1936 BTA LEXIS 689">*689 1. Joint Resolution No. 88, 71st Congress, extending for one year the period of limitations in the case of taxpayers filing separate returns including community property, held constitutional.
2. The profit which the Commissioner determined that the petitioners realized from the sale of 20,000 shares of stock in 1927 may not be reduced on the theory that 6,000 of the shares belonged to another party nor on the theory that a portion of the proceeds belonged to or was paid for another party.
3. The profit which the petitioners realized from the sale of the stock may not be reduced by a basis of $15 per share on the theory that the stock had a fair market value of $15 a share at the time it was received in an earlier year as compensation for services.
34 B.T.A. 479">*479 The Commissioner determined the following deficiencies in income tax for the year 1927:
| Petitioner | Docket No. | Amount |
| Adam H. Davidson | 60670 | $19,697.90 |
| Clifford Drake Davidson | 60671 | 19,859.53 |
1936 BTA LEXIS 689">*690 The issues for decision by the Board are: (1) Whether the period of limitation for assessment of the deficiencies expired before the mailing of the deficiency notices; (2) whether 6,000 shares of Oklahoma Natural Gas Corporation stock, which Davidson received in 1926, belonged to S. W. Sibley so that Davidson realized no gain from the sale or disposition of those shares of stock; (3), as an alternative to (2), whether the petitioners are entitled to a total deduction of $122,780, or some part thereof, alleged to represent a part of the proceeds of the sale of 20,000 shares of Oklahoma Natural Gas Corporation stock paid to Sibley; and (4) whether the petitioners are entitled to use $15 a share as a basis for gain or loss upon the shares of stock which Davidson received in 1926 and sold in 1927. The petitioners also claim the benefit of any adjustment of deductions for contributions which may result from a change in the amount of income. 34 B.T.A. 479">*480 The parties have agreed that this latter point can be taken care of in a recomputation under Rule 50. The Commissioner has attempted to set up the defense of estoppel to the petitioners' contention as set forth in issue (4), above.
1936 BTA LEXIS 689">*691 FINDINGS OF FACT.
The petitioners are husband and wife. They were domiciled and lived together in the State of Texas during the period here involved. They filed separate individual income tax returns for the calendar year 1927 with the collector of internal revenue for the second district of Texas on June 15, 1928. Each included therein one-half of income which, under the laws of the State of Texas, upon receipt became community property. The deficiency notices upon which these proceedings are based were mailed on October 2, 1931. No assessment of the taxes in controversy had been made up to that time. The returns were made on the basis of cash received and disbursed.
The petitioner, Adam H. Davidson, hereafter referred to as Davidson, was engaged in the business of selling securities and was also engaged in acting as agent for corporations seeking capital. He brought to the attention of Pope, Richardson & Co. the possibility of purchasing certain assets. The latter firm interested White, Weld & Co. in the transaction. Those two firms were investment bankers. The organization of the Oklahoma Natural Gas Corporation in 1926 resulted from this beginning. Pope, Richardson1936 BTA LEXIS 689">*692 & Co. agreed with Davidson upon the division between the two of whatever was received from White, Weld & Co. as a result of the transaction.
Davidson received 20,000 shares of Oklahoma Natural Gas Corporation common stock on October 26, 1926, as a part of his share in the division of the proceeds of the transaction. The shares of Oklahoma Natural Gas Corporation common stock received by Davidson had no fair market value when received by him in 1926. The receipt of the 20,000 shares was not reflected in any way in Davidson's income tax return for the year 1926.
Davidson had entered into an agreement not to sell or in any way trade in the 20,000 shares of Oklahoma Natural Gas Corporation common stock for a period of one year beginning September 21, 1926, without written permission of White, Weld & Co. The agreement also affected the stock in other ways. The restrictions were removed by joint agreement of all of the parties in May 1927.
The 20,000 shares of Oklahoma Natural Gas Corporation common stock which Davidson received in 1926 were sold for $500,000 in May 1927. Of the proceeds, $20,598.97 was used to pay taxes and expenses of the sale and $144,000 was paid to the1936 BTA LEXIS 689">*693 Seaboard Bank. Davidson received a check for the balance of $335,401.03. The petitioners 34 B.T.A. 479">*481 each reported in their income tax returns for 1927 one-half of certain net income which included an item reported as follows:
| COMMISSIONS RECEIVED | ||
| Proceeds of Sale of Stock of the Oklahoma Natural Gas Corp. - Stock Received as commission for Services Rendered in connection with Reorganization and consolidation of Above Company | $491,811.19 | |
| Less: Pro-rata shares of above commission Paid to Associates for Services in connection with Re-organization & Consolidation | 178,942.99 | |
| $312,868.20 |
The Commissioner, among other adjustments made in determining the deficiency, increased by $110,780 the total net income of the community reported by the petitioners. This adjustment represented an increase in the profit from the sale of 20,000 shares of Oklahoma Natural Gas Corporation common stock resulting from the elimination of $110,780 claimed by the petitioners on their returns as a part of the $178,942.99 item shown above. The explanation given by the Commissioner for eliminating the $110,780 in the computation of the petitioners' gain from the sale of the 20,0001936 BTA LEXIS 689">*694 shares of stock was that Davidson and Sibley had disputed the ownership of 6,000 shares of the stock; their disagreement over the 6,000 shares had resulted in a lawsuit in which Davidson contended that he had merely loaned the stock to Sibley and had not given the stock to Sibley as his share of the commission, and in which Sibley was contending that the stock had been delivered to him as his commission in the Oklahoma Natural Gas Corporation deal and the stock belonged to him; the suit was finally settled out of court by an agreement in March 1928; if the stock was merely loaned, there would be no reason to reduce the profit by $110,780, alleged to have been paid to Sibley, and if the parties finally agreed in 1928 that the $110,780 represented a commission to Sibley, then that amount was deductible from the petitioners' income for 1928.
Davidson and S. W. Sibley had some kind of an arrangement whereby Sibley was to advance money to Davidson for some purpose connected with the organization of the Oklahoma Natural Gas Corporation, this money was to be returned to Sibley, and Sibley was to share in any profits realized by Davidson. Sibley advanced some money to Davidson, but the1936 BTA LEXIS 689">*695 amount is not shown. The agreement between Davidson and Sibley is not made clear in the record. Davidson loaned Sibley some of the shares of Oklahoma Natural Gas Corporation common stock which he had received in 1926. The total number of shares loaned was 4,000. Those shares were pledged by Sibley with banks as collateral security for loans secured by notes. Sibley was the sole maker of one of the notes and was a joint maker 34 B.T.A. 479">*482 of the other. Davidson also permitted 2,000 shares to be held by Sibley as collateral on a note. When the sale took place in May 1927, the 4,000 shares which had been loaned to Sibley and the 2,000 shares pledged with him were sold, along with the 14,000 shares held by Davidson. Seventy-six thousand dollars of the amount paid to the Seaboard Bank from the proceeds of the sale was received by it on behalf of the banks which had held the 4,000 shares as collateral security for Sibley's loans and was credited by the latter banks against the loans. There was an understanding between Davidson and Sibley that Sibley was in this way receiving credit for some amounts due him from Davidson. The amount of this credit is not shown in the record. The1936 BTA LEXIS 689">*696 record does not disclose what become of the remainder of the $144,000 of the proceeds of the sale paid to the Seaboard Bank.
The agreement whereby the suit of Davidson against Sibley and others was settled in 1928 stated that Davidson was the owner of the 4,000 shares of Oklahoma Natural Gas Corporation stock, which had been sold while pledged for the indebtedness of Sibley and another, Davidson consented to have the cash proceeds of the sale of his shares applied by the banks against the indebtednesses, additional collateral for the loans held by the banks should be sold and, after the balance of the indebtedness had been paid to the banks, the balance of the proceeds should go to Davidson.
OPINION.
MURDOCK: The period of limitations for assessment of taxes imposed by the Revenue Act of 1926 was "three years after the return was filed." Sec. 277(a)(1). That period had expired before the deficiency notices involved in these proceedings were mailed. However, that three-year period was "extended for a period of one year in the case of any married individual where such individual or his or her spouse filed a separate income-tax return for such taxable year and included therein1936 BTA LEXIS 689">*697 income which under the laws of the State upon receipt became community property." Joint Resolution No. 88, 71st Cong., 2d sess., approved June 16, 1930, ch. 495, 46 Stat. 589. The four-year period provided by the joint resolution had not expired when the notices of deficiency involved herein were mailed. The petitioners contend "that the joint resolution is unconstitutional and void because it violates Article 5 of the Constitution of the United States in that it purports to deprive certain specific taxpayers of property without due process of law." They fail, however, to cite any authorities which are really in point. The statute is presumed to be valid. It took away no vested rights. The petitioners argue that the statute is arbitrary and capricious in its classification of the persons affected. There was some question at the time of the enactment 34 B.T.A. 479">*483 of the joint resolution whether married persons living in community property states had a right to file separate income tax returns reporting thereon one-half of the community income. The question was settled, in so far as it affected persons living in Texas, by the decision of the Supreme Court of November 24, 1930, in1936 BTA LEXIS 689">*698 the case of Hopkins v. Bacon,282 U.S. 122">282 U.S. 122. The purpose of the joint resolution was to protect the interests of both the Government and the taxpayers pending the final decision of the question. See Committee Reports on the resolution in the Congressional Record, June 11, 1930, pp. 10923-10925. There was no reason to extend the period of limitations as to other classes of taxpayers. Other taxpayers would not be affected by decision of the test cases then pending before the courts. The classification was neither arbitrary nor capricious, and the resolution is not unconstitutional. Cf. Poe v. Seaborn,282 U.S. 101">282 U.S. 101; Graham v. Goodcell,282 U.S. 409">282 U.S. 409.
Davidson received 20,000 shares of Oklahoma Natural Gas Corporation stock in 1926 as part of his compensation for bringing the business to the attention of the investment bankers and for performing whatever other services he may have performed in connection with the organization of the Oklahoma Natural Gas Corporation. All of the 20,000 shares thus received belonged to him. The same 20,000 shares were sold in the taxable year now before the Board, and, at the time of the1936 BTA LEXIS 689">*699 sale, all of the 20,000 shares still belonged to Davidson. Between the date when he received the shares in 1926 and the date when he sold them in 1927, he had parted with possession of certificates for 6,000 shares. But it is clear from the present record that those shares still belonged to Davidson. He always insisted that he was at all times the owner of the 6,000 shares. Sibley may have made some claim that some of the 6,000 shares belonged to him. But Davidson entered suit against Sibley, contending that the shares had always belonged to him and demanding full restitution from Sibley, and all parties to that suit agreed, in the final settlement, that the shares had at all times belonged to Davidson and Davidson was to receive certain compensation for permitting the proceeds of the sale to be used to pay the debts of Sibley and another. The evidence clearly indicates that none of the 6,000 shares belonged to Sibley at the date of the sale.
The petitioners on their return deducted $110,780 from the proceeds of the sale for the alleged reason that that portion of the proceeds of the sale went to Sibley as his share of the profit from the transaction. They now claim that1936 BTA LEXIS 689">*700 the correct amount is $122,780. The record not only fails to sustain the petitioners in this contention, but it proves conclusively that a substantial part of the amount should not be used to reduce the petitioners' profit from the sale of the 20,000 shares. The increase of $12,000 is alleged to have something to do 34 B.T.A. 479">*484 with a note for $8,500 given by Davidson and one for $3,500 given by his wife. But we are unable to make any relative finding of fact from the record in regard to the $12,000. Sibley testified that he had advanced some money to Davidson to cover some expenses in connection with Davidson's participation in the organization of the Oklahoma Natural Gas Corporation. He never stated just how much he had advanced, but once said it was about $20,000. He also testified that at the time the 20,000 shares were sold Davidson owed him $40,000 or $50,000 and the debts due him from Davidson were to be canceled by reason of the fact that the proceeds of the sale of some of the stock were to be received by banks and credited against Sibley's indebtednesses to the banks. At least $76,000 of the $144,000 received by the Seaboard Bank out of the proceeds of the sale were1936 BTA LEXIS 689">*701 used for this purpose. Davidson got full benefit from the proceeds of the sale thus used. The record is not clear as to what became of the rest of the proceeds of the sale which were paid to the Seaboard Bank, but it allows the inference that the entire amount received by the Seaboard Bank directly benefited Davidson. There is, therefore, no reason to reduce the amount realized from the sale of the stock by any amount, except the uncontested amount used to pay taxes and expenses of the sale.
The next argument advanced on behalf of the petitioners is that the 20,000 shares received by Davidson in 1926 had a fair market value of $15 a share or $300,000 at the time he received them in 1926; he, therefore, received taxable income of $300,000 in 1926 through receipt of the shares; each share thereafter had a basis of $15 for the computation of gain or loss to Davidson; therefore, the amount realized in 1927 from the sale of the shares should be reduced by this basis of $300,000. The contention thus made is inconsistent with the determination of the Commissioner. The petitioners had the burden of proof. They have called no witness to testify before the Board that the shares had1936 BTA LEXIS 689">*702 a fair market value of any particular amount at the time they were received by Davidson in 1926. The petitioners' counsel would infer that the shares were worth $15 in 1926 because Sibley was able to obtain some loans from banks in 1926 and 1927 in connection with which he pledged some of these shares as collateral. They would also draw inferences of value from certain statements appearing in exhibits. Not only is the evidence upon which they rely extremely weak, but there are other reasons for holding that the stock had no fair market value at the time it was received by Davidson in 1926. Davidson had been engaged for a number of years in the business of selling securities. If the 20,000 shares of stock which he received had had a fair market value in 1926, he would have known that fact and should have returned as income for that year the total fair 34 B.T.A. 479">*485 market value of the shares which he received. He did not report any income in 1926 from receipt of the shares, which in itself is an indication that, in his opinion, the shares had no fair market value at that time. If the shares had had a fair market value at the time received, they would have had a basis of that amount1936 BTA LEXIS 689">*703 in the hands of Davidson for the purpose of computing gain or loss from the sale or disposition of the shares by him. He sold the shares in 1927 and reported a gain from the transaction in his income tax return for that year. But he claimed no basis in computing his profit on his return. That is another indication that in his opinion the shares had no fair market value at the time he received them in 1926. The question of the fair market value of the shares was raised thereafter by a revenue agent, and Davidson stated to the revenue agent that, in his opinion, the shares had no fair market value at the time he received them in 1926. Davidson swore to the original petition in the proceeding now pending. That petition contained a statement that the shares of stock which he received in 1926 were evidenced by temporary certificates, had no par value, no market value, and no ascertainable value of any kind, represented secondary issues of a corporation which had only recently been financed, and, hence, were not returnable as income in the year 1926. The claim that these shares had a fair market value in 1926 was first advanced on behalf of the petitioners in an amended petition brought1936 BTA LEXIS 689">*704 forward for the first time when the case was on for hearing. New counsel had been but recently employed and was apparently responsible for the new contention. Davidson was a witness in this proceeding. But he did not testify that, in his opinion, the shares had any fair market value at the time he received them in 1926. The determination of the Commissioner is to the effect that the shares had no fair market value in 1926, and we hold, after considering all of the evidence in the case, that the shares had no fair market value when received by Davidson in 1926 and, therefore, the petitioners are not entitled to reduce the amount realized in the sale in 1927 by any basis.
Reviewed by the Board.
Decision will be entered for the respondent.