*2220 Where stock is sold by an agent for cash and the net proceeds thereof retained as a loan from the principal, the profit on the transaction is taxable income to the principal in the year of its receipt by his agent.
*1264 In this proceeding, instituted to redetermine a deficiency of $8,588.24 in income tax for 1923, the issue is whether the sum of $86,067.18 realized from the sale of stock is taxable income to petitioner.
FINDINGS OF FACT.
Prior to 1923 the petitioner acquired from Frank E. Best, Inc., a Washington corporation having an authorized capital stock of 600,000 shares, each of the par value of $1, a portion of its stock in exchange for certain patents and patent rights. On January 1, 1923, petitioner owned in excess of 400,000 shares of the capital stock of the corporation. The board of trustees of the corporation consisted of petitioner, president, L. M. Riches, secretary and treasurer, and J. L. Bradfield, vice president.
A number of unofficial meetings of the board of trustees*2221 were held, at which the members thereof urged upon petitioner the necessity of donating stock of Frank E. Best, Inc., to the corporation for the purpose of providing capital to develop some of its assets. Thereafter at a special meeting of the trustees held on January 2, 1923, all members being present, the following resolution was adopted:
*1265 WHEREAS, Frank E. Best, Inc., has heretofore been engaged in selling its capital stock, from the proceeds of which development work of the Company is being carried on, and
WHEREAS, additional funds are needed for the purpose of completing the development work and Frank E. Best [Inc.] is obliged to secure money for the purpose of carrying on its present operations; and
WHEREAS, Frank E. Best, individually, is the owner of certain capital stock of Frank E. Best, Inc., and is willing to advance the Company certain sums of money provided the Company will obtain the funds from the sale of the stock now owned by said Frank E. Best.
NOW, THEREFORE, IT IS HEREBY AGREED as follows:
1. That Frank E. Best, Inc., is hereby authorized to sell during the month of January, 1923, not to exceed $100,000.00 par value of the stock owned*2222 by said Frank E. Best, individually, and to retain 20% commission on such sales, 80% of the proceeds from the sale of said stock to be loaned to Frank E. Best, Inc. for the uses and needs of said corporation.
2. That upon the receipt of the proceeds from the sale of said stock by Frank E. Best, Inc., said Frank E. Best, Inc. shall execute and deliver to Frank E. Best, individually, demand promissory notes at 7% after demand, which said notes shall equal 80% of the proceeds from the sale of all stock belonging to said Frank E. Best, sold by said Company under this agreement. It is understood, however, that said notes shall be paid from profits received by Frank E. Best Inc., and that the holder of said notes shall not make demand in excess of 25% of said profits.
3. That any portion of the said 100,000 shares unsubscribed or cancelled is to be considered unencumbered by this agreement and reverts back to Frank E. Best, personally.
4. That nothing in this agreement contained shall be construed to authorize the Company to purchase the stock of said Frank E. Best and the only right granted hereunder is the right to act as agent and to sell said stock not exceeding $100,000.00*2223 par value to third persons, the proceeds of which shall be used by the said company as hereinabove provided.
Prior to the adoption of the foregoing resolution the trustees had been advised by counsel that under the laws of the State of Washington the corporation could not purchase its own stock.
At a meeting held on June 1, 1923, of all the members of the board of trustees of the corporation, the following resolution was adopted:
WHEREAS Frank E. Best, Inc. was on Jan. 2, 1923, authorized to sell not to exceed one hundred thousand shares of the capital stock of the Company owned by Frank E. Best individually, and
WHEREAS the amount sold was considerably less than one hundred thousand shares, being in fact less than ninety-four thousand shares, and
WHEREAS Frank E. Best individually is willing to advance certain sums of money to Frank E. Best, Inc. for the purpose of carrying on the company's future and present operations, provided the Company will obtain the funds from the sale of the stock now owned by Frank E. Best.
NOW THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
That Frank E. Best, Inc. is authorized to sell at a price not less than five dollars ($5.00) per share, *2224 ten thousand shares of the capital stock owned by Frank E. Best individually and to retain twenty per cent (20%) commission on such sales, eighty per cent (80%) of the proceeds from the sale of said stock to be loaned to Frank E. Best, Inc. for the uses and needs of the Company.
*1266 That nothing in this agreement contained shall be construed to authorize the company to purchase the stock of said Frank E. Best and the only rights granted hereunder is the right to act as agent and to sell said stock to third persons the proceeds of which shall be used by said company as hereinabove provided.
The petitioner in 1923 endorsed in blank and delivered to the corporation a certificate for 100,000 shares of its stock for sale in accordance with the terms of the agreements set forth in the resolutions. Practically all of the stock was sold by the corporation in 1923 for $107,583.90. A selling commission of 20 per cent was paid to agents of the corporation for the sale of the stock. Stock certificates were issued by the corporation to the purchasers of stock sold under the agreements with petitioner. The net proceeds of the sales, amounting to $86,067.18, were received by the*2225 corporation in 1923 and credited to the account of petitioner on the corporation's books. This sum in its entirety has been treated by respondent as a profit realized by petitioner from the sale of the stock and no evidence was produced by petitioner to the contrary.
During 1923 the corporation had no net profits and made no payments to petitioner on the account, and petitioner made no demand for payment of any part thereof. The corporation did not execute any demand notes in favor of petitioner as provided for in the agreement approved by its trustees on January 2, 1923.
OPINION.
ARUNDELL: The stipulated facts disclose that petitioner, a majority stockholder of Frank E. Best, Inc., in order to provide that corporation with operating capital, appointed it his agent to sell a portion of his stock, with the understanding that it would be allowed a selling commission of 20 per cent on all stock sold and that he would loan the remainder to the corporation, the loans to be evidenced by demand promissory notes payable out of corporate profits. Under this agreement a portion of petitioner's stock was sold during 1923 to third parties for an amount, after paying a selling commission*2226 of 20 per cent, equal to $86,067.18. This sum was actually received by the corporation in 1923 as agent for petitioner and was placed to the credit of petitioner on the corporate books. We are asked to say that the amount so received and credited should not be treated as taxable income to petitioner in 1923 because he had agreed that the net proceeds of the stock sales should be loaned to the corporation and repaid only out of its earnings. But the sales out of which the profit arose were not to the corporation, but to outsiders, who paid cash, and it is this amount so paid which it is sought to tax and which the statute designates as income.
*1267 It is urged that the entire transaction was one conceived and carried out for the purpose of furnishing money to Frank E. Best, Inc., to operate on; that it should be viewed as a sale of the stock to the corporation, payable out of its profits, if any, and as no money was actually received in 1923 by the petitioner in payment for his stock and his right to receive any amount was indefinite and contingent, there was no income realized. The facts which have been stipulated do not permit us to treat the transaction in the manner*2227 urged. The stock, as already stated, was not sold to the corporation, but through it, as agent of petitioner, to third parties. The transaction was planned and carried out in the manner in which it was because of advice of counsel that under the laws of Washington the corporation might not purchase its own stock. Receipt of the purchase price of the stock by the agent was receipt by the principal and the mere fact that the money was not delivered into the possession of petitioner before being loaned to the corporation does not take the case out of the rule. In 1923 the cash had been received for the stock and loaned to the corporation and the profit is taxable to petitioner in that year. ; ; .
Decision will be entered for the respondent.