*1147 1. Corporate stock received by a partnership as compensation for services rendered should be included in partnership net income at its fair market value when received.
2. In the circumstances disclosed the fair market value of rights to subscribe to stock of a different corporation from the one issuing the rights did not constitute a taxable dividend.
*285 The respondent has determined deficiencies in income taxes against the petitioners Bartlett and Poe for 1920 in the respective amounts of $4,768.24 and $348.10. He has determined a deficiency against the estate of L. B. Keene Claggett for 1929 in the amount of $121.94. The only issue common to all of the proceedings is whether certain corporate stock received by the law partnership of Bartlett, Poe and Claggett, as compensation for legal services rendered, should be included in computing partnership net income at its fair market value on September 7, 1929, when it was received, or on December 31, 1929, when the partnership net income*1148 was distributed. In Docket No. 63632 an additional issue is raised as to the petitioner, J. Kemp Bartlett, namely, whether the fair market value of rights to subscribe to stock of a corporation other than that issuing the rights constitutes a taxable dividend. The proceedings were consolidated for hearing by order.
FINDINGS OF FACT.
The petitioners at Docket No. 63629 are the executors of the estate of L. B. Keene Claggett, who died a resident of Baltimore, Maryland. The petitioners Bartlett and Poe are individuals residing in Baltimore, Maryland. During the taxable year Bartlett, Poe and Claggett were engaged in the practice of law as copartners.
On September 7, 1929, the copartnership of Bartlett, Poe and Claggett received 500 shares of common stock of the Consolidated Instrument Co. of America as compensation for legal services rendered. The stock was listed on the Baltimore Stock Exchange and *286 the New York Curb Exchange and, during the period from September 7 to September 13, 1929, sold at prices ranging from $18 to $22 pet share. On December 31, 1929, it sold at $3 per share. In computing partnership net income for the taxable year, stock of the Consolidated*1149 Instrument Co. of America was included at its fair market value on December 31 of that year. Upon audit the respondent determined that the fair market value on September 7, 1929, which he fixed at $18 per share, was the amount to be included in partnership net income.
On January 15, 1929, the petitioner Bartlett owned 20,830 shares of common stock of the United States Fidelity & Guaranty Co., hereinafter referred to as the Guaranty Co., a Maryland corporation engaged in the business of issuing fidelity and surety bonds and casualty insurance policies. Stock of the Guaranty Co. was widely distributed throughout the United States and Canada and business was done over that territory through approximately 6,000 agents. In the latter part of 1928 the directors of the Guaranty Co. determined to organize a fire insurance company, since it was not chartered to do such a business, to sell fire insurance through the Guaranty Co.'s agents and to its stockholders. It was determined to organize the new corporation with a capital of $1,000,000 and a paid-in surplus of $3,000,000 by selling stock having a par value of $10 per share at $40 per share. The plan called for selling 100,000 shares*1150 of stock, 25,000 of which would be purchased by the Guaranty Co., 25,000 by the stockholders of the Guaranty Co., 25,000 by its agents, and the remaining 25,000 by certain financial institutions and individuals who were to serve as directors of the new company. The plan agreed upon was carried out and no November 27, 1928, the United States Fidelity Fire Corporation, hereinafter referred to as the Fire Co., was chartered under the laws of Maryland.
At a meeting of the board of directors of the Guaranty Co. on November 21, 1928, the following resolutions were adopted:
RESOLVED, that the Company purchase fifty thousand (50,000) shares of the capital stock of the United States Fidelity Fire Corporation of the par value of ten dollars ($10.00) per share, at and for the price of forty dollars ($40.00) per share; and be it further
RESOLVED, that there be offered to the stockholders of the company of record as of the 15th day of January 1929, pro rata rights to purchase from the Company twenty-five thousand (25,000) shares of the capital stock of said United States Fidelity Fire Corporation of the par value of ten dollars ($10.00) each, at and for the price of forty dollars ($40.00) *1151 per share; and be it further
RESOLVED, that the officers of the company be and they are hereby authorized and empowered to do all things necessary in connection with the purchase of said fifty thousand (50,000) shares of such stock and the offering for sale of twenty-five thousand (25,000) shares of said stock to the stockholders, in accordance with the above resolutions.
*287 On February 5, 1929, the Guaranty Co. paid $1,000,000 to the Fire Co. to cover its subscription to 25,000 shares of stock. Certificates for such stock were issued by the Fire Co. to the Guaranty Co. on April 11, 1929, in blocks of 500 shares each. On February 15, 1929, the financial institutions and the individuals paid $1,000,000 to the Fire Co. for 25,000 shares of its stock while on the same day the agents of the Guaranty Co. paid their subscription for 25,000 shares of the Fire Co. stock. The remaining 25,000 shares were purchased by the stockholders of the Guaranty Co. for a total price of $1,000,000 in the following manner: The Guaranty Co. addressed a circular letter to its stockholders, inclosing a subscription warrant entitling the stockholders to subscribe to stock of the Fire Co. The*1152 letter set forth the resolutions of the board of directors of the Guaranty Co. on November 21, 1928, and explained that the rights must be exercised on or before February 15, 1929. On or before that date the Guaranty Co. received subscriptions and payment for stock of the Fire Co. in the total amount of 25,000 shares. On February 15, 1929, $1,000,000 was paid over to the Fire Co. by the Guaranty Co. and 25,000 shares of stock were issued by the Fire Co. directly to the subscribing stockholders. The Fire Co. received $4,000,000 for its 100,000 shares of capital stock and started business on March 1, 1929.
No certificate or certificates were ever issued to the Guaranty Co. representing the 25,000 shares of stock of the Fire Co. which were purchased by the former's stockholders. Lists of such subscribers showing the name and address were prepared by the Guaranty Co. and delivered to the Fire Co. and certificates were issued directly to the subscribers. Those persons who exercised "rights" remitted to the Guaranty Co. and the total amount received by its was then paid over to the Fire Co.
Rights to subscribe to stock of the Fire Co. were traded in on the Baltimore Stock Exchange*1153 prior to February 15, 1929, at prices ranging from 83 cents to $1.20. The petitioner Bartlett exercised his rights to subscribe for shares at a price of $40 per share, executing the following subscription form:
TO THE UNITED STATES FIDELITY AND GUARANTY COMPANY:
The undersigned hereby subscribes for the number of shares of capital stock of the UNITED STATES FIDELITY FIRE CORPORATION of the par value of Ten Dollars ($10.00) per share covered by this Warrant and agrees to pay for same at the price of Forty Dollars ($40.00) per share, upon the terms set forth herein.
(Signature) J. KEMP BARTLETT [[Seal]]
(Address) Calvert & Redwood Sts., Baltimore, Md.
OPINION.
LANSDON: The respondent has determined that the fair market value of the stock of the Consolidated Instrument Co. of America*288 at the date received by the partnership is the amount to be included in computing partnership net income. The petitioners contend that its value at December 31, 1929, when it was distributed, is the amount on which the partners are taxable. In Old Colony Trust Co. et al., administrators,*1154 , we held that the fair market value of stock received as compensation for services rendered constituted taxable income to the recipient when received. Article 53 of Regulations 74 provides that where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income, where there is no stipulated price for the services rendered, and that compensation in stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. It seems perfectly clear that the date on which value must be determined is the date of payment rather than the end of a taxable year. The partnership income was earned on September 7, 1929, and the value on that date must be included as distributable income even though it had shrunk at the date actually distributed. Cf. ; ; affd., ; *1155 .
The respondent contends that the right to subscribe to stock of the Fire Co. granted by the Guaranty Co. to its stockholders represents a taxable dividend to the extent of the fair market value of the "right". In support of his contention he cites ; ; ; ; ; ; affd., ; and .
The facts of the instant case are different from those of the cases cited by the respondent. Here the Guaranty Co. acted as agent for the Fire Co. in distributing 25,000 shares of the latter's stock to stockholders of the former. It subscribed for 25,000 shares on its own account and for 25,000 which were to be taken by its stockholders at the subscription price. It never received certificates for the latter 25,000 shares and it never owned them. *1156 Payment was made therefor only after the money had been collected from the subscribers. Surplus of the Guaranty Co. was in no way affected by the transaction and it received no benefit from the subscription price, which was immediately paid over to the Fire Co.
In such circumstances we think the petitioner has realized no taxable profit or dividend upon receipt of the rights to purchase stock of the Fire Co. Cf. .
Reviewed by the Board.
Decision will be entered under Rule 50.