Oil Corporation v. Commissioner, 120 Fed. (2d) 133.
This evidence of the existence of a fair market value for the Pierce contract when it was received by the petitioners stands uncontradicted. Respondent offered no testimony. It is true, as the majority opinion states, that “no testimony as such was offered on the question of value of the Pierce contract”, but the opinions of Pierce, Cassatt, and the bankers, together with their supporting reasons and the fact that the two Philadelphia banks loaned $160,000 on the sole security of that •contract, appear in the stipulation. They were so included without limitation or objection and were therefore accepted by the Board and the respondent as admissible testimony of the existence of fair market value of the Pierce contract at the critical date. On brief, respondent *414makes this comment: “The Board is not bound as a matter of law to. adopt as a determination of value the opinions of these persons, notwithstanding there is no conflicting testimony of other witnesses.”
The majority casts aside all this evidence upon its conclusion that Burnet v. Logan, 283 U. S. 404, concludes the petitioners on this point. However, its discussion basing that conclusion is supported upon a nonexistent premise. It is stated that the accrual by the firm in 1935 of the amounts it “hoped to receive under the Pierce contract” was not warranted, since in that year there was no liability upon Pierce to pay any amount, and such liability would not arise until a future year, based upon conditions and happenings of that future year. Unquestioned authority is then cited to support that rule. The fact is that petitioners are not asking for the accrual in 1935 by the firm of the amounts it hoped to receive in the future. They seek no accrual. They want only to include in the firm income of 1935 the fair market value of an asset received in that year in an exchange.
Moreover, quite recently the Board adopted a new construction of the holding in the Logan case. In Robert J. Boudreau, 45 B.T.A. 390 (on appeal, C.C.A., 5th Cir.), the Board held that the Supreme Court in the Logan case did not mean to say that a promise to pay $450,000 solely out of one-twelfth of the oil produced from an oil lease had no fair market value per se. It was held that the existence of such value was always a question of fact. Thus, despite the fugitive nature and the uncertain commercial existence of oil underground, the Board, in the Boudreau case, sustained the determination of the respondent that such promised oil payment had a fair market value of $188,470.26 when the contract to pay was made and taxed the petitioners upon the receipt of their respective interests in that amount. The Board made that finding in the face of testimony contradicting the existence of any fair market value. Here there is none.
Petitioners rely most strongly on the Boudreau case. The respondent however does not attempt to distinguish it. Neither does the prevailing opinion. I do not think it can be effectively distinguished. As the majority opinion states, of course, Burnet v. Logan, supra, is still the law. But so is Robert J. Boudreau, supra, which merely construes Burnet v. Logan.
The majority fears the “hardship” to other taxpayers which will follow the precedent of a decision for the taxpayers here. But, though wrongly in my judgment, the precedent has been established in the Boudreau case. The majority does not propose to overrule it. The taxpayers there were subjected to the consequent “hardship.” By the application of the same rule, I think, the taxpayers here should be relieved from six years of “hardship.”
Tyson agrees with this dissent.