Court Opinion

ID: 4629991
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:06:32.994714+00
Date Added: 2024-06-11T07:57:27.890255
License: Public Domain

HENRIETTA S. CARTER, EXECUTRIX, ESTATE OF R. L. CARTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carter v. CommissionerDocket No. 14669.United States Board of Tax Appeals18 B.T.A. 853; 1930 BTA LEXIS 2579; January 17, 1930, Promulgated *2579  1.  Held, that petitioner's decedent took title to certain shares of stock in 1920 and that any gain resulting therefrom must be taxed in that year.  2.  Evidence not sufficient to overcome the presumption that the Commissioner correctly determined the profit realized by the exchange in 1920 of a certain patent for shares of stock.  C. F. McLaughlin, Esq., for the petitioner.  Arthur H. Murray, Esq., for the respondent.  LANSDON *853  The respondent has asserted a deficiency in income tax for the year 1920 in the amount of $1,834.36.  After certain confessions of error by counsel for the respondent, the issue remaining to be decided is *854  whether petitioner realized gain in 1920 in the exchange of a certain patent and parcel of real estate for shares of the capital stock of a corporation.  The statement attached to the deficiency notice covers 1920 and 1921, but no deficiency is asserted as to the latter year.  The petitioner states that the entire deficiency for 1920 is in dispute and that the Board may redetermine his tax liability for 1921.  The death of the petitioner of record prior to the hearing was suggested and, by agreement*2580  of parties, Henrietta S. Carter, Executrix, was substituted for the deceased petitioner.  FINDINGS OF FACT.  The petitioner's decedent was an individual residing in Omaha, Nebr., where he was the president and principal stockholder of the Carter Sheet Metal Co., hereinafter designated as the corporation, which was engaged in the manufacture and sale of sheet metal products.  On February 24, 1920, the stockholders of the corporation held a meeting and the record thereof was incorporated in the minute book of the corporation as follows: February 24, 1920, adjourned meeting of the stockholders of the Carter Sheet Metal Company, present R. L. Carter, representing all the stock except one share held by Henry S. Carter, present and voting and one share held by Mrs. Allen C. Gifford, present and voting, R. L. Carter, president, called the meeting to order.  President, called the meeting to order.  The president reported that the new building which had been erected by him for the company was about finished, and that the cost of the building was about $40,000, and that he was ready to present a statement of the items of cost to a committee appointed for that purpose, that he had*2581  placed the mortgage on the premises $17,500, and that he was ready to turn over the property to the corporation for stock at par amounting to $22,500.  On motion of the president, and duly seconded and carried by full vote of the stockholders, H. S. Carter and Alice C. Gifford, a committee was appointed to examine the statement of R. L. Carter and his report.  After examination the committee reported that the statement and above mentioned report were correct.  It was then moved by H. S. Carter and seconded by Alice C. Gifford that the directors of the corporation be instructed to purchase the said premises, to-wit: lots 14 and 15, block 5, Paddock place, an addition to the City of Omaha, Douglas County, Nebraska, and that they pay for the same by issuing paid up stock in the corporation to R. L. Carter to the sum of $22,500, the corporation assuming the mortgage as the balance on $40,000 purchase price.  Motion was carried by unanimous vote, there being no further objection the meeting was adjourned.  On March 10, 1920, the directors of the corporation held a meeting and the record thereof was incorporated in the minute book of the corporation as follows: *855  March 10, 1920. *2582  Adjourned meeting of the directors of Carter Sheet Metal Company, present all of the directors, the meeting was called to order by the president, R. L. Carter.  Communication from the stockholders of the corporation was received, authorizing and directing the directors to purchase lots 14 and 15, block 5, Paddock Place, Omaha, Nebraska, from R. L. Carter, at the agreed price of $40,000, subject to a mortgage of $17,500, which the corporation is to assume and pay, the balance of the purchase price in capital stock of the corporation.  The same was read and placed on file.  On motion of H. S. Carter, seconded by Alice C. Gifford, it was carried that the corporation purchase said premises and pay the said price of $22,500 in capital stock and $17,500 by assuming and agreeing to pay the said mortgage to the Conservative Savings and Loan Association.  The president reporting that the statement of affairs of the corporation for the year just closed shows profits and available assets subject to dividend amounting to $18,500, and moved that a stock dividend of said available profit be declared, the president and secretary issued stock to stockholders in the sums as follows: To R. L. *2583  Carter, $18,300.  H. S. Carter, $100.  Alice C. Gifford, $100.  Sec. Alice C. Gifford.  The parties agree that the real estate offered to the Carter Sheet Metal Co., as above set forth, cost the decedent the amount of $34,730.38, and that the consideration received therefor was $40,000.  The balance sheets of the Carter Sheet Metal Co. as of December 31 for the years 1919, 1920, and 1921 were as follows: 191919201921RESOURCESCash$3,036.97$1,843.16$15.89Accounts receivable16,413.647,271.524,653.28Miscellaneous inventory18,873.6828,551.7223,798.53Patents and good will9,847.359,847.35Real estate40,000.0039,040.00Machinery and equipment11,500.0022,321.9520,126.76Furniture and fixtures608.00547.20Truck and roadster950.00650.0049,824.29111,393.7098,679.01LIABILITIEAccounts payable8,178.127,822.485,662.40Notes payable16,912.5016,700.0014,000.00Notes payable - R. L. Carter1,600.004,865.00Mortgage payable16,787.7015,678.00Depreciation reserve3,192.19Capital stock15,000.0064,100.0067,100.00Surplus9,733.674,383.52-11,814.5849,824.29111,393.7098,683.01*2584  The books of the corporation show that at December 31, 1920, its outstanding capital stock was 641 shares of the par value of $100, and that on that date certificates Nos. 6 and 29 for 225 and 183 shares, respectively, and each dated January 4, 1921, stood of record as issued to R. L. Carter.  At December 31, 1921, there were outstanding 671 shares of stock of the par value of $67,100.  *856  Upon audit of petitioner's income-tax return for 1920, the Commissioner added to the gross income therein reported the amounts of $5,868.80 and $8,347.35 alleged to represent profits realized from the sale of real estate and patents to the corporation in the taxable year for 225 and 178 shares of the stock of the corporation, made other adjustment, and determined the deficiency here in question.  The parties agree that in 1920 the stock of the corporation had a realizable value of $100 per share.  OPINION.  LANSDON: At the hearing of this proceeding counsel for the respondent confessed error in disallowing as deductions from the petitioner's gross income for 1920, the amounts of $240, $23.01, and $335.67, representing insurance on a building in process of construction, taxes on such*2585  building, and local taxes paid by petitioner during such year.  Due adjustment should be made therefor in the recomputation of petitioner's tax liability for 1920 under Rule 50.  The petitioner's decedent was the president and principal stockholder of the Carter Sheet Metal Co.  Prior to March 10, 1920, he completed the construction of a building suitable for the business of the corporation.  On February 24, 1920, he offered such building to the stockholders of the corporation for a consideration made up of 225 shares of capital stock and the assumption of a mortgage then on such property in the amount of $17,500.  This offer was accepted by proper action duly recorded and the purchasing corporation at some time thereafter, but within the year 1920, entered into the use and possession of the premises.  The parties agree that the sales price was $40,000, and that the cost of the premises to the petitioner, as finally adjusted, was $34,730.38.  As there is no question of depreciation involved it follows that profit in the amount of $5,269.62 was realized from the sale.  The controversy here relates solely to the date at which the petitioner received his consideration and became liable*2586  for tax on any gain which he realized from the transaction.  The evidence leaves much to inference and conclusion.  It is certain, however, that the offer of sale was made by the petitioner and accepted by the stockholders of the corporation on February 24, 1920; that on that date the directors were authorized to close the deal; and that on March 10 the directors voted to complete the purchase.  The petitioner contends that he received nothing until January 4, 1921, and that the gain, if any, was realized at that date and taxable, if at all, in that later year.  In our opinion the record does *857  not sustain this contention.  There was an offer and acceptance, a complete meeting of minds not later than March 10, 1920, which were reduced to writing in the minutes of the corporation.  In ; , the court, asked to determine the date at which title to certain personal property passed from seller to buyer, said: The material question to be determined, then, is, who held title to the hay at the time this action was commenced?  The modern doctrine undoubtedly is that neither delivery nor payment of the*2587  purchase money is generally requisite for vesting title to personal property in the buyer under a contract of sale; it being necessary only that the identical goods which are the subject of the contract should be ascertained and the price fixed.  Newmark on Sales, § 159, gives the rule in the following language: "When the terms of sale are agreed on, and the bargain is struck, and everything that the seller has to do with the goods is complete, the contract of sale becomes absolute as between the parties without actual payment or delivery, and the property and the risk of accident to the goods vest in the buyer." Schouler's Personal Property, vol. 2, § 243, is as follows: "Where specific chattels are embraced under a contract of immediate sale, and nothing remains to be done to them, the presumed intent of the parties is that the right of property shall become transferred to the buyer and vest in him immediately upon the completion of the bargain by mutual assent, and, even though the seller subsequently continue in possession of the goods, the presumption remains the same as between the parties; his possession being that of a bailee with a right to recover his price." In the instant*2588  proceeding there is a contract for immediate sale of certain property to the corporation with payment by the issue of shares of stock.  It is reasonably clear that the seller delivered immediate possession and that thereafter nothing remained to be done except the delivery of the stock.  The corporation had acted and thereafter the petitioner had the absolute right to demand the issue of the stock, which was none the less his property because it had not been evidenced in the form of a certificate.  Even if there were no other material facts in evidence, we are convinced that title to the stock to be issued as consideration for the property purchased vested in the petitioner from March 10, 1920.  The record here plainly indicates that both seller and purchaser intended that the sale should be regarded as completed at March 10, 1920.  The balance sheet of the corporation as of December 31, 1920, includes the real estate in question as an asset and the stock contracted to be issued therefor as a liability.  It seems clear, therefore, that the corporation, in conformity with its action on February 24 and March 10, 1920, entered into possession of the purchased property in that year. *2589  That the stock certificate was issued on January 4, 1921, is not material, since the corporation charged itself with that obligation in 1920, took the amount represented thereby *858  into its liabilities as of that year, and included the value of the property in its assets.  The parties being in agreement as to the cost, sales price, and readily realizable cash value of the stock at March 10, 1920, we are of the opinion, therefore, that the gain as adjusted by the respondent's confessions of error was taxable in 1920 under the provisions of section 202(2)(b) of the Revenue Act of 1918.  The respondent contends also that the petitioner realized gain in the amount of $8,347.35 from the sale of a certain patent to the corporation in exchange for 178 shares of stock.  The petitioner's counsel asserts that such patent was given to the corporation without consideration, and that the 178 shares of stock were part of a stock dividend declared in 1920, but not distributed until January 4, 1921, and that if any tax liability resulted it attaches to income for the latter year.  The evidence on this point is limited to the minutes of the corporation, which show that a stock dividend*2590  was declared on March 10, 1920, and to a stipulation of the parties that a certain stock certificate was issued on January 4, 1921.  The record here discloses that at December 31, 1919, no patents were included in the balance sheet assets of the corporation and that at December 31, 1920, there were such assets of the value of $9,847.35.  It is clear, therefore, that some petents were acquired within the year 1920, but the petitioner contends that they were a gift to the corporation.  If this be true it may explain how a corporation with a surplus of only $9,733.67 at December 31, 1919, was able, a little more than two months thereafter, to declare a stock dividend of $18,500 and charge the amount thereof to surplus.  There is, however, no proof that the petitioner assigned any patents to the corporation without consideration.  We are of the opinion, therefore, that the evidence fails to overcome the presumption that the Commissioner correctly determined the tax liability resulting from the sale of the patent to the corporation.  The petitioner suggests that the Board may determine his tax liability for 1921.  Inasmuch as the respondent has asserted no deficiency for 1921, we are*2591  without jurisdiction as to that year.  . Decision will be entered under Rule 50.