*1283 Held, petitioner did not actually or constructively receive certain stock or the value thereof in the taxable year.
*735 Respondent determined a deficiency of $13,144.60 in petitioner's income tax for 1937. The full amount of the deficiency is contested by petitioner in this proceeding.
The sole issue is whether respondent erred in determining that petitioner during 1937 actually or constructively received 776 shares of Ironwood Amusement Corporation stock or the value thereof.
*736 FINDINGS OF FACT.
Most of the facts were stipulated and are hereby found as so stipulated. Additional facts hereinafter appearing which are not taken from the stipulation are found from the record.
Petitioner, an individual residing in Iron Mountain, Michigan, is and since 1907 has been engaged in the business of managing and operating motion picture theaters. The Ironwood Amusement Corporation, a Michigan corporation, for many years has owned and operated a motion picture theater in Ironwood, Michigan.
By agreement*1284 dated June 14, 1934, the company engaged petitioner for a term of five years beginning April 1, 1934, to assist in the management and operation of its business. Under the terms of the agreement petitioner was to receive $25 per week to cover all expenses incident to his employment; and, in addition, after reciting that the company's indebtedness on June 14, 1934, aggregated $91,000, the agreement provided as further compensation for his services that if, on or before April 1, 1939, petitioner having fully performed those things on his part to be performed, the indebtedness as of June 14, 1934, had been discharged from operating profits, the company would issue to petitioner 776 shares of its capital stock. The agreement provided that it was the intent of the parties that petitioner should receive 15 percent of the issued capital stock of the company at the time of the completion of his performance thereunder. The agreement recited that the company had an authorized capital stock of 30,000 shares of no par value, divided into 1,500 shares of class A stock and 28,500 shares of class B stock, both classes being nonassessable and equal in rights, and that there were issued as of the*1285 date of the contract 1,400 shares of class A and 3,000 shares of class B.
On January 18, 1937, one of the stockholders of the company instituted a suit against the company and others, including petitioner, challenging the validity of the issuance of 2,996 1/2 shares of class B stock and praying for an injunction against all the defendants. On the following day an injunction was granted by the court against all the defendants, which read in part as follows:
* * * that you do absolutely disist and refrain from assigning or selling your respective certificates or shares of Class B stock of the Ironwood Amusement Corporation, a Michigan corporation, and from transferring any Class B stock owned by the above named Defendants on the books of said Ironwood Amusement Corporation, and from issuing any other certificates of Class B stock of the said Ironwood Amusement Corporation, a Michigan corporation, until the further order of this court.
The injunction was in full force and effect after January 19, 1937, and was not dissolved until the suit was dismissed by court order on January 23, 1939.
*737 Petitioner completed the performance of his part of the agreement of June 14, 1934, on*1286 or before March 4, 1937, the indebtedness of the company having been discharged out of operating profits by that date. At a meeting of the board of directors petitioner gave notice of his performance and requested the company to issue to him the stock to which he was entitled under the agreement. The directors advised petitioner that the stock could not be issued to him because of the injunction, but they recognized that he had fulfilled the terms of the agreement so far as he was concerned. On March 4, 1937, the board of directors adopted a resolution which referred to the terms of the agreement, the representation by petitioner that he had fully performed his part thereof, and his request that the stock as provided in the agreement be issued to him. The resolution recited that by reason of the pendency of the suit the number of shares to which petitioner was entitled under the agreement could not be determined at that time, and that in any event the certificates could not be issued because of the restraining order. The resolution provided, however, that both parties were desirous of bringing the agreement to a conclusion and that the board of directors "does hereby determine*1287 that the said Martin Thomas, as of the 4th day of March, 1937, had fully performed all those things to be performed by him under said agreement" and "is entitled to receive from the Ironwood Amusement Corporation such shares of stock as he would be entitled to receive upon full performance under said agreement of June 14, 1934." The resolution then provided that the proper officers of the company, upon final disposition of the pending suit, should issue to petitioner certificates of the company's stock in such number and amount as he might be entitled to under the agreement, that is, the number that would equal 15 percent of the issued capital stock of the company upon disposition of the suit. It was further resolved:
That the said Martin Thomas from and after the 4th day of March, 1937, shall participate in the affairs and share in the profits and losses of said corporation as though he were the owner of 15% in number and amount of the issued capital stock of the company.
During all of the term of his employment petitioner, in the capacity of director of operations, attended practically all the stockholders' and directors' meetings of the company. He did not vote, however, *1288 at any of these meetings prior to 1939. No certificates of the capital stock of the company, or other evidence thereof, were issued to or received by petitioner in 1937 or until 1939. After the adoption of the resolution petitioner received proportionate distributions from the company which were reported as dividends on his income tax returns for the years 1937 and 1938.
*738 In 1939, after dismissal of the suit and dissolution of the injunction, certificates for 776 shares of stock, being the number to which petitioner was entitled under the agreement, were issued to and received by him.
Petitioner filed his income tax return for 1937 on the cash receipts and disbursements basis, omitting from his income any amount representing the value of the stock in question. To his taxable income respondent added the sum of $25,243.28, with the explanation that by reason of his participation in the directors' meetings and his receipt of dividends he had received taxable income from compensation to the extent of the value of 776 shares of the company's stock. It is stipulated that the value of the stock, for the purposes of this proceeding only, was $17.50 per share as of March 4, 1937.
*1289 OPINION.
VAN FOSSAN: Respondent held that petitioner received taxable income in the year 1937 to the extent of the value of 776 shares of the capital stock of the Ironwood Amusement Corporation. It is agreed that the shares were not actually issued or received in 1937. On brief respondent contends that petitioner constructively received the 776 shares in the taxable year. Petitioner contends that neither the shares nor the value of the shares was actually or constructively received in 1937. We sustain the petitioner.
That this is not a case for the application of the doctrine of constructive receipt seems clear. The Board said in , that the doctrine of constructive receipt should not be applied lightly. We adhere to that view and believe that to apply the doctrine here as to the receipt of the shares would do violence to a proper interpretation of the law and the present facts. By reason of the injunction the shares could not have been issued to petitioner in the taxable year. They were not issued until 1939. In 1937 they were not in any sense subject to his command and disposition.
We hold the same opinion as to the*1290 respondent's finding that petitioner received the value of the shares in the taxable year. This holding was predicated on the resolution of the company recognizing that petitioner had qualified to receive the stock due him as compensation and granting him the right to "participate in the affairs and share in the profits and losses of [the company] as though he were the owner of 15%" of the issued capital stock, and on the further fact that petitioner received proportionate distributions of profits which he returned as dividends.
That the distributions received by petitioner were not dividends on stock is clear. No stock had been issued to him and he was not a stockholder in the company. The fact that they were erroneously called dividends in petitioner's return is not controlling.
*739 It will be recalled that the compensation to petitioner was to be 15 percent of the issued capital stock of the company at the time of completion of performance of the contract. The resolution on which respondent chiefly relies recited that, by reason of the pendency of the injunction suit questioning the legality of the issue of certain of its shares, the number of shares to which*1291 petitioner was entitled under the agreement could not be determined at that time and that in any event the certificates could not be issued because of the restraining order.
The further part of the resolution, while nominally granting petitioner the right to participate in the affairs and share in the profits and losses "as though he were the owner of 15% in number and amount of the issued capital stock" amounted only to granting of compensation for services rendered in the amount of 15 percent of the company's profits. Had there been no net profits in 1937 there would have been no payment to petitioner.
The right to participate in the affairs of the company, without the right to enforce his views by voting in corporate meetings, was an empty gesture. It was not an asset which could be sold or transferred. Moreover, the record is that petitioner had attended most of the meetings all during the term of his contract. To hold that petitioner in 1937 received the equivalent in value of the 776 shares of stock, i.e., that the rights conferred by the resolution were tantamount to ownership of such stock, would be unjustified and not warranted by the facts. In none of the cases*1292 cited by respondent were the facts sufficiently parallel to those here present to constitute them contrary authority or to require their discussion.
Reviewed by the Board.
Decision will be entered for the petitioner.
OPPER, dissenting: For the reason that it seems to me we are forsaking a rule that is by now firmly established, I with deference dissent. What petitioner was entitled to receive was a proprietary interest in his employer. This being a corporation, such an interest would commonly be spoken of as stock. What is comprehended, however, is the right to share in profits and losses, in management, and in assets upon liquidation. Frank J. and Hubert Kelly Trust,38 B.T.A. 1014">38 B.T.A. 1014, 1016. All this the petitioner received in the taxable year.
The certificates of stock would have been nothing but evidences of an ownership which it thus appears he already possessed. 11 Fletcher on Corporations, Permanent Ed., 55; ; *1293 ; affd., . A failure to receive such evidence is not the equivalent of a failure to receive the property which it represents. . See also .
This is not an instance of constructive receipt, for if petitioner received anything in 1937 he actually received the proprietary interest which is the subject of the tax. If he did not receive that interest it is difficult to see how he could participate in the "affairs", in the profits, and particularly in the losses, of the corporation, as he and the corporation agreed that he should. The parties have stipulated that if he was in receipt of income in the taxable year the amount was 776 times $17.50. I believe he should be held to have received income in that amount.
SMITH agrees with this dissent.