Court Opinion

ID: 6869598
Source: CourtListenerOpinion
Date Created: 2022-07-23 20:59:06.744156+00
Date Added: 2024-06-11T16:05:22.906478
License: Public Domain

WILSON, Circuit Judge
(dissenting).
In the main I agree as to the facts set forth in the opinion, but not to the conclusion drawn therefrom.
The Commissioner found that a fair market value of the securities transferred by the Superpower Company to the United Corporation, hereinafter referred to as “United,” in exchange for 344,187 shares of preferred stock, 2,210,853 shares of common stock, and 1,000,000 option warrants entitled the Superpower Company to purchase 1,000,000 shares of United, was $72,480,000, upon the basis of which the Commissioner found that a fair market value of the common stock was $25 per share.
Superpower then offered to sell 821,472 shares of the common stock of United thus acquired to the stockholders of Superpower at $25 per share. In carrying out the proposal, Superpower issued to its stockholders, what it termed “Purchase Certificates,” thereby giving to each stockholder of Superpower the right to purchase at $25 per share one share of United for each two purchase certificates issued to him.
I' agree with the opinion that the purchase certificates themselves did not represent taxable income, but I do not agree that when sold the amount received represented a dividend by Superpower, although it represented taxable income. Neither do I agree that, if exercised, the value of the shares of United received in “excess of the amount paid for it in cash was a distribution of property and taxable at its fair market value,” and as a dividend. It was a sale at what the Commissioner determined was its fair market value.
A “dividend” as defined by the Revenue Act 1928, 45 Stat. 822, c. 852, § 115, 26 U. *563S.C.A. § 115 and note, is “any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.” (Italics supplied.) Ordinarily an increase in the market value of stock is not treated as profits until actually realized by sale or exchange.
Neither the purchase certificates nor the shares of United stock were a distribution of property from the earnings of Superpower; nor were the assets of Superpower or its earned surplus decreased by the sale of United stock at $25. In fact, according to the determination of the value of the Superpower securities by the Commissioner, which were exchanged for United stock, the actual value of its assets remained the same, though the book value of its assets were increased, for which Superpower accounted in its tax return for 1929. It was a substitution of an equal amount of cash for the value of each share of United Stock as determined by the Commissioner and sold under the options. Neither Superpower nor the taxpayer treated either the purchase certificates or the sale of United stock as a dividend, or as a distribution of property, but as a bona fide sale. The Board of Tax Appeals so found. Even if the United stock proved to have a market value in the boom market of 1929 over and above the cash paid, it could not be realized as income until sold. The Board may well have found that the trading in purchase certificates in such a market was not sufficient grounds for determining the fair market value of United stock. Other elements than sales on the Stock Exchange enter into the determination of a fair market value of stocks. San Francisco National Bank v. Dodge, 197 U.S. 70, 80, 25 S.Ct. 384, 49 L.Ed. 669.
The Ramapo Case (C.C.A.) 84 F.(2d) 986, presents a different state of facts from this case. In that case the taxpayer was a corporation, and both the Commissioner and the taxpayer found it to be for their interests to treat the purchase certificates and sale of United stock as dividends, which they did. The taxpayer sold a part of its purchase certificates and, of course, was taxable as income for the amount received therefor. It also sold the stock or a part of it acquired by the exercise of the remaining purchase certificates, and the profit gained by it was, of course, taxable. The situation which arises from the facts in this case was not considered by the court except in the form of dicta.
The premises assumed in the Ramapo opinion as a basis for holding that the issuing of the rights was a distribution of corporate assets, apd that if the value of the United stock in excess of the price paid for it in cash represented earnings or surplus was a dividend, do not exist as facts found or stipulated in this case.
This was not a distribution of corporate assets, but a sale at a price found by the Commissioner to represent the fair market value of the United stock. The cash received therefor by Superpower restored to it as assets the proportionate fair market value of the securities exchanged by Superpower for the stock of United.
We are not concerned with what might have resulted if the petitioner had sold the purchase certificates, or had sold the stock acquired after the exercise of his right to purchase. He did neither.
In the Metcalf Case (Metcalf’s Estate v. Commissioner (C.C.A.) 32 F.(2d) 192, cited in the Ramapo opinion, the rights were sold and there was no difficulty in determining the basis for an income tax.
In Helvering v. Bartlett (C.C.A.) 71 F.(2d) 598, at page 600, however, the court considered the exact situation which has arisen here and said in its opinion:
“We think that this holding of the Board was clearly right. We are not dealing with a case where a stockholder who has received rights to purchase stock sells the rights and thus realizes a profit. If the taxpayer here had sold the rights allotted him, the amount received in such sale would, of course, have been taxable as income. Miles v. Safe Deposit & Trust Co., 259 U.S. 247, 42 S.Ct. 483, 66 L.Ed. 923; Metcalf's Estate v. Commissioner (C.C.A. 2d) 32 F.(2d) 192. But he did not sell the rights. He exercised the option which they conferred upon him to purchase stock in the fire company; and he has as yet realized no profit upon this transaction. The rights were nothing but options to purchase stock, and the fact that they were allotted to stockholders of the Guaranty Company did not make them in any sense dividends. An option is but a continuing offer; and, when the offer is accepted, it is merged in the contract which results. We have, then, nothing upon which to-predicate an assessment of the tax but a purchase of 'Stock by the taxpayer; and it is-well settled that such a transaction does not. *564give rise to taxable income until a profit is realized by the sale. of the stock purchased. The taxing statutes are not based upon the theory that a man can ‘buy himself rich.’ ”
In Miles v. Safe Deposit & Trust Co., 259 U.S. 247, 42 S.Ct. 483, 66 L.Ed. 923, it was held that, where a stockholder sold rights to subscribe to new stock in a corporation, the amount thus realized was taxable as income; but the court pointed out that, if he had decided to accept the new shares instead of selling the rights, there would have been no profit and hence no taxable income. In that case it was the stock of the same corporation; but the court held that the same principle would hold as to the purchase of stock of another corporation. No profit is realized upon' a purchase; and the mere right to purchase is not to be treated as a dividend or distribution of assets, unless the right to purchase is a mere cloak for what in fact is a dividend.
There is no evidence that the offering of the stock of the United was intended by Superpower as a cloak for what in fact was a dividend. The Board of Tax Appeals found as a fact that it was not. This court cannot review this finding.
Taxation is a practical matter. The income tax law is concerned, generally speaking, only with realized gains or losses. Lucas v. American Code Company, Inc., 280 U.S. 445, 449, 50 S.Ct. 202, 203, 74 L.Ed. 538, 67 A.L.R. 1010; Burnet v. Logan, 283 U.S. 404, 413, 51 S.Ct. 550, 552, 75 L.Ed. 1143; Weiss v. Wiener, 279 U.S. 333, 335, 49 S.Ct. 337, 73 L.Ed. 720; United States v. S. S. White Dental Manufacturing Company, 274 U.S. 398, 401, 47 S.Ct. 598, 599, 71 L.Ed. 1120. No gain is realized by a taxpayer as a result of the allotment to him of rights to purchase, or of a purchase under those rights until the stock acquired is sold. That he might have realized a profit if he had sold the rights is beside the point. Helvering v. Bartlett, supra. Taxes must be imposed on the basis of what happened, not on the basis of what might have happened.
Obviously the taxpayer cannot be taxed as income based on the selling price of the purchase certificates during the period he held 'them, since he did not realize income from them. If he failed to exercise them, he could claim no loss. Eastern Shares Corporation v. Commissioner, 32 B.T.A. 608. To him they simply represented a right to buy United stock. When exercised they became merely an acceptance of an offer to sell. If the stock proved to have an increased market value in the boom market of 1929 over the cash paid the company, he has not realized on it, To determine taxable income there must be a sale or exchange of property, or something definite other than a fluctuating stock exchange market. The court does not recognize theoretical gains or losses.
As the court said in Commissioner v. Cummings (C.C.A.) 77 F.(2d) 670, 672: “Taxation does not concern itself with hypotheses, but with real situations.” Citing Helvering v. Bartlett, supra.
■I think the decision of the Board should have been affirmed.