Court Opinion

ID: 4617499
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:42.12649+00
Date Added: 2024-06-11T07:55:18.766079
License: Public Domain

THOMAS A. HUNTER, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hunter v. CommissionerDocket No. 58490.United States Board of Tax Appeals33 B.T.A. 941; 1936 BTA LEXIS 802; January 22, 1936, Promulgated *802  An employee, receiving a fixed annual salary, entered into a contract whereby at the termination of his employment he was to receive in cash an amount equal to the then book value of certain shares of stock of the employer corporation.  Held, that the petitioner was not the owner of shares of stock issued in his name under the plan and realized no gain when class A shares were substituted for class B shares standing in his name.  Herman T. Reiling, Esq., for the petitioner.  C. R. Marshall, Esq., for the respondent.  MURDOCK *942  The Commissioner determined a deficiency of $6,114.49 in the petitioner's income tax for the year 1927.  Two issues are raised by the assignments of error.  The first is whether the petitioner realized a gain of $47,126.28 in 1927, as the result of a transaction with Marshall Field & Co. in January of that year; and the second is whether he received a distribution from Marshall Field & Co. on January 5, 1927, in the amount of $1,118.51.  FINDINGS OF FACT.  The petitioner is an individual, who filed his income tax return for the calendar year 1927 with the collector of internal revenue for the first district of*803  Illinois.  He kept his accounts and filed his return on the basis of cash receipts and disbursements.  He was continuously in the employ of Marshall Field & Co. from 1901 to 1930.  The petitioner, as an employee of Marshall Field & Co., entered into a contract with that corporation on March 14, 1921, which recited that he had been connected for some time with the management of the business of the corporation and the corporation desired to have him continue.  The contract provided that "the corporation hereby sells said party of the second part 417 shares of the Common Stock Class B of the corporation at a price of ten dollars ( $10) per share, being its book value as of January 1, 1921, * * * said purchase price for said Common stock Class B purchased under this contract, together with interest on any unpaid portion thereof at the rate of seven per cent (7%) per annum from January 1, 1921 with annual rests, shall be paid from time to time out of the dividends paid on the said Common Stock Class B this day sold to said employee as and when the same shall be declared and paid, and until said purchase price shall be fully paid all dividends declared and paid on said stock shall be*804  applied to that purpose." The contract further provided that the title to all shares of the common stock of the corporation, both class A shares and class B shares, held by the employee under the contract when he should cease to be in the service of the corporation should at once revert to the corporation and the employee, or his representatives, should be credited as of the date of the termination of his services with the then book value of the stock, with interest at the rate of 7 percent from the date of the balance sheet to the date of payment, less any dividends declared and paid on the stock in the meantime.  The contract also contained the following provision, which was never carried out: (3) On the first day of January, 1923, or as soon thereafter as practicable, and after the balance sheet of the corporation as of January 1, 1923 shall *943  have been ascertained and determined by its Board of Directors, so many shares of the Common Stock Class B of each stockholder, including the employee, shall be surrendered to the corporation and a like number of shares of Common Stock of Class A shall be issued in lieu thereof at a book value for each A share of one hundred*805  dollars ($100.00) in excess of the book value of each B share, as shall be required to reduce the book value of his remaining shares of Common Stock of Class B to a book value of ten dollars ($10.00) per share as of January 1, 1923.  The employee agreed to devote his time and services exclusively to the business of the corporation until termination of the contract by either party giving written notice or by the death of the employee.  Paragraphs 5 and 6 of the contract were as follows: (5) After the entire purchase price for all of the Class B shares sold to the employee shall have been fully paid as provided in Paragraph (1) hereof, the dividends declared and paid on the shares of stock that may be held by the employee hereunder shall be applied as follows: All preferential cumulative dividends, at the rate of seven dollars ($7.00) per share per annum, paid upon Class A shares, held under this contract by the employee, may be retained by the employee for his own use, but all other dividends paid on such Class A shares and all dividends whatsoever paid on Class B shares of the employee shall be left with the corporation and draw interest at the rate of seven per cent (7%) per*806  annum until the 1st day of January next thereafter, and on said date the amount thereof, together with accumulated interest (together with any other money that the employee may desire to use for the same purpose) shall be used to convert his B shares into A shares (leaving him always the holder of the same total number of Class A and Class B shares combined) by applying the sum of one hundred dollars ($100.00) for each Class B share converted into Class A share; provided, however, that the employee shall not be required to apply any of such dividends for said purpose after the total number of Class A shares held by the employee hereunder shall equal fifty-four and seven-tenths per cent (54.7%) of the total number of shares of common stock of both classes A and B held by him hereunder.  (6) All certificates for said shares of stock to be so held by the employee shall be endorsed in blank by said employee and deposited with the Treasurer of said corporation to secure the carrying out of the terms and provisions of this contract, and there shall be stamped upon the face of said certificate the following: "The shares of stock represented by this certificate are subject to a certain contract*807  with Marshall field & Company, dated March 14, 1921." This contract was supplemented on January 26, 1922, by a paragraph stating that the corporation sold to the employee 417 additional shares of common stock, class B, at its book value on January 1, 1922, to be paid for and held in all respects as provided by and subject to all the terms of the contract of March 14, 1921.  The same parties entered into a contract on February 5, 1923, which recited that the employee, the petitioner, was the holder of 2,000 shares of class B stock of the corporation subject to certain terms and conditions therein expressed.  The provisions of the contract *944  in regard to title to the shares, services, termination, dividends, and the endorsement and holding of the certificates were similar to the provisions of the contract of March 14, 1921, except that the provision in regard to dividends was not dependent upon the entire purchase price for all of the class B shares having been fully paid.  The corporation charged the petitioner in an account on its books with the appropriate book values of the shares mentioned in the contracts.  The account showed at the beginning of the year 1927 a*808  debit balance of $2,249.54.  The contract of February 5, 1923, was still in effect.  Two thousand shares of class B stock stood in his name at that time.  No other shares were in his name at that time.  None of the shares had ever been in the possession of the petitioner.  He had endorsed the certificates in blank and had also signed voting proxies at the direction of the corporation.  An officer of the corporation advised the petitioner in February 1927 that the corporation was going to decrease his shares under the contract from 2,000 to 1,000.  The petitioner resisted this change and continued to resist it when he learned that the shares standing in his name were to be changed from 2,000 class B shares to 541 class B shares and 459 class A shares, which would have a total book value substantially equivalent to the book value of 2,000 class B shares.  Under threat of worse treatment if he did not agree to the change the petitioner signed a new agreement on February 1, 1927.  This agreement recited that the petitioner was the holder of 1,000 shares of the common stock of the corporation made up of 459 class A and 541 shares class B subject to certain terms and conditions agreed*809  upon and expressed in the contract.  The terms and conditions were substantially the same as the terms and conditions of the contract of February 5, 1923, described above.  The petitioner did not report any income for 1927 from the above transaction.  The Commissioner in determining the deficiency held that the petitioner realized a capital net gain of $47,126.28 as the result of an exchange of the stock of Marshall Field & Co.  He also determined that the petitioner received $1,118.51 as a distribution from Marshall Field & Co. on January 5, 1927.  The entire deficiency is due to the tax computed on these two items.  The petitioner did not own any class B common stock of Marshall Field & Co. in 1927.  He did not exchange any class B common stock of Marshall Field & Co. for any class A common stock of Marshall Field & Co. in 1927.  He did not realize any gain or any capital net gain from an exchange of Marshall Field & Co. stock.  The petitioner did not receive a distribution of $1,118.51 from Marshall Field & Co. on January 5, 1927, or at any other time in 1927.  *945  OPINION.  MURDOCK: The manner of computing the profit of $47,126.28 need not be set forth since the*810  petitioner makes no attack upon the figures used.  His contention is that he realized no profit whatever.  The Commissioner, in determining the deficiency, has approved the report of a revenue agent.  The latter has held that the petitioner was the owner by purchase of 2,000 shares of class B common stock of Marshall Field & Co. and became the owner of 459 shares of class A common stock by exchanging therefor 1,459 of the class B common stock.  Certain words and provisions of the contracts, when read alone, bear out the interpretation which the revenue agent apparently placed upon them.  Nevertheless, the contracts when read in their entirety, and the other evidence in the case, show that the petitioner never actually purchased any shares and never became the owner by purchase or exchange of any shares of either class B or class A common stock.  The corporation never delivered and never intended to deliver any certificates to the petitioner so that he would become the owner of the shares.  The contracts describe him as a purchaser and a holder of the shares, and the corporation went through the form of issuing stock certificates in his name, but those certificates never went out*811  of the control of the corporation.  They were placed before the petitioner in the office of the corporation merely for the purpose of having him endorse them in blank so that they could be retained permanently by the corporation.  His testimony shows that he was not free to vote the stock.  The contracts provided that under no circumstances could the petitioner ever become the actual unrestricted owner of any class A or class B shares.  The shares standing in the name of the petitioner and held by the corporation were never to be delivered to the petitioner.  He was never to be permitted to sell them or use them for any purpose whatever.  The shares were used merely as a part of a plan for computing an amount to which the petitioner would become entitled at the termination of his employment.  The amount was to be paid to him or to his representatives in cash.  Under no circumstances could stock be demanded in payment.  The general plan was to build up a fund to be paid to the petitioner as compensation over and above his fixed salary upon the termination of his employment.  He was charged with the book value of the shares at the approximate dates of the contracts.  The equivalent, *812  in amount, of interest was computed on the charges.  Entries were made on the credit side corresponding to the dividends declared on the stock.  The petitioner was to receive for his own use *946  an amount equal to dividends at the rate of 7 percent per share per annum upon any class A shares standing in his name.  However, no class A shares stood in the name of this petitioner prior to the contract of February 1, 1927, and the question of how any amounts he may have received thereafter are to be taxed to him is not now in issue.  The sole question is whether or not the petitioner realized a profit on an exchange.  The decision of that question depends upon whether or not the petitioner became the owner of any shares as the result of an exchange giving rise to profit.  Individual words in the contracts are not controlling where, as here, the evidence viewed in its entirety, shows that the petitioner was not intended by the parties to own any shares and in fact never became the owner of any shares.  Since the petitioner owned no shares either before or after February 1, 1927, he did not exchange any shares and, consequently, he realized no profit from an exchange on that day. *813  The change which took place put into operation a somewhat different method of eventually determining the amount which the petitioner was to receive at the indefinite time in the future when his employment should terminate.  He was on a cash basis and received in 1927 as a result of the new contract neither cash nor its equivalent.  The transaction did not result in the realization of any income by the petitioner in 1927.  The revenue agent's report, upon which the determination of the deficiency was based, simply states that the petitioner received a distribution of $1,118.51 from Marshall Field & Co. on January 5, 1927.  However, the petitioner testified that he received no such distribution from Marshall Field & Co.  The evidence fails to weaken his direct testimony on the subject.  The presumption of correctness attaching to the determination of the Commissioner has been overcome.  Decision will be entered for the petitioner.