dissenting: I respectfully dissent from the holding of the majority on the first issue.
The conclusion there reached is in effect that taxpayers are not free to make the bargain of their choice, even though that bargain be made at arm’s length with a third party.
Said conclusion seems to be based on the narrow premise that section 111(b) cannot apply because of the character of the thing bargained away and upon the broad premise that this particular contract with Stanolind was the equivalent of cash in petitioners’ hands and therefore taxable under section 22(a).
As to the narrow premise it seems clear to me that the word “property” in section 111(b) was intended to mean “something of value” whether real, personal, tangible, intangible, or as here, the right and power to demise, and Burnet v. Harmel, 287 U.S. 103, cited by the majority, does not hold otherwise.
That section 111(b) is broad enough to cover intangibles has never been questioned. See Perry v. Commissioner, 152 F. 2d 183, involving, inter alia, contractual rights and unliquidated claims; A. W. Henn, 20 B.T.A. 1133, involving, inter alia, interests in leaseholds; Alice G. K. Kleberg, 43 B.T.A. 277, involving the right to receive annual payments of cash; and Curtis R. Andrews, 23 T.C. 1026, involving a partnership interest.
As to the broad premise of the equivalent of cash, the majority cites no case which has gone so far down the road of constructive receipt. Harry Leland Barnsley, 31 T.C. 1260, dealt with negotiable notes having a stipulated fair market value. Indeed, Barnsley, by way of dictum, indicates a contrary result in the instant case and approves Alice G. K. Kleberg, supra, which is factually similar.
The basic questions for resolution in constructive receipt cases are whether the thing received was received in satisfaction of the obligation, or merely as evidence thereof, Dudley T. Humphrey, 32 B.T.A. 280, C. W. Titus, Inc., 33 B.T.A. 928, and if the former, its fair market value. In resolving these questions courts have usually drawn the line at negotiable instruments, known to the law merchant, and such instruments have acquired the status of property, separate and apart from the obligations they represent. Commissioner v. Moore, 48 F. 2d 526; Bedell v. Commissioner, 30 F. 2d 622; Commissioner v. Garber, 50 F. 2d 588; Charles C. Ruprecht, 16 B.T.A. 919, affd. 39 F. 2d 458 (C.A. 5); Dudley T. Humphrey, supra; Perry v. Commissioner, supra; A. W. Henn, supra; Alice G. K. Kleberg, supra; Nina J. Ennis, 17 T.C. 465; Curtis R. Andrews, supra. Perry v. Commissioner, supra, made the distinction by stating that a simple contractual promise to pay had intrinsic value, but not the fair market value required by the statute. In Bedell v. Commissioner, supra, Judge Learned Hand stated:
But if land or a chattel is sold, and title passes merely upon a promise to pay money at some future date, to speak of the promise as property exchanged for the title appears to us a strained use of language, when calculating profits under the income tax. * * * it is absurd to speak of a promise to pay a sum in the future as Raving a “market value,” fair or unfair. Such rights are sold, if at all, only hy seeking out a purchaser and higgling with him on the hasis of the particular transaction. Even if we could treat the case as an exchange of property, the profit would be realized only when the promise was performed. [Emphasis ■ supplied.]
The reason for thus drawing the line is clear. A negotiable promissory note is freely and easily negotiable chiefly because equities and defenses available between the original parties thereto are not available as against a third-party purchaser for value, before maturity and without notice. This rule does not extend to such unique rights as the simple, executory promise to pay in the future involved in the instant case.
True, the facts indicative of intrinsic value of the Stanolind contracts are strong, but other cases have involved solvent obligors. Sinclair Oil & Gas Company in Commissioner v. Moore, supra; Standard Oil Co. in Charles C. Ruprecht, supra; Tidal Oil Co. in C. W. Titus, Inc., supra; and the King estate in Alice G. K. Kleberg, supra.
True, the Stanolind contracts were discounted at almost face value, but not to a stranger, for Frank Cowden, Sr., was a director of both First National Bank of Midland and of First Mortgage Company, Midland, and it is found as a fact that the bank did not consider such transactions commonplace.
Thus the result reached by the majority can only be based upon the proposition that Stanolind would have as willingly paid the bonuses in cash on execution of the lease and therefore these cash basis taxpayers were in constructive receipt of the cash.
In my view this is a far-reaching and dangerous extension of the doctrine of constructive receipt. Petitioners should be taxed on the basis of the transaction into which they actually entered, not one into which they might have or could have entered.
It has been axiomatic that a taxpayer is free to cast his transactions in any maimer he may choose, and the tax consequences of such transactions are to be based on what he did, not what he could have or might have done, the only qualification being that he must in fact have done what he claims, not merely appear to have done so. As expressed by the Supreme Court in United States v. Cumberland Pub. Serv. Co., 338 U.S. 451, at page 455: “Consequently, a corporation may liquidate or dissolve without subjecting itself to the corporate gains tax, even though a primary motive is to avoid the burden of corporate taxation.” Also cf. United States v. Isham, 84 U.S. 496.
Here, taxpayers could have entered a transaction entitling them to full cash payment in 1951, and in such instance would have been then taxable upon the entire amount of the bonus or advance royalty. But no such transaction materialized. The majority is in the position of ignoring that fact and taxing them as though it had.
FisheR, J., agrees with this dissent.