*4302 (1) DEDUCTIONS. - Petitioner is entitled to deduct, in computing net income, the difference between the value of its own stock as stipulated between the parties, purchased in the open market for sale to employees, and the sale price thereof.
(2) Petitioner is entitled to include in invested capital accounts receivable from employees on account of stock purchased, from date of acceptance of contract of purchase.
*1087 This appeal is from the determination of deficiencies in income and profits taxes for the fiscal years ended January 31, 1919, and January 31, 1920, of $20,743.08 and $10,379.93, respectively. The petitioner assigned a number of errors, all of which may be included in two distinct assignments of error:
(1) Whether or not the respondent erred in disallowing as a deduction in the taxable year a sum representing a stock bonus.
*1088 (2) Whether certain alleged accounts receivable resulting from stock sales to employees may be included in invested capital for the taxable years in question.
Both*4303 of the assignments of error arise out of the same transaction.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of New York in 1916, for the purpose of engaging in the manufacture and sale of railroad cars and similar equipment. The general offices and the manufacturing plant were located at Michigan City, Ind. The petitioner had authorized capital stock of 250,000 shares (no par value) of which 220,000 shares were issued and outstanding. The stock was listed and was actively traded in on the New York Stock Exchange.
At a meeting of the board of directors on November 21, 1918, a committee appointed to devise ways and means of purchasing stock of the company and selling the same to the employees of the petitioner at a reduced price by way of additional compensation reported and the following minutes were taken and resolutions adopted:
In the absence of Mr. Marcy, Chairman of the Committee appointed at the meeting held October 31, 1918, to devise a plan for the purchase of the stock of the Company in addition to that already held in the Company's treasury, and to recommend terms and conditions for the sale thereof to officers and employees*4304 of the Company, Mr. Corey, a member of the Committee stated that on behalf of the Chairman he was authorized to report the Committee's recommendations as follows:
For the purpose of providing compensation to the President, chief executive and operating employees of the Company in addition to their respective salaries, for services actually rendered during that year, the Committee recommends that the Company purchase out of surplus profits 5,000 shares of its capital stock in addition to the 5,000 shares now held in the treasury, and that said 10,000 shares be sold.
(1) 5,000 shares thereof to the President of the Company, Mr. Edward F. Carry, at $25 per share. In the opinion of the Committee the difference between that price on said 5,000 shares and the present market price, is a reasonable compensation to the president, in addition to his salary, for his service actually rendered to the Company during the year.
(2) 5,000 shares thereof to the chief executive and operating employes at $25 per share, in such proportion as in the opinion of the President will make the difference between said price of $25 on the number of shares sold to each and the present market price, a reasonable*4305 compensation to such chief executive or operating employee, in addition to his salary, for his services actually rendered to the Company during the year.
Upon motion duly made, seconded and carried, Mr. John R. Morron was elected Chairman pro tem.
Following discussion of the foregoing recommendations, on motion duly made, seconded and adopted (Mr. Carry not voting), it was
*1089 Resolved, That the Committee appointed at the meeting of the Board of Directors of this corporation held on October 31, 1918, be continued and that said Committee be authorized and empowered to buy on behalf of this corporation out of surplus profits, five thousand (5,000) shares of its capital stock at such price or prices as in their judgment is deemed advisable; and
Further resolved, That the Company sell 5,000 shares of its capital stock now held in the treasury to Mr. Edward F. Carry at the price of $25 per share, as compensation, in addition to his salary, for his services actually rendered during the year, and that 5,000 shares when purchased pursuant to the preceding resolution be sold to the chief executive and operating employees of the Company, in such proportions as in the opinion*4306 of the President will make the difference between said price of $25 on the number of shares sold to each and the present market price, a reasonable compensation to such chief executive or operating employee, in addition to his salary for his services actually rendered to the Company during the year.
Pursuant to the above resolution the petitioner actually used 10,145 shares and the average cost to the company per share was $43.16.
The vice president of the company, who was not a lawyer, for the purpose of carrying into effect the resolutions of the board of directors, prepared a form of contract to be entered into between the petitioner and its employees. Thereafter 68 employees were selected and were allotted a certain number of shares, determined by the president, which allotment was based upon the quality of the employee's services.
The following is a typical form used for each of the 68 employees, varying only with respect to the number of shares and the name of the employee:
To
In recognition of the special service of officers and employees in meeting the difficult conditions of war time operations, and as special compensation therefor, the Board of Directors of*4307 the Company have authorized the offer to you of a bonus in the form of subscription right to stock acquired for this purpose, under the following terms and conditions:
1st. The Company offers you the right to subscribe for shares of the above-mentioned stock of the Company, at a price of $25.00 per share.
2nd. Payment of all or any part of the subscription price of such stock may be made as of the first day of any calendar quarter, but payment must be completed in any event within five years from January 1, 1919. Failure to complete payment within the specified period shall cause the subscription right to lapse, and the Company will return to you the net profit, if any, accruing to you over carrying charges.
3rd. Pending completion of payment for above subscription, the certificate of stock shall remain in the Company's possession, and upon completion of payment for entire lot shall be delivered to you.
4th. Dividends paid by the Company on this stock after the date hereof and pending completion of your payment therefor, shall be credited on the balance due on your subscription.
5th. Interest at the rate of 5 per cent per annum will be charged on the balance due*4308 on your check, but in any event the interest charged shall not exceed the amount of dividend credited on your subscription during the year.
6th. In the event of your death prior to completion of payment on the subscription, the Company will, as directed by your administrator or other legal *1090 representative, either return to your estate the entire amount, if any, credited to you on this subscription, without deduction for carrying charges, and cancel the contract, or will accept complete payment thereon from your administrator or legal representative and deliver the certificate of stock to such person.
7th. In the event of your departure from the employ of this Company, for any cause, prior to completion of payment of this stock, or upon your written request at any time while still in its employ, the Company will repay to you the net credit, if any, accrued to you on this subscription and your subscription will thereupon be canceled with no further interest to you therein.
8th. This subscription contract is made with you individually, and is not assignable or transferable to any other person without the consent of the Company in writing.
This subscription offer*4309 has been executed in duplicate on the part of the Company and your acceptance thereof in writing in the form appended will constitute this a contract between yourself and the Company, but only for the purpose and to the effect herein stated.
HASKELL & BARKER CAR CO. INC.
By E. F. CARRY, President.
Attest:
D. A. CRAWFORD,Asst. Secretary.
In witness of my acceptance of the terms and conditions of the above subscription offer: I have subscribed my name hereto this 29th day of Jan. 1919.
Witness
In the month of January, 1919, within the petitioner's fiscal year, all of the 68 employees selected to receive a bonus executed one of the above forms.
At the time the shares of stock were purchased they were charged to an asset account entitled "Securities Owned." When the foregoing contract was entered into between the petitioner and these employees, an entry was made in the books of account as follows:
| Debit | |||
| Credit | |||
| Employees' stock account | $253,625 | Securities Owned | $253,625 |
Explanation made in the books of account to support this entry was "10,145 shares of Haskell & Barker Car Co. Inc., stock sold to employees at $25.00*4310 per share as authorized by the board of directors under date of November 21, 1918."
At about the same time another entry was made in the books of account as follows:
| Debit | |||
| Credit | |||
| Profit and Loss | $123,814.47 | Securities Owned | $163,127.19 |
| Cost Account Lot 5178 | 20,018.89 | ||
| Cost Account Lot 5179 | 19,293.83 |
The explanation given in support of this entry was "For difference between the selling value of 10,145 shares of Haskell & Barker Car Co. Inc., stock sold to employees and the cost value of the same. Cost *1091 value per share $41.079565 and selling price $25.00; 10,145 shares at $16.079565." There was also a charge made to cost-plus accounts for a part of this bonus because of the fact that petitioner had cost-plus contracts with the United States Railroad Administration, whereby the said Administration was to be charged with a proportionate part of the company's expense, which said expense was in fact accepted by the Railroad Administration as proper.
The market value of the stock of the petitioner was not less than $42.50 per share during the month of January, 1919.
The petitioner kept its books of account and made its returns*4311 on the accrual basis.
As the name of the employee who was to receive a bonus was selected he was called into the office of D. A. Crawford, vice president, W. N. Oehm, general manager, or G. P. Rogers, the auditor, who explained in detail that the company proposed to pay him as additional compensation for services rendered during the year the sum of the difference between $25 a share which he would be required to pay the company and the market value of the stock at that date, which was between $42 and $43 per share; that by acceptance and signing of this contract the employee created an obligation to pay the company the sum of $25 a share for his stock; that the company would advance the purchase price and that the employee could pay the company at any time within five years. The employee was further told by these men that the stock was his to do whatever he wanted to with it; that he could make a loan at the bank, take up the stock and sell it if he so wished; that the company would hold his stock certificate as collateral until full payment had been made; that the company would credit him with dividends, and would charge him with interest on the balance due. Furthermore, the*4312 employee was told that the company would protect him in any event and should the stock decline in value, the company would take the stock back and pay him the net balance due him. The petitioner made this offer without placing any limitations upon the employee with respect to leaving the services of the company. Two of the employees paid for their stock and received certificates therefor after leaving the company. In fact, one employee was discharged for excessive use of liquor and he received the full market value of his stock, which was then $58.50 per share.
During the month of January, 1919, 5,225 shares of the total of 10,145 shares so allotted and sold to employees were paid for and they were immediately given possession of their stock certificates. The remaining 4,920 shares were held by D. A. Crawford, vice president of the company, as trustee, which shares were placed in a safe-deposit box and marked as collateral for these contracts. As was the custom with the petitioner it mailed a notice to all of its employees at the end of the calendar year telling them the amount of compensation *1092 which they had been paid during the year, and there was a special notice*4313 sent to each of the 68 employees hereinbefore referred to. A copy of typical notice was mailed as follows:
DEAR SIR: For your information in connection with your income tax return for the calendar year 1919, we have secured from the company's counsel an opinion that those employees who contracted to purchase this company's stock in January, 1919, at the fixed price of $25.00 per share, should report as part of their compensation received from the company in 1919, the difference between the above price of $25.00 and the price of $42.66268 per share, the cost price of stock purchased by the company for this purpose. The above basis applies to those employees only who have not sold their stock.
For your information, there is attached to this letter a memorandum showing the total compensation paid you by this company including the total "compensation value" of the stock allotted to you. There is also shown thereon, a statement showing the number of shares subscribed for by you under your contract with the company, the amount of dividends received by the company and credited to your account on the company's books and the amount of interest charged to your account on the deferred*4314 payments on your stock subscription. The amount of the dividends received by you on the above stock allotment should be accounted for by you as income, whether the dividend checks were received by you direct or credited up to you by the company, and, similarly, the amount of interest charged to you should be reported as a deduction on your income tax return.
Those employees who sold all or any part of their stock during the year 1919 should report as a profit on the sale of such portion of the stock the difference between the $42.66268 price and the price they actually received for the stock. Those employees who sell all or any part of their stock in any calendar year after 1919, should report as income in the year in which such sale is made, the difference between the above value of $42.66268 per share and the price at which they sell.
If this information is not entirely clear to you, either the writer or Mr. Dudley will be glad to go into the matter further with you.
G. P. ROGERS.There was also a computation appended to this notice and sent to each of the 68 employees, a copy of which is given below:
ACCOUNT NO.
Statement of salary, bonus and other compensation*4315 paid to you during the calendar year 1919.
Monthly salary for 12 months, 1919
Semi-annual cash bonus
Production bonus
Stock bonus, on basis of shares at $17.66268 per share, as per letter furnished you under date of Feb. 18th, 1920 herewith attached
Total compensation or Wages
For your information, it is suggested, and believed advisable that whether or not you have sold, during the year 1919, any stock which you purchased from the company, you should on your income tax return, show the amount given *1093 above as "Total Compensation" paid you by this company and should be entered under item "B" on Form 1040 or Form 1040-A.
Any amount derived from the sale of stock in excess of the $42.66268 per share should be shown on your tax return as "profit" resulting from the sale of stock and should be entered under Item "D" on Form 1040 or Form 1040-A.
For your information, the company's records show you were credited on your stock subscription account during the calendar year 1919 with dividends accruing thereon amounting to:
Your stock subscription was charged during the same period with interest amounting to
It will be noted that the above notice carries a*4316 figure of $42.66 per share. That figure is in error, accounted for by the fact that the petitioner misinterpreted the Treasury regulations and the company used "cost" of the stock instead of the market value thereof on the date of the sale to the employees. The correct figure should have been $43.16 per share which was the actual cost. These witnesses who testified by deposition at the hearing included this bonus in their income-tax return for the year 1919 as additional compensation. This was done regardless of whether or not payment had been made for these shares and a certificate of stock received.
All of the 10,145 shares of stock have been paid for by employees and certificates delivered to them with the exception of one, an employee who purchased 35 shares and who disappeared and could never be located.
The respondent allowed the deduction of $17.50 per share on each of the 5,225 shares paid for and delivered to the employees during the month of January, 1919, but denied the deduction on the remaining shares. He also reduced invested capital for 1920 by the sum of the unpaid amounts on the stock assigned to the employees as hereinabove set forth.
OPINION.
MORRIS: *4317 The first allegation of error is the failure of the respondent to allow as a deduction for the fiscal year ended January 31, 1919, an amount of $17.50 per share (difference between the stipulated market price of $42.50 and sale price to employees) on the stock which had not been paid for in full in the computation of net income. The respondent alleges and contends that there was no binding obligation upon the petitioner, certainly not more than contingent liability until the stock in question was fully paid for by the employee and his certificate of stock delivered to him. Therefore, the respondent contends, the bonus of $17.50 should not be allowed as a deduction until the payments are completed by the employee. The petitioner, on the other hand, contends that there was a binding and enforceable contract between the petitioner and its employees and that the bonus sought to be paid by this agreement was for services *1094 actually rendered within the fiscal year ended January 31, 1919, and therefore the sum claimed as a deduction in that year should be allowed as provided for in section 234(a) of the Revenue Act of 1918. Section 234(a)(1) of the Revenue Act of 1918 provides*4318 that in computing the net income of a corporation subject to the tax imposed by section 230, there shall be allowed as deductions, "(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *." The words "paid or incurred" as used in the above section are defined in section 200 of the same Act as follows:
The term "paid," for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred," and the terms "paid or incurred" or "paid and accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212.
Section 212(b) of the same Act provides that, "The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer." In this case there seems to be no dispute over whether the sums in question were "ordinary and necessary" or*4319 whether the sums constitute a "reasonable allowance." Nor is there any doubt expressed as to the right of the petitioner to deduct a bonus as such in computing its net income. . Therefore we are only called upon to determine whether or not the $17.50 per share on stock contracted to be sold to the employees but not already paid for within the fiscal year ended January 31, 1919, is "paid or incurred during the taxable year" as provided for in the statute. In deciding this point in issue it will be necessary, not only to construe the writing entered into between the parties, but to determine from the oral testimony of witnesses and all the surrounding circumstances which caused the parties to contract with each other, what the intention of these parties was. , and .
Let us first, therefore, examine briefly some of the pertinent terms of the minutes of the board of directors of November 21, 1918, referred to in the findings of fact. The committee appointed to work out the plan of the stock bonus "for the*4320 purpose of providing compensation to the president, chief executive and operating employees of the company, in addition to their respective salaries for services actually rendered during the year * * *" recommended the purchase of 5,000 shares of stock in addition to the 5,000 shares held in *1095 the treasury and that 5,000 shares be sold to the president at $25 per share, the committee stating with respect to this sale "the difference between that price on said 5,000 shares and the present market price, is a reasonable compensation to the president, in addition to his salary, for his services actually rendered to the company during the year." There was also a similar provision with respect to the chief executive and operating employees. The terms of the above committee's recommendation were adopted by resolution of the board of directors.
Therefore, insofar as the intention of the petitioner is concerned, there can be no question but that it intended the amount in controversy to cover compensation in addition to the salaries already paid for services actually rendered to the company "during the year." Some obligation was certainly incurred within the taxable year in question. *4321 An agreement was drawn up to carry out the resolution of the board of directors by the vice president of the company, who was not a lawyer and skilled in the drafting of legal instruments. The preamble to the contract simply recites that the company is desirous of compensating the employee further and that it has authorized the offer of a bonus in the form of subscription right.
The first numbered paragraph of the contract recites "the company offers you a right to subscribe for shares of the abovementioned stock of the company, at a price of $25.00 per share."
The second numbered paragraph provides for the manner of payment and specific provisions that the failure to complete payment within the specified period shall cause the subscription right to lapse. That paragraph further provides "and the company will return to you the net profit, if any, accruing to you, over the carrying charges."
The third numbered paragraph provides that the company shall have possession of the certificate of stock pending completion of payment.
The fourth numbered paragraph provides that the company shall pay dividends on this stock pending completion of the payment therefor, which dividends*4322 were to be credited on the balance of the employee's subscription.
The fifth numbered paragraph provides for the charge of interest on the balance. That paragraph also provides "but in any event the interest charged shall not exceed the amount of dividend credited on your subscription during the year."
The sixth numbered paragraph provides briefly that in the event of the death of an employee before payment, the company will, at the option of the employee's personal representative, either return to his estate the entire amount, if any, credited on his subscription "without deduction for carrying charges" and calcel the contract, *1096 or will accept complete payment from his personal representative and deliver the certificate of stock to such person.
Paragraph seven of the contract, which seems to be the one in controversy, or at least more so than any other one, reads as follows:
In the event of your departure from the employ of this company, for any cause, prior to the completion of payment of this stock, or upon your written request at any time while still in its employ, the company will pay to you the net credit, if any, accrued to you on this subscription and*4323 your subscription will thereupon be canceled with no further interest to you therein.
The eighth numbered paragraph provides that the contract is not transferable or assignable without consent of the company in writing. The final paragraph provides, "This subscription offer has been executed in duplicate on the part of the Company and your acceptance thereof in writing in the form appended will constitute this a contract between yourself and the Company, but only for the purpose and to the effect herein stated." This contract was executed by the president for the petitioner, attested by the secretary and signed by the employees. All the elements of a binding contract to sell stock, on the one hand, and to purchase, on the other, are present. There is the element of offer and acceptance required in all binding contracts. It is true that the acceptance on the part of the employee is not in the exact words of the offerer, but as we understand it, that is not necessary to create a legally binding contract. At page 128, Volume I, of Williston on Contracts, the author says, "in order to make a bargain it is necessary that the acceptor shall give in return for the offerer's promise*4324 exactly the consideration which the offerer requests. If an act is requested, the very act and no other must be given. If a promise is requested, that promise must be made absolutely and unqualifiedly. This does not mean necessarily that the precise words of the requested promise must be repeated, but by a positive and unqualified assent to the proposal the acceptor must in effect agree to make precisely the promise requested." In , cited by the petitioner, wherein the agreement between the parties was that the defendant deliver certain rifles, the plaintiff did not in terms agree to buy the rifles nor did he promise in terms to pay for them. The court said, "clear and explicit words were used to express the terms of the contract and agreement, leaving no doubt as to the subject matter thereof, the time and place for the delivery of the goods to be delivered, and the price or sum to be paid, and when such payment was to be made; and the assent of both the contracting parties also appears, that of the sellers, by subscribing their firm name at the end of the contract, and that of the buyer by the acceptance thereof. *4325 Although there is no distinct *1097 and express promise in terms by the plaintiff to pay the price specified, the terms, 'cash on delivery,' imply a promise, and create an obligation to make such payment when the rifles are delivered." In the light of the words used in the above citation it seems clear that in this case there was clearly an offer and acceptance.
Let us consider for the moment paragraph seven of this contract, which simply says, in effect, "if you wish to return your stock any time before payment of your subscription, you may do so." We can see no reason why this provision in the contract should alter its legal efficacy. The testimony of the officers of the company with respect to paragraph seven of the contract was to the effect that the company wished to give the employee every advantage, that it wished to protect him in the event of a possible decline in the market value of his stock. Indeed, we are inclined to the belief that if such a provision had not been made in this contract, it might have been inconsistent with the giving of a bonus and would have amounted to nothing more than a strict contract between the parties for the sale and purchase of stock. *4326 If the stock in question had not been protected by that provision a decline in the market value of the stock could have deprived the employee not only of the $17.50 sought to be paid to him as a bonus, but also could have deprived him of a portion or all of his purchase price.
We can not segregate paragraphs in this contract and consider them separately from all of the other provisions. The entire contract must be construed in the light of all of the terms therein and of the surrounding circumstances which tend to show the intention of the parties. In , the court said:
The elementary canon of interpretation is, not that particular words may be isolatedly considered, but that the whole contract must be brought into view and interpreted with reference to the nature of the obligation between the parties, and the intention which they have manifested in forming them.
The testimony discloses that all of the 68 contracts in question were executed in the presence of one of the officers of the company and as each employee executed his contract, the terms thereof were clearly explained to him. He was told that the company proposed*4327 to pay him additional compensation for services rendered during the year; that the sum which the company would give him would be the difference between $25 which he would pay and $42 or $43 per share; that by accepting and signing this contract the employee created an obligation to pay the sum of $25; he was told that he could take the stock up at any time he wanted to and sell it or do anything else that he wanted to with it; that he could borrow money at the bank and take it up. Furthermore, he was told the company would protect him in the event of a decline in value. The testimony was clear *1098 that the company offered this stock to its employees without any obligation on the employee other than to pay the $25 mentioned in the contract.
Some of the employees testified that they understood that this was a contract between the company and themselves and they were obligated to pay $25 per share; that they understood that paragraph seven was designed for their protection in case of a decline in the market value; that they understood that they could take this stock up at any time they wanted to. It seems to us that the practical construction placed upon the contract by*4328 the parties should be considered rather than a theoretical construction. In , the court said, "The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much a part of it as anything else. There is no surer way to find out what parties meant, than to see what they have done."
It was further said in , "We think that the practical construction which the parties put upon the terms of their own contract, and according to which the work was done, must prevail over the literal meaning of the contract, according to which the defendant seeks to obtain a deduction in the contract price."
The testimony of all the parties concerned was to the effect that they understood and intended that this writing between themselves was a contract. Another important consideration is the fact that the company credited dividends to the account of each employee on the amount of stock so purchased from the date when the contract was entered into.
Taking into consideration the purpose*4329 for which this contract was designed and the intention of the parties as expressed in oral testimony and all of the surrounding circumstances, we believe that the petitioner is entitled to deduct in the fiscal year ended January 31, 1919, not only $17.50 per share for the stock paid for and taken up by the employee, but also that amount per share for the stock covered by the contracts, but not paid for.
The second allegation of error relates to the deduction from invested capital for 1920 by the respondent of the balance due from employees on the contracts as of January 31, 1919, less the payments made on those contracts during the following year prorated in accordance with the date received. We have held that the agreements between the company and the 68 employees were binding contracts. The question therefore narrows itself down to the proposition whether the accounts receivable, secured by stock held as collateral by a trustee, the fair market value of which was in excess *1099 of the amount due, may be included in invested capital under section 326 of the Revenue Act of 1918. That section provides, "That as used in this title the term 'invested capital' for any year*4330 means (except as provided in subdivisions (b) and (c) of this section): (1) Actual cash bona fide paid in for stock or shares; (2) Actual cash value of tangible property, other than cash bona fide paid in for stock or shares at the time of such payment * * *." Section 325(a) of the same statute defines the term "tangible property" to mean "stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property." Under the facts in this proceeding there can be no question that the actual cash value of the accounts receivable is equal to their face value. We are therefore of the opinion that these accounts receivable evidenced by the contracts should be included in invested capital and that the respondent was in error in reducing invested capital by the amount of the balance due from employees on the contracts as of January 31, 1919. See .
Reviewed by the Board.
Judgment will be entered for the petitioner on 15 days' notice, under Rule 50.
MILLIKEN did not participate.
TRAMMELL dissents.
*4331 STERNHAGEN, dissenting: In my opinion, the decision should be for the respondent on the first point. I can not see how the purchase by a corporation of its own stock and its subsequent transfer can be an expense either paid or incurred. The only outlay by the corporation was the purchase price of some outstanding stock. This was not an expense. The resale or reissuance of the stock for less than the purchase price involved no loss, Simmons & Hammond Mfg. Co.,1 B.T.A. 803">1 B.T.A. 803, and since it carried with it no further outlay or liability, it seems to me there was no expense to deduct. The employees bought at a cheap price, but so far as the corporation was concerned there was simply a change in the personnel of its stockholders. The corporation avoided an expense by giving the employee at an advantageous price an opportunity of sharing in future earnings or liquidation.
PHILLIPS, dissenting: Upon the basis of the decision of the Supreme Court in ; *4332 47 Sup.Ct. 520; 6 Am.Fed.TaxRep. 6747, I concur in the decision that the bonus to be paid the employees of the petitioner was a deduction in the fiscal year ended January 31, 1919.
I can not, however, agree with the result reached upon the second point involved. The agreement between the employees and the *1100 company appears to me to be no more than an accepted subscription agreement. Certainly there was a meeting of the minds of the parties, and certainly there was a contract; but it does not follow that the employees thereby became stockholders of the corporation or that the amount of their unpaid subscriptions became accounts receivable. Nor do we know that they ever would become stockholders. For example, under paragraph 7 of the agreement, if an employee severed his relationship with the company, his only right was to recover the "net credit accrued to you on this subscription and your subscription will thereupon be canceled with no further interest to you therein." Entirely aside from the language used in designating the agreement as a subscription, how is the result consistent with the theory that the subscriber was the owner of the stock? *4333 If he was he would be entitled to pay his obligation to the company and receive his stock, for there was no agreement to resell. What is the purpose and effect of paragraph 8th if the employee owns the stock? What is the meaning of the last paragraph of the contract and especially of the words of limitation contained in the last sentence?
That dividends should be credited and interest debited on the balance due seems an equitable arrangement for the protection of both parties, but is far from establishing that the subscriber owned the stock. My opinion is that we have here only an executory contract for the purchase of stock under which the subscribers become stockholders only when the subscription price is paid. I therefore conclude that the respondent was correct when he included in invested capital only the amounts paid on these subscriptions.
MURDOCK, dissenting: I dissent on both of the points covered by the prevailing opinion. However, I concur in the dissent of Mr. Sternhagen on the first point.