*1075 Held, that petitioner acquired an option to purchase certain stock at less than market as a gift and not as compensation for services.
*60 This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1933 in the sum of $3,649.90.
The sole issue is the correct cost basis of 1,500 shares of United States Electric Power Corporation stock sold by the petitioner during the taxable year. Counsel agree that this issue turns on a determination of whether a certain option acquired by the petitioner in 1930 to purchase such shares at less than their market value was additional compensation for services or was a gift.
FINDINGS OF FACT.
Certain facts were stipulated substantially as follows:
The petitioner is a resident of the city of New York, New York.
*61 During the months of October, November, and December, 1929, the firm of Ladenburg, Thalmann & Co. engaged in negotiations which resulted in an agreement signed December 21, 1929, for the sale of 165,000 shares of common stock of Standard Power*1076 & Light Corporation to the United States Electric Power Corporation for the sum of $25,000,000, payable $10,000,000 in cash and $15,000,000 in deferred notes having various maturities, such agreement, however, not to be consummated unless certain radical corporate procedures were approved with substantial unanimity by the stockholders of Standard Gas & Electric Co. and the Standard Power & Light Corporation.
On the same day, December 21, 1929, the firm of Ladenburg, Thalmann & Co., in consideration of signing an agreement surrendering certain of its financing rights to the United States Electric Power Corporation, received from the latter corporation an option to purchase 266,666 shares of the latter's unissued common stock for a total payment of $75,000, but this option was not exercisable sooner than 10 days nor later than 30 days after the consummation of the contract relating to the 165,000 shares of common stock of the Standard Power & Light Corporation.
The sale from Ladenburg, Thalmann & Co. to the United States Electric Power Corporation of 165,000 shares of common stock of the Standard Power & Light Corporation, referred to in the option, was consummated on January 7, 1930.
*1077 The firm of Van Vorst, Siegel & Smith and its predecessor firms of Van Vorst, marshall & Smith, Underwood, Van Vorst & Hoyt, and Underwood, Van Vorst, Rosen & Hoyt, had been regular counsel to the firm of Ladenburg, Thalmann & Co. for a period of upwards of 25 years at a regular and stated retainer of $15,000 a year. Since the death of Van Vorst in 1919, the petitioner, of the firm of Van Vorst, Siegel & Smith, had had general charge of all legal work for Ladenburg, Thalmann & Co. and had attended to such legal work with assiduity and loyalty.
Throughout the years 1929 and 1930 the petitioner was a member of the firm of Van Vorst, Siegel & Smith, and had approximately a 40 percent interest in the profits of the said firm. The members of the firm during 1929 and 1930, other than the petitioner, were William Mason Smith, whose interest in the profits of the firm was approximately 33 1/3 percent, and Sidney Bacharach, Arthur B. Brenner, and Ferdinand S. Crosley, who divided between them the remaining profits of the Firm.
On January 17, or 18, 1930, the firm of Ladenburg, Thalmann & Co. agreed to pay and did later pay to the firm of Van Vorst, Siegel & Smith, in addition to its*1078 retainer, a fee of $50,000 for its services in *62 drafting the contract covering the sale of Standard Power & Light Corporation stock and seeing through the consummation of the said contract, and Ladenburg, Thalmann & Co. also assigned to the petitioner the right to exercise the option with respect to 5,000 shares of common stock ofUnited States Electric Power Corporation, with warrants attached, such right being practically simultaneously split up by petitioner among himself and three of his partners as follows: The petitioner retained the right to exercise the option with respect to 3,500 shares and conferred the right to exercise the option with respect to the remaining 1,500 shares to his partners as follows:
| To William Mason Smith | 500 shares |
| To Sidney Bacharach | 500 shares |
| To Arthur B. Brenner | 500 shares |
Ladenburg, Thalmann & Co. made no charge either to the petitioner or to the said William Mason Smith, sidney Bacharach or Arthur B. Brenner for the transfer of the option to buy the said 5,000 shares of United States Electric Power Corporation common stock with warrants attached and the petitioner made no charge to William Mason, smith, sidney Bacharach, *1079 or Arthur B. Brenner for his transfer to them of the right to receive 500 shares of such stock each, respectively.
On January 30, 1930, Ladenburg, Thalmann & Co. informed the United States Electric Power Corporation that they intended to esercise and did exercise the option, the stock to be delivered pursuant to the option on February 4, 1930. Ladenburg, Thalmann & Co. called upon the petitioner, William Mason Smith, sidney Bacharach, and Arthur B. Brenner to pay for their shares of the option price and the petitioner on February 4, 1930, paid $984.34 representing his share of the option price applicable to the purchase of 3,500 shares of common stock of the United States Electric Power Corporation with warrants attached.
On or shortly after February 4, 1930, there were delivered by Ladenburg, Thalmann & Co. to the petitioner certificates representing the aforesaid 3,500 shares of common stock of the United States Electric Power Corporation with warrants attached in the name of Richard H. Staats, duly endorsed by the said Richard H. Staats. The said Richard H. Staats was a street name employed by Ladenburg, Thalmann & Co. and this was the form in which the whole 266,666 shares*1080 had been issued by the United States Electric Power Corporation pursuant to the exercise by Ladenburg, Thalmann & Co. of the option dated December 21, 1929.
During December 1929 and throughout the year 1930 the common stock of the United States Electric Power Corporation with warrants attached was listed on the Boston Stock exchange and from and *63 after January 22, 1930, it was also traded in on the New York Curb Exchange. The stock was traded in on those exchanges as follows:
| BOSTON STOCK EXCHANGE | ||||
| Week ended | High | Low | Last | Volume |
| Dec. 6, 1929 | 19 1/2 | 17 | 18 | 29,294 |
| Dec. 13, 1929 | 18 1/2 | 16 1/2 | 16 1/2 | 15,519 |
| Dec. 20, 1929 | 17 | 14 | 14 | 23,039 |
| Dec. 27, 1929 | 20 3/4 | 14 1/4 | 19 5/8 | 39,126 |
| Jan. 3, 1930 | 20 1/2 | 19 | 19 5/8 | 37,868 |
| Jan. 10, 1930 | 22 | 19 1/8 | 21 | 23,735 |
| Jan. 17, 1930 | 23 | 20 1/2 | 21 5/8 | 40,357 |
| Jan. 24, 1930 | 21 7/8 | 19 5/8 | 20 | 19,657 |
| Jan. 31, 1930 | 21 1/8 | 18 1/4 | 18 1/2 | 5,652 |
| Feb. 7, 1930 | 19 1/2 | 18 1/2 | 18 1/2 | 6,210 |
| Feb. 14, 1930 | 22 1/2 | 18 | 21 1/2 | 14,603 |
| Feb. 21, 1930 | 22 | 19 | 20 | 4,229 |
| Feb. 28, 1930 | 20 1/8 | 19 | 19 5/8 | 4,593 |
| Mar. 7, 1930 | 21 | 19 | 19 3/4 | 4,994 |
| NEW YORK CURB EXCHANGE | ||||
| Week Ended | High | Low | Last | Volume |
| Jan. 24, 1930 | 21 | 19 1/8 | 19 1/8 | 11,400 |
| Jan. 31, 1930 | 20 3/8 | 18 1/8 | 18 1/2 | 10,400 |
| Feb. 7, 1930 | 19 5/8 | 18 1/4 | 18 3/8 | 7,500 |
| Feb. 14, 1930 | 22 7/8 | 18 1/8 | 21 5/8 | 45,300 |
| Feb. 21, 1930 | 21 3/4 | 19 1/2 | 19 3/4 | 25,400 |
| Feb. 28, 1930 | 20 5/8 | 18 5/8 | 19 | 14,000 |
| Mar. 7, 1930 | 21 1/4 | 18 3/4 | 19 1/2 | 22,800 |
*1081 During the year 1933 the petitioner sold of such certificates of stock, in the open market, certificates representing 1,500 shares at the aggregate price of $2,135. The petitioner did not acquire (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law) and did not enter into a contract or option so to acquire substantially identical stock or securities within either 31 days before or after the respective dates of sale, and he retained no interest, direct or indirect, in the shares of certificates of stock so sold.
The petitioner did not report as income for the year 1930 or for any other year the transfer to him of the option to purchase the 3,500 (or 5,000) shares of stock of the United States Electric Power Corporation at a price of 28 cents a share, claiming that such transfer to him was by way of gift.
Before the operation of the statute of limitations against the petitioner's income taxes for the year 1930, the respondent, upon an examination of the income tax returns of the firm of Ladenburg, Thalmann & Co. and its partners, with the knowledge of the transfer by Ladenburg, Thalmann & Co. to the petitioner, William Mason Smith, *1082 Sidney Bacharach, and Arthur B. Brenner of the right to receive 5,000 shares under the option at the option price stated *64 therein, taxed to the firm of Ladenburg, Thalmann & Co. (and its partners) the receipt of the whole of the 266,666 shares of common stock of United States Electric Power Corporation with warrants attached at the price of $20 per share and assessed and adjusted the income taxes payable by the firm of Ladenburg, Thalmann & Co. and its members accordingly. One of the members of the firm of Ladenburg, Thalmann & Co., Benjamin Guinness, has brought action in the Court of Claims to recover Federal income tax paid for the year 1930 upon the ground, among others, that the price of $20 per share for the 266,666 shares of common stock of United States Electric Power Corporation with warrants, attached was too high, and the Commissioner is resisting the contention of Guinness in that case. All the other members of the firm of Ladenburg, Thalmann & Co. have accepted such basis and their 1930 income tax cases are definitively closed.
The record discloses the following additional facts:
In the fall of 1929 the law firm of Van Vorst, Siegel & Smith represented*1083 the Standard Gas & Electric Co., the Standard Power & Light Corporation, and H. M. Byllesby & Co. in a complicated reorganization transaction. The option to purchase the United States Electric Power Corporation stock was not exercisable until the reorganization was consummated.
On January 17 or 18, 1930, Maurice Rosenthal, senior member of Ladenburg, Thalmann & Co., called the petitioner to his office. Walter T. Rosen, also a member of that firm, was present. Rosenthal asked the petitioner if the amount of his firm's fee in the reorganization matter had been fixed. The petitioner replied that it had been discussed and that he thought $125,000 would be a satisfactory sum. Rosenthal said that he was sure that the corporations would agree to $150,000 and that he would help the petitioner to get it. The petitioner expressed his thanks for Rosenthal's kindness and also for the $50,000 fee which Ladenburg, Thalmann & Co. was to pay to the petitioner's firm and which was considered by Ladenburg, Thalmann & Co. as a reasonable fee, as heretofore mentioned.
Rosenthal then stated that they (meaning Ladenburg, Thalmann & Co.) were going to give the petitioner for himself the option*1084 to purchase 5,000 of the 266,666 shares of the United States Electric Power Corporation stock. The offer was wholly unexpected, but the petitioner refused to accept it on the ground that he could not take a "separate fee" for himself. Rosenthal then stated that the transfer had nothing to do with the fee to the law firm, but was a personal and substantial gift to the petitioner in appreciation of the extraordinary character of his services and his conduct of the firm's affairs. The petitioner then disclosed to three of his partners, Smith, *65 Bacharach, and Brenner, the proposed gift and insisted on giving to each of them a portion of it.
Ladenburg, Thalmann & Co. had never made any such gift during the preceding thirty years or more, but it also had never made any such profit on one transaction. The value of the option transferred to the petitioner was approximately $100,000. The option, covering the remaining 261,666 shares of the Power Corporation Stock, was assigned ratably to the Ladenburg, Thalmann & Co. partners.
When the petitioner's income tax return for the year 1930 was reviewed by the revenue agent the petitioner disclosed the facts relating to the option. *1085 The petitioner also attached to his income tax return for the year 1933 a complete statement of the transaction.
OPINION.
VAN FOSSAN: Technically, the question at bar is the basis to be used in determining the gain or loss, if any, on the sale by petitioner in 1933 of certain stock acquired in 1930 by the exercise of an option. Petitioner contends that the option had been acquired by gift and that the basis is accordingly the basis to the transferor, i.e., the fair market value of the right. (Sec. 113(a)(2), Revenue Act of 1932).
Although the option was received by the donors in December 1929, it had no fair market value at that time. Its value was entirely dependent on, and was Fixed by, the consummation of the sale contract, which did not occur until January 7, 1930. This fact undoubtedly accounts for the Commissioner's action in taxing the receipt of the same to the donors in 1930 at its then value of $20 per share. No question is presented on this phase of the case. Respondent's counsel concedes that if the option was transferred to petitioner as a gift there is no tax due on the transaction. Respondent claims, however, that the option was acquired as compensation*1086 for services rendered and that accordingly the cost paid when the option was exercised, 28 cents per share, is the basis of gain or loss on the shares sold.
The Supreme Court, in Bogardus v. Commissioner,302 U.S. 34">302 U.S. 34, held that the determination of the question whether a payment was compensation or was a gift was a question of law or a mixed question of law and fact, and that the terms "gift" and "compensation for personal services" were mutually exclusive. A bestowal of money can not be both. The Court stated, "if it be in fact a gift that is an end of the matter." Addressing itself to the case in hand the Court observed:
In sum, then, the case comes to this: The stockholders of the Unopco, having at the time no connection with the Universal Company, but rejoicing in the fact of their own great good fortune, and mindful of the former loyal support of a number of employees of the Universal Company, and desiring to remember *66 them "in the form of a gift or honorarium," resolved to make through the Unopco Company the distribution in question. In doing so, they were moved, as Judge Swan said in his dissenting opinion below, to an act of "spontaneous*1087 generosity." We agree with this dissenting opinion of Judge Swan, and the dissenting opinion of Judge Morton in Walker v. Commissioner, supra, as stating the correct view of the matter.
The only facts which even seem to militate against this view are: (1) That the Unopco stockholders had benefited by the former services of the recipients; (2) that the stockholders at their meeting described the payment as a gift or "honorarium"; and (3) that the resolutions authorized the payment as a "bonus * * * in recognition of the valuable and loyal services" of the employees, etc.
1. Because the Unopco stockholders had benefited by the past services of the recipients, it by no means follows that the distribution in question was not a gratuity. It nowhere appears in the record that full compensation had not been made for these services. There would seem to be a natural inference to the contrary; and the inference is made determinate by the stipulated fact that no one was under any obligation, legal or otherwise (and this would include a moral obligation, however slight), "to pay any additional compensation." There is no ground for saying that the benefit received and the compensation*1088 then paid for it were not equivalents.
The Court also stated:
Some stress is laid on the recital to the effect that the bounty is bestowed in recognition of past loyal services. But this recital amounts to nothing more than the acknowledgment of an historic fact as a reason for making the gifts. A gift is none the less a gift because inspired by gratitude for the past faithful service of the recipient.
Testing the facts of record by the criteria thus laid down, it is clear that the transfer of the option was in every sense a gift. It was so specifically characterized by both parties. Compensation in the full amount agreed on had been paid. It came as a surprise to petitioner and was conceived and suggested by the donor. On receipt by petitioner it was gratuitously apportioned by him among certain of his associates but not in the ratio of participation and ownership in the firm business. The only premises on which respondent's case is based are the fact that the relationship of attorney and client had existed, the coincidence in time with the payment of fees, and the further fact that the assignment was inspired by appreciation of valuable services rendered. But the Supreme*1089 Court has indicated clearly that these circumstances are not sufficient to defeat a gift if in fact a gift is intended and carried out.
Counsel having agreed that a holding to the above effect is dispositive of the case, no purpose will be served by further discussion.
Decision will be entered under Rule 50.