Court Opinion

ID: 9442717
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:56:51.222545+00
Date Added: 2024-06-11T17:29:12.189412
License: Public Domain

MILLER, Circuit Judge
(dissenting).
The ruling of the Tax Court appears to me to be based upon the assumption that the taxpayer bought the business of Claude H. Foster from Foster through a cash payment from it to Foster of $4,358,705.70, raised for it through the underwriting services of Otis & Company. I would concur in an affirmance of the judgment if I could agree with that factual basis. However, as I view the facts, the taxpayer (1) did not buy the business from Foster, (2) did not sell its stock to Otis & Company, the underwriter, for money, and (3) did not pay for the business with cash.
It is true that Foster sold his business for $4,358,705.70 cash, but that sale was to Otis & Company, not to the taxpayer. The taxpayer was not in existence at that time. The later sale from Otis & Company to the taxpayer was evidenced by a separate sales contract with different terms.
It seems dear to me from the subsequent contract of sale between Otis & Company and the taxpayer that the taxpayer not only bought the business from Otis & Company, who was then the owner and with whom the contract was made, but that payment was made in stock, not in cash. This contract, dated April 24, 1925, provides that "in consideration" of Otis & Company procuring a conveyance of the business to the taxpayer, the taxpayer would repay Otis & Company for certain expenses, increase its authorized capital stock to 200,000 shares, and that “all of such increase of capital stock shall be issued to the undersigned or its nominees as fully paid and nonassessable,” Otis & Company being the undersigned. The last paragraph of the contract refers to the assets “proposed to be transferred to you in payment for stock." The stipulated facts state that the taxpayer had no other agreement with reference to the issuance of its stock. No cash figure is mentioned as the purchase price. It contains no provision respecting the price at which the stock would be sold to the public, nor any provision concerning the disposition of the proceeds to be received by Otis & Company from the resale. The stipulated facts state that all the shares of stock “were issued to Otis & Company, * * * in exchange for all the assets, including good will, of the business * * The Tax Court recognized this fact in the statement in its opinion “Otis & Company was simply the underwriter purchasing and reselling petitioner’s stock on its own account and not as the petitioner’s agent.” It seems clear to me that Otis & Company not only purchased taxpayer’s stock on its own account, but also paid for that purchase by transferring to the taxpayer the business property herein involved. That is what the contract provided, and that is what the taxpayer actually received. The taxpayer did not in fact receive any money for its stock.
Under sections 718(a)(2) and 113(a) of the Internal Revenue Code, 26 U.S.C.A. §§ 113(a)(2), 718(a), the equity invested capital includes property previously paid in for stock, such property being valued at its cost. Section 35.718-1 of Regulations 112 provides: “If the basis to the taxpayer is cost and stock was issued for the property, the cost is the fair market value of such stock at the time of its issuance.” Our *796problem is to determine the fair market value of the stock issued to Otis & Company at the time of its issuance. There are established and approved methods for determining that value. What Foster received for the property, through a noncompetitive sale accompanied by unusual conditions of his own choosing, is not the formula to be used. Instead, we must determine the fair market value of what the taxpayer gave in exchange for the property. Appeal of Markenheim Co., 1 B.T.A. 1240; Cassidy Company, Inc., v. Commissioner of Internal Revenue, 11 B.T.A. 190. That is the taxpayer’s investment. La Belle Iron Works v. United States, 256 U.S. 377, 388, 41 S.Ct. 528, 65 L.Ed. 998. Since the taxpayer gave its stock for the property, rather than money, the fair market value of the stock so exchanged is the issue to be decided in this case. Hazeltine Corp. v. Commissioner of Internal Revenue, 3 Cir., 89 F.2d 513. Whether that value is different, and by how much, from the figure used by the Tax Court, is not now before us. In my opinion, the method used in reaching that valuation was incorrect.
In some cases, where tax avoidance is the dominant purpose, formal legal transactions, unaccompanied by a bona fide business purpose, have been disregarded by the Courts. Tax avoidance is lacking in the present case. The transaction took place in 1925. The tax involved is for the year 1944. The bona fide character of the transaction is not questioned. The business purpose was and is a very generally accepted one, designed to meet the needs of the seller, who would probably have had great difficulty in obtaining his purchase price of over four million dollars from any one other than a corporate purchaser, particularly under the conditions imposed. I do not believe the Court is justified in disregarding the legal form which, the transaction took in the present 'case. United States v. Cummins Distilleries Corp., 6 Cir., 166 F.2d 17, 20-21. Even if we accept the view of the Tax Court that the transactions must be considered as a whole, and not divided into separate transactions through an intermediary, the net result was that the taxpayer acquired the business of Foster in exchange for its stock. The fair market value of the business and the fair market value of the stock are the decisive elements in determining the fair market value of its investment, rather than the arbitrary, non-competitive figure placed upon the business by Foster.
I am of the opinion that the judgment should be reversed and the case remanded to the Tax Court with directions to redetermine the invested capital of the taxpayer in accordance with the views-expressed herein.