*2410 Under the evidence adduced, certain shares of stock, alleged by the petitioner to have been acquired by purchase, with the purchase of debenture bonds, constitute income in the year in which received, and for failure to overcome the prima facie correctness of the value of said shares as found by the respondent the value so found is approved.
*1300 This proceeding is for the redetermination of a deficiency in income tax for 1923 of $18,789.25.
The petitioner alleges error on the part of the respondent in that for 1923 he included in its income $200,000, the value, computed at $10 a share, of 20,000 shares of North American Light & Power Co. stock; in holding that the said stock was received by the petitioner as a commission; in valuing said stock at $10 a share, or in finding that it had any market value at the time of its receipt, and, furthermore, in failing to hold that the stock in question and certain bonds were acquired in 1923 by purchase and that no income was derived by the petitioner*2411 by reason of such purchase.
FINDINGS OF FACT.
The petitioner is a corporation organized and incorporated under the laws of the State of Illinois, with its principal office in Chicago, and is engaged in the investment banking business.
In 1923 the petitioner participated with E. H. Rolling & Sons, bankers, and Clement Studebaker, Jr., in financing the North American Light & Power Co., a holding company forming the nucleus for the consolidation of various public utility properties scattered throughout Missouri, Kansas, Oklahoma, and various other places in the middle west. The promoters of the plan of consolidation had discussed the matter thoroughly with said E. H. Rollins & Sons, and had proceeded quite a way with it when they realized that considerable financing would be entailed and it was thereupon suggested that the petitioner take part in the proposed transaction as an additional banker. Thereafter, the petitioner began negotiations, and, in so doing, learned that about $1,500,000 cash would be needed to complete the transaction. Thereafter, on March 10, 1923, the petitioner agreed to purchase from the North American Light & Power Co. $1,250,000, par value, of 7 per*2412 cent, five year debenture bonds, of the Inland Power & Light Co., a new corporation, then being organized by the said North American Light & Power Co. at $90 and interest. The agreement as entered into follows:
AGREEMENT made March 10th, 1923, between North American Light and Power Company (called the Company) and Marshall Field, Glore, Ward & Company, E. H. Rollins & Sons, a Maine corporation, and Clement Studebaker, Jr., (called collectively the Bankers).
1. The North American Company will cause to be organized a holding company to be called Inland Power & Light Company, or some other suitable name, which shall own the following securities (subject to the pledge of the same with First Trust & Savings Bank of Chicago to secure an issue of First Lien 6% bonds of which $4,075,000, approximately are now outstanding, and which will be assumed by the Inland Company).
| Company | Capital stocks par value | Bonds par value |
| Adair County Light, Power & Ice Co | $100,000.00 | $100,000.00 |
| Ardmore City Gas Co | 219,900.00 | |
| Boonville Light, Heat & Power Co | 75,000.00 | |
| Cahokia Gas & Oil Co | 200,000.00 | |
| Citizens Electric Light Co | 5,000.00 | |
| Consumers Appliance Co | 124,500.00 | |
| Consumers Light & Power Co | 1,000,000.00 | 1,000,000.00 |
| Huntsville Light & Power Co | 25,000.00 | |
| La Plata Light, Heat & Ice Co | 12,500.00 | 12,500.00 |
| Missouri Heat, Light & Power Co | 50,000.00 | |
| Moberly Light & Power Co | 300,000.00 | 169,000.00 |
| Randolph County Gas & Electric Co | 90,000.00 | |
| Southern Oklahoma Pipe Line Co | 94,000.00 | |
| Washington Gas & Electric Co | 250,000.00 | 50,000.00 |
| Wilson Ice Co | 100,000.00 |
*2413 *1301 2. The Inland Company shall issue its 7% five year debentures to the amount of $1,750,000, guaranteed principal and interest by endorsement by North American Light & Power Company, and secured by the pledge of the securities owned by Inland Company, and described in paragraph #1 above, subject to the pledge aforesaid, and further secured by the deposit by the North American Light & Power Company of $1,248,300 par value of common stock of Illinois Traction Company.
3. The North American Light & Power Company has made certain representations as to the appraised value and gross and net earnings of the properties enumerated in paragraph #1, and the North American Light & Power Company will furnish to the Bankers before delivery of the securities, papers satisfactory to the Bankers substantiating the above figures. These representations are substantially as follows:
| Appraised value of property with additions to 12/31/1922 | $7,362,292.01 |
| Less depreciation | 246,307.75 |
| Gross earnings 12 months ended 12/31/1922 from the | |
| properties whose securities are enumerated in parag. #1 | 2,312,760.03 |
| Operating expenses | 1,761,908.62 |
| Operating income | 550,851.41 |
| Less annual interest on $ 4,021,800 par value first lien | |
| bonds outstanding 12/31/1922 | 241,308.00 |
| Balance for debentures | 309,543.00 |
| Annual interest on $1,750,000 seven per cent debentures | 122,500.00 |
*2414 The above does not include any income from Illinois Traction Company common stock.
4. The North American Light & Power Company sells to the Bankers, and the Bankers agree to buy severally, but not jointly, the $1,750,000 of debentures above referred to in the amounts and to the extent set opposite the respective names, at 90 and interest, to date of delivery.
5. The debentures, and indenture securing the same, shall be in form satisfactory to the Bankers, and their legality and that of the guarantee of North American Light & Power Company, shall be approved by counsel for the Bankers. All expenses incident to the issue of the securities will be paid by the company.
6. The debentures shall be delivered, at the Company's option, at any time between May 1 and June 1, 1923, payment to be made on delivery, one week's notice being first given.
7. The North American Light & Power Company may cancel the sale to the Bankers at any time before actual delivery of the securities upon payment to the Bankers jointly of 1/4 of 1% on the amount of the debentures.
| NAME | AMOUNT |
| North American Light & Power Co. | |
| By W. A. Baehr, President. | |
| Attest - H. L. Hanley, Secretary. | |
| Marshall Field, Glore, Ward & Co | $1,250,000.00 |
| E. H. Rollins & Sons | $250,000.00 |
| By John V. Esmond, V.P. | |
| Clement Studebaker, Jr | $250,000.00 |
*2415 *1302 The bonds aforesaid were actually delivered to the petitioner on May 31, 1923, and were duly entered in its books of account at 90 per cent of their face value, or a total amount of $1,125,000.
Under date of March 10, 1923, the same date as the above agreement, the said Clement Studebaker, Jr., wrote the following letter to the petitioner:
Gentlemen:
In consideration of your execution of an agreement for purchase of debentures of Inland Power & Light Company of even date, we agree to deliver you 10% of all common stock of the same kind and in the same way and manner as the stock which is delivered by us to E. H. Rollins & Sons in connection with the reorganization and consolidation of Illinois Traction Company system.
Pursuant to the foregoing communication, the North American Light & Power Co. by its vice president, under date of April 7, 1923, addressed the following communication to the petitioner, and the stock mentioned therein was actually delivered on or about that date, and was duly entered in the petitioner's books of account at a nominal value of $1 :
DEAR SIRS:
Herewith is delivered to you certificate No. 365 representing 20,000 shares of the*2416 Common Stock of the North American Light & Power Company, a Maine Corporation, issued in the name of Charles F. Glore. The Par value of these shares is $5. and the total authorized issued and outstanding at the present time is 200,000 shares.
This is so issued at your request and is delivered in harmony with a letter addressed to you under date of March 10, 1923, signed by Clement Studebaker, Jr. This stock is made available through contribution by Messrs. Clement Studebaker, Jr., Geo. M. Studebaker, Wm. A. Baehr, H. L. Hanley, P. C. Dings and the undersigned, owners of the Common Stock of the North American Light & Power Company.
As you know it is contemplated that there will be organized in the near future a Voting Trust for the Common Stock of this Company and we understand that if such Voting Trust is organized in form satisfactory to you, you will join the other Common stockholders in depositing your stock thereunder. In this connection and in order to avoid the scattering of the shares into the hands of the general public, we may ask you to agree that for some reasonable period your stock will be held either by your firm or by one or more of your partners. It may be*2417 thought best to increase the number of shares of Common Stock, probably through the medium of a stock dividend, to 400,000 shares *1303 or double the present number. If this is done we understand that we shall have your cooperation in the undertaking.
We all appreciate your associations with us as we do the association of the other bankers in this enterprise and we hope that it will turn out to be both a pleasant and profitable one.
Kindly sign at the foot of the attached copy your acknowledgement of this letter and your agreement to its contents.
According to an understanding between the parties, the bonds, which were for a period of two years, were not to be sold to the public, but were to be carried by the petitioner and they were in fact so carried until March 21, 1924, when they were resold to that company at $90 each.
The stock received by the petitioner was placed in a voting trust on July 2, 1923, under and by virtue of a prior agreement and a certain trust indenture bearing the date aforesaid, and the said stock remained in said voting trust until sometime in 1926. The 20,000 shares owned by the petitioner were, however, declared and paid as a dividend*2418 to its stockholders on December 27, 1923, at which time the $1 value on the books was credited and the surplus account charged.
There were no sales of the North American Light & Power Co. common stock between the receipt of same by the petitioner and the date when it was trusteed. The stock was neither listed on any exchange nor bought nor sold at any public sales, nor was there any market for it during 1922 or 1923.
The value of such a new stock depends upon several things, viz., management, economy in operation, and the ability of the particular company to obtain its senior money at a lower rate. The consolidation effected economical operation and better management than smaller independent companies could have, and the company obtained cheaper money for senior financing, creating greater earnings for the stock. The value, however, was prospective and depended upon future developments and, when the shares were received, was problematical. It was while the stock was trusteed that the economies referred to were effected and the stock became more valuable.
The stock of that company was fairly closely held. There were some smaller interests involved in the transaction whose*2419 stock was acquired by the men consolidating the companies for as high as $5 or $10 a share.
There was no market for the voting trust certificates representing the shares trusteed in 1923, nor were there any sales thereof while the trust was in force.
In computing petitioner's taxable income for the year 1923, respondent added $200,000 thereto representing, as he states in his deficiency notice, a "commission of Inland Power and Light Company *1304 stock * * *." The respondent held "that the sales of stock made near the date of purchase fully supports the value of $10.00 a share placed by the revenue agent on the stock received with the purchase of the bonds, and that the understanding that such stock was to be placed in a voting trust is immaterial in determining the value."
OPINION.
MORRIS: The major question with which we are concerned is whether the 20,000 shares of stock of the North American Light & Power Co. received by the petitioner in 1923 represent a commission, as contended by the respondent, or whether said shares were acquired by purchase together with bonds of the Inland Power & Light Co., as the petitioner contends. If it was in fact a purchase, obviously, *2420 the purchase, as such, can not be taxed, but if it was a commission, then it becomes taxable to the petitioner, unless it has been shown by the evidence that the stock received had no fair market value.
The record shows that the petitioner was sought to become one of the bankers in financing the consolidation of a large number of public utility properties, and that on March 10, 1923, it entered into a written agreement with the North American Co., in which it was recited that the Inland Co. would issue certain debenture bonds to the extent of $1,750,000, whereby the said North American Co. agreed to sell, and the bankers, the petitioner, Rollins & Sons, and Clement Studebaker, Jr., agreed to buy "the $1,750,000 of debentures above referred to in the amounts and to the extent set opposite the respective names, at 90 and interest, * * *." That agreement makes absolutely no mention of the sale or any other disposition of the stock in question nor any other stock or securities other than the bonds just referred to, nor is there any language therein from which we might reasonably assume that the parties intended that the 20,000 shares of stock of the North American Light & Power Co.*2421 were to be included in and considered a part of the purchase price of the bonds, and, in fact, it appears that the stock was not owned by that company. But the petitioner refers to the communication of Clement Studebaker, Jr., dated March 10, 1923, in which he said "In consideration of your execution of an agreement for purchase of debentures of Inland Power and Light Company etc.," as evidence of an intention to include the 20,000 shares of stock in the purchase price of the debenture bonds. Had this communication been written to the petitioner by the North American Light & Power Co., the vendor of the bonds under the agreement of March 10, 1923, other considerations may arise which might *1305 require treatment or discussion here, but since, however, that communication was written by Clement Studebaker, Jr., who was himself one of the bankers and a vendee under said agreement of March 10, 1923, the same as the petitioner, we can not possibly see how he could, by a collateral writing in his own behalf, alter, or in any manner affect the agreement of March 10, 1923.
During the course of the hearing the petitioner's sole witness was asked, "Was the question of your getting*2422 stock of the North American Company discussed at the same time as the question of getting bonds, did the two go together?," and he replied, "Well, the general idea was that that was part of the trade, that we, in getting into the picture, should receive, as others had received, a certain amount of the stock and should at the same time buy a certain number of bonds, * * *."
In an attempt on the part of the respondent's counsel to ascertain why the stock was not mentioned in the agreement of March 10, 1923, the witness said, "We had an agreement I imagine with regard to the stock, certainly, a verbal agreement," meaning, we presume, that the agreement was oral as distinguished from written. He further said that the substance of that agreement was "for purchasing a certain amount of bonds, we were to receive a satisfactory security and stock, and were verbally understood to be one of the bankers for the company." Respondent's counsel asked the witness if "In consideration of the services that you were performing in lending this money to the company, you were to receive these twenty thousand shares of stock?," and the witness replied, "Yes, sir."
In the light of what we have just*2423 said with respect to the agreement of March 10, 1923, the communication regarding the stock which the petitioner received and the testimony of the petitioner's witness, we are constrained to believe that this was not an ordinary transaction where common stock was received as a bonus with the purchase of bonds, but that the bonds were acquired separately, and the stock transferred as compensation for services rendered or to be rendered or as an inducement for the lending of financial aid in the proposed consolidation. Whether that conclusion would be sound if all the facts and circumstances of the transaction were clearly placed before us, we do not know. We are satisfied, however, that it is the only reasonable and logical one to draw from the facts of record as they have been presented.
The petitioner's counsel in his brief states "that there is no presumption in this case that the stock had any value, because the Commissioner has never determined that it had a value, and he has never, so far as this record shows, even claimed any value for it." In this we believe counsel is a bit inconsistent, because it is alleged in the *1306 petition, among other errors, that "the*2424 respondent erred in valuing said stock at $10 a share, or in fact in finding that the stock had any market value at the time of its receipt." There can be no question but that the respondent has determined the value and, furthermore, that the record so discloses, because the respondent's deficiency notice states, "It is held that the sale of stock made near the date of purchase fully supports the value of $10.00 a share * * *." It is true that the respondent refers to "Inland Power and Light Company stock" and not stock of the North American Co., but this erroneous statement of fact on the part of the respondent appears to be one of form and can not possibly affect the substantial rights of the parties, since there seems to be a clear understanding between them that only one block of 20,000 shares of common stock is in issue. Therefore, unless the petitioner has overcome the prima facie correctness of the respondent's findings, the usual presumption of the correctness thereof must prevail.
In computing the value of the stock in question, the respondent has used $10 a share. On the subject of valuation, the record shows there were no sales of this stock between the receipt thereof*2425 and the date when it was trusteed; that it was an unlisted security during 1922 and 1923; that there was no market for the voting trust certificates representing said shares in 1923, nor were there any sales thereof while the said trust was in force. The record nowhere discloses that this stock was valueless, nor does it show what its true value was. The petitioner's witness, when asked the value of those shares in 1923, testified that "it was very difficult to arrive at * * *. It was purely problematical, I would say, depending entirely as to how this consolidation worked out, what economies were effected in operation and how it was managed and everything else. In other words, its value, you see, at that time, was purely in the future." When asked if he could have determined the market value at the time the stock was received by the petitioner, the witness replied, "No, it would have been simply guess work, you see. You could have sold it perhaps if you wished to sacrifice it, you could have sold it, I don't know at what price, but through some people you could have sold it at a better price than others * * *."
While it appears to our satisfaction that the principal value of*2426 the stock of the North American Light & Power Co. was prospective, and depended upon the company's ability to succeed in its undertaking, we are not convinced from the evidence adduced that it had no value in 1923 nor that it had any lesser value than that found by the respondent.
Judgment will be entered for the respondent.