Court Opinion

ID: 4625078
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:29.299942+00
Date Added: 2024-06-11T07:56:38.283732
License: Public Domain

H. L. CARNAHAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Carnahan v. CommissionerDocket No. 34915.United States Board of Tax Appeals21 B.T.A. 893; 1930 BTA LEXIS 1775; December 23, 1930, Promulgated *1775  Taxpayer, on the cash receipts and disbursements basis, received a certificate of stock prior to tax year for legal services rendered to promoters of a corporation, which he immediately deposited in escrow according to State law and by order of the commissioner of corporations of the State.  The certificate was not released to him until during the tax year.  Taxpayer voted the stock during the escrow period and received dividends thereon, but he could not sell or transfer it without the written consent of the commissioner of corporations during that period.  Held, the stock constituted income in the year in which the certificate was received by the petitioner.  Lawrence H. Cake, Esq., for the petitioner.  B. M. Coon, Esq., for the respondent.  MCMAHON *893  This is a proceeding for the redetermination of a deficiency in income tax for the year 1924 in the amount of $762.81.  The following errors are alleged: (1) Respondent erred in amending the petitioner's return of income for 1924 by adding thereto the value of 5,000 shares of the common stock of the Union Mortgage *894  Co. of California, the said shares having been received by the*1776  petitioner in 1922 as compensation for personal services and held in escrow until 1924; (2) respondent erred in finding that the release of the said shares of stock from escrow in 1924 constituted an accrual of income to the petitioner in 1924.  FINDINGS OF FACT.  The petitioner is an individual, resident of Los Angeles, Calif.The Union Mortgage Co. of California is a corporation organized under the laws of Delaware during 1921, having an authorized capital stock consisting of 500,000 shares of preferred stock of the par value of $10 per share, without voting power, and 500,000 shares of common stock of no par value.  Under the "Blue Sky Law" of California, called the "Corporate Securities Act," adopted in 1917, the company, before selling or issuing any shares of its capital stock in California, was required to secure from the commissioner of corporations a permit authorizing it to do so, in which permit the commissioner was authorized to provide the terms and conditions upon which the stock thereby authorized should be sold or issued.  The Union Mortgage Co. being desirous of obtaining such a permit, accepted a written proposal made to it by Berman and Aldrich.  The substance*1777  of this proposal was that for 100,000 shares of its common stock, Berman and Aldrich would procure suitable offices, engage the necessary office help and, during 1922, supervise the preparation of all necessary legal forms and the purchase of securities by the company, and otherwise act as its general managers.  As the shares of stock were sold in units of one preferred and one common, one share of common was to be issued to the promoters for each unit sold until the 100,000 shares had been issued.  January 13, 1922, the commissioner of corporations issued a permit to the company, authorizing it to sell 100,000 shares of preferred and 100,000 shares of common in units of one share of preferred and one of common at $12.50 per unit.  In each subscription for shares under the permit, the subscriber agreed to pay $10, the par value thereof, for each share of preferred subscribed, and the balance ($2.50) of the subscription price of $12.50 per unit for the common share subscribed therewith.  One of the conditions of the permit was that "when issued, all certificates evidencing any of the shares herein in paragraph 2nd authorized to be issued to R. L. Aldrich and J. Berman, shall be*1778  forthwith deposited with a depositary to be selected by said certificate holders and approved by the commissioner of corporations to be held as an escrow pending the further order of said commissioner; *895  that the receipt of such depositary for such certificates shall be filed with said commissioner and that while said certificates shall be so held, the holders of the shares evidence thereby shall not sell or offer for sale, or other wise transfer, or agree to sell or transfer such shares, until the written consent of said commissioner shall have been obtained so to do." During all the time herein mentioned prior to January 1, 1924, the petitioner and Oliver O. Clark were equal partners in the practice of law under the firm name of Carnahan & Clark, in Los Angeles, Calif.  In December, 1921, the firm was employed under an oral contract by Berman and Aldrich to render such legal services to the corporation as might be required by it or by Berman or Aldrich in performing their agreement with it above mentioned.  For such services Berman and Aldrich agreed to transfer to the petitioner, for his partner and himself, and the petitioner agreed to accept, when and as the same should*1779  be issued by the corporation, 10,000 of the 100,000 shares of the common stock to be issued to them under the permit.  The required services were performed prior to and during 1922.  Berman and Aldrich, about March 14, 1922, executed and delivered to the petitioner an interim trust certificate.  On May 11, 1922, the commissioner of corporations, in accordance with the conditions of the permit, consented in writing to the transfer by Berman and Aldrich to the petitioner, when and as issued, of 10 per cent of the 100,000 shares to be issued to them.  In accordance with the permit and certificate of Berman and Aldrich, and the consent of the commissioner, the corporation issued to the petitioner in his name, December 14, 1922, its certificate of stock No. 344 for 10,000 shares of its common stock.  This certificate when received by the petitioner, was deposited by him (in accordance with the condition of the permit) with a depositary selected by the petitioner and approved by the commissioner, to be held by it as an escrow pending the further order of the commissioner.  The depositary continued to hold the certificate until January 17, 1924, when the escrow was terminated by the commissioner*1780  by an order and the certificate was then redelivered to the petitioner.  The petitioner himself had formerly occupied the position of commissioner of corporations.  As to stock deposited in escrow the practice was to permit transfers to be made except in cases where it affirmatively appeared to the commissioner that such transfers would be to the detriment of the corporation or were actually in effect fraudulent as between the parties to the transfer.  In February, 1924, Clark transferred his half of the stock to A. L. Irish, and they requested the petitioner to have the same transferred to A. L. Irish on the books of the corporation.  Before the *896  transfer was made, the petitioner purchased such 5,000 shares from A. L. Irish for $12,500, paying $2,500 in cash and giving an interest-bearing promissory note payable to him on or before one year thereafter for $10,000.  Said note was paid prior to maturity.  Since such purchase, the petitioner has resold from time to time all of the 5,000 shares so purchased, except 100 shares.  No part of the 5,000 shares originally received by the petitioner in 1922 has been sold or otherwise disposed of.  The petitioner was on the cash*1781  receipts and disbursements basis.  Dividends were paid to the petitioner on the stock held in escrow in October, 1923, and he voted the stock during all the time it was held in escrow.  OPINION.  MCMAHON: There is only one question involved in this case and that is, did the 5,000 shares of stock received by the petitioner as compensation for services rendered to the promoters of the corporation constitute income to him in 1922, when the stock was deposited in escrow, or in 1924, when it was finally released from the escrow, the petitioner being on a cash receipts and disbursement basis?  The respondent, in computing petitioner's income for 1924, included the value of the shares as income and the petitioner contends that such action was erroneous.  The Union Mortgage Co. of California, a Delaware corporation, before selling or issuing its stock in California, was required under the "Blue Sky Law" of that State to secure a permit from the commissioner of corporations.  This corporation employed two promoters, Berman and Aldrich, to act as its general managers, for which they were to receive a maximum of 100,000 shares of the common stock of the corporation.  Whenever shares of*1782  common stock of the corporation were sold the promoters were to receive a like number of shares.  The promoters in 1921 entered into an oral agreement with the partnership of Carnahan & Clark, of which the petitioner was a member, to the effect that the partnership was to render such legal services to the corporation as might be required, for which it was to receive 10,000 shares of the 100,000 to be issued to the promoters.  Such services were performed either during or prior to 1922 and in March, 1922, Berman and Aldrich delivered an interim trust certificate to the petitioner for himself and his partner.  Later on, in the same year, a certificate of stock for the 10,000 shares was issued by the corporation to the petitioner and was immediately deposited, in accordance with the terms of the permit issued by the commissioner of corporations, with a depositary.  The only shares *897  in dispute are the original 5,000 issued to the petitioner as his portion of the partnership fee for services rendered.  The evidence discloses that during all the time the stock in question was held in escrow the petitioner voted it and received the dividends thereon.  Furthermore the petitioner*1783  received the certificate for stock in his own name and deposited it in escrow in accordance with the requirements of the State law.  The petitioner received all the benefits possible from the stock in question except the right of actual physical possession and unrestricted power of sale thereof.  It is possible that the petitioner could have sold the stock by obtaining permission of the commissioner of corporations of the State.  The evidence shows that as to stock deposited in escrow the practice was to permit transfers to be made except where it affirmatively appeared to the commissioner that such transfers would be to the detriment of the corporation or were actually in effect fraudulent as between the parties to the transfer.  From a careful consideration of the proceeding, it is our opinion that the stock in question was income to the petitioner in the year 1922 and the respondent erred in taxing it to the petitioner in the year 1924.  Reviewed by the Board.  Judgment will be entered for the petitioner.