1929 BTA LEXIS 2877">*2877 1. In 1919 the petitioner received $45,000 in consideration of an agreement to transfer on January 2, 1920, certain shares of stock owned by him in the Syracuse Washer Corporation. In his income-tax return for 1919 he returned the $45,000 thus received as taxable income and paid the tax due upon such return. The Commissioner has held this amount to be taxable income of the petitioner for 1920. Held, that the $45,000 in question was taxable income for the year 1919.
2. In part consideration of the contract above referred to, the petitioner, in 1920, received 10,010 shares of class A common stock of the Syracuse Washing Machine Corporation which he returned in his income-tax return in 1920 as having a fair market value at the date of receipt of $1 per share. The respondent has held that this stock had a fair market value on the date of receipt of $10.94 a share. Held, that the fair market value of the stock at the date of receipt was not in excess of $1 per share.
15 B.T.A. 306">*306 This is a proceeding for the redetermination of a deficiency in income1929 BTA LEXIS 2877">*2878 tax for 1920 of $89,340.63. The points in issue are (1) whether $45,000 received by the petitioner in 1919 was income of that year or of the year 1920, and (2) whether 10,010 shares of class A common stock of the Syracuse Washing Marchine Corporation received by the petitioner in 1920 had any fair market value at the date of receipt, and, if so, how much.
FINDINGS OF FACT.
The petitioner and one Guy C. Wilkinson were in 1919 the sole owners of the entire outstanding capital stock of the Syracuse Washer Corporation, which was engaged at Syracuse, N.Y., in the manufacture of washing machines. The corporation had very limited capital, 15 B.T.A. 306">*307 crude machinery and equipment, and restricted facilities and quarters. During 1919 its business developed very rapidly and gave such attractive promise of earning power that numerous promoters representing engineering and banking interests endeavored to induce the petitioner and Wilkinson to join them in plans for providing additional capital and for enlarging the corporation's operations through the organization of a new corporation with larger capital resources. A syndicate was organized by Bioren & Co., bankers of New York City, 1929 BTA LEXIS 2877">*2879 to organize a new corporation by the name of Syracuse Washing Machine Corporation. On December 19, 1919, Bioren & Co. addressed a letter to the board of directors of the Syracuse Washing Machine Corporation, in which it offered to subscribe or to obtain subscriptions for $999,000 par value of the authorized convertible preferred stock of this new corporation at par and the banking concern agreed "that $99,000 in par value thereof shall be subscribed and paid for in cash on December 22nd, 1919, and the balance thereof subscribed and paid for on January 2nd, 1920." On December 18, 1919, the petitioner and Wilkinson addressed a letter to the board of directors of the new corporation, which provided as follows:
SYRACUSE, NEW YORK,
December 18th, 1919.
To the Board of Directors of Syracuse Washing Machine Corporation.
DEAR SIRS:
In consideration of the payment by you to us of the sum of $73,000. ($45,000 to be paid to John N. Derschug and $28,000 to be paid to Guy C. Wilkinson) on the 22nd day of December, 1919, we hereby offer to transfer or cause to be transferred to your Corporation on the 2nd day of January, 1920, the entire capital stock, being 600 full paid nonassessable1929 BTA LEXIS 2877">*2880 shares without nominal or par value of Syracuse Washer Corporation, a New York corporation. This transfer shall be free and clear of debt against said Syracuse Washer Corporation or said capital stock thereof, except the ordinary trade accounts payable and accruals of said Syracuse Washer Corporation, and a note signed by us at The Syracuse Trust Company to the amount of $46,000, with interest at the rate of 6% per annum from September 30, 1919. The payment of such note and interest to be made by you on January 2nd, 1920, contemporaneously with our delivery of said 600 shares, and you thereupon to receive the entire number of said shares.
Upon the delivery of said certificates representing said 600 shares, the Syracuse Washer Corporation shall deliver to you a bill of sale, transferring to your Corporation all its fixed plant and equipment, inventories, cash, bank accounts, accounts receivable, trade acceptances receivable, contracts in course of performance, unexpired insurance and other prepaid or deferred items, books of account, files, records, all patents and other rights for the United States, and the one-half interest in the patent rights for foreign countries now owned1929 BTA LEXIS 2877">*2881 by said Syracuse Washer Corporation, as well as all other tangible and intangible assets then owned by said Syracuse Washer Corporation, and the business of said Syracuse Washer Corporation as a going concern.
15 B.T.A. 306">*308 In consideration for such transfer, there shall be issued to us contemporaneously therewith 12,510 shares of the Class A Common Stock of your Corporation in two certificates therefor; one for 10,010 shares in the name of the undersigned John N. Derschug, and 2,500 shares in the name of the undersigned Guy C. Wilkinson, and the further payment to the undersigned of $73,000 in cash, of which cash $45,000 shall be paid by a check to the order of the undersigned John N. Derschug and $28,000 by a check to the order of the undersigned Guy C. Wilkinson, and as further consideration for said transfer it is understood that your Corporation shall be liable for payment of excess profits and income taxes, as well as all other taxes resulting from the manufacturing operations of said Syracuse Washer Corporation up to January 1, 1920.
(Signed) JOHN N. DERSCHUG
(Signed) GUY C. WILKINSON.
The offer in the above-mentioned letter was accepted by the corporation, which made1929 BTA LEXIS 2877">*2882 payment of $45,000 to the petitioner and $28,000 to Wilkinson by checks on the Syracuse Trust Co. dated December 22, 1919. The petitioner received his check for $45,000 and deposited it to his personal credit in the Syracuse Trust Co. on December 23, 1919. This amount was charged to the payor's account by said trust company on the same date.
The petitioner kept his books of account and made his income-tax returns for 1919 and 1920 upon a cash receipts and disbursements basis. In his 1919 return he accounted for the $45,000 received by him on December 22, 1919, and paid the tax shown to be due by his return.
On January 2, 1920, all of the several parties to the above referred to offer and acceptance performed the same in absolute harmony with all the requirements set forth in the letter above quoted, dated December 18, 1919. The Syracuse Washer Corporation was liquidated and in due course it was dissolved and its charter canceled.
Additional transactions were also carried out on January 2, 1920, as follows:
(1) The corporation sold 14,000 shares of its preferred stock having a par value of $100 each for $1,362,500.
(2) The corporation induced the petitioner to execute1929 BTA LEXIS 2877">*2883 a so-called employment contract obligating him to give his services exclusively to it for a period of five years beginning January 1, 1920, and for a salary consideration therein specified. Execution of this contract by the petitioner was accompanied by a certain deed of trust, executed contemporaneously by the corporation and the petitioner and the Syracuse Trust Co., pursuant to which $270,000 was paid over on that date to the trust company for the sole benefit of and for eventual absolute delivery to petitioner. On the same date and in the same manner $68,000 was paid "in trust" to the same trust company to secure execution of a similar employment contract by 15 B.T.A. 306">*309 Wilkinson. The total amount of money thus paid out by the corporation on January 2, 1920, to secure the execution of the two so-called service contracts was $338,000.
(3) On the same date the corporation created and set up on its balance sheet as assets:
| Good will | $200,000 |
| Patents | 300,000 |
(The cost of the patents to the Syracuse Washer Corporation was $2,824.)
(4) On January 2, 1920, the corporation issued 6,000 shares of class A common stock for a consideration of $1 per share, certain1929 BTA LEXIS 2877">*2884 creditors of the corporation receiving the stock in lieu of cash in liquidation of a bona fide and recorded credit given by the corporation for personal and professional services actually rendered in connection with the organization of the corporation and the acquiring of the old corporation.
On December 22, 1919, the corporation charged the expenditure ($45,000 to Derschug and $28,000 to Wilkinson - total $73,000) to an account styled "Syracuse Washer Contract with J. N. Derschug and G. C. Wilkinson."
On January 2, 1920, when the obligations created by the agreement or contract were duly satisfied by performance, the above account was closed by transfer to an account created on that date and styled "Cost of Syracuse Washer Corporation Stock and Assets," which account was in turn and on the same date dissolved by charges and credits which created miscellaneous asset and liability accounts.
After January 2, 1920, there was no sale of the new corporation's common stock earlier than December, 1920. During this interval the corporation's preferred stockholders had been clamoring for dividends upon their stock and, in December, 1920, the common stockholders to keep the corporation1929 BTA LEXIS 2877">*2885 from being placed in the hands of a receiver purchased 10,000 additional shares of common stock at $25 per share. Prior to that date no market could be found for 30 shares of the common stock owned by a widow, which were acquired by inheritance. The corporation's officers refused to purchase them.
The following circumstances confronted the corporation on January 2, and later during 1920:
(1) From the date of its organization the corporation was obligated on written contracts made by the old corporation for the purchase of 100,000 motors at $17 each, a total of $1,700,000, and for 840,000 pounds of copper contracted for at the peak prices of 1919.
(2) Sales of washing machines declined gradually from 1,800 in December, 1919, to 800 by the new corporation in December, 1920.
15 B.T.A. 306">*310 The fair market value on January 2, 1920, of the class A common stock of the Syracuse Washing Machine Corporation was not in excess of $1 per share.
OPINION.
SMITH: The petitioner kept his books of account and made his income-tax returns for 1919 and 1920 upon the basis of cash receipts and disbursements. On December 22, 1919, he received $45,000 as a consideration for entering into1929 BTA LEXIS 2877">*2886 a contract by which he agreed to dispose of his shares of stock in the Syracuse Washer Corporation for an agreed amount of cash, a given number of shares of class A common stock of a new corporation, and an undertaking on the part of the new corporation to pay a note to a bank upon which he was jointly liable. He considered this to be income received in the year 1919 and treated it accordingly.
At the hearing of this proceeding counsel for the respondent stated that the theory upon which the respondent held it to be income of 1920 was:
* * * That it is a payment on a 1920 contract consummated in the year 1920, otherwise the $45,000 would be a payment on an option to purchase the stock and the assets of the Washer Corporation, and inasmuch as it was a substantial payment, it was a payment on account of the purchase and not a payment of an option, being a part of the purchase price it was income for 1920, as the contract of sale was closed in 1920, consummated in 1920.
A reference to the letter of the petitioner and Wilkinson to the board of directors of the Syracuse Washing Machine Corporation dated December 18, 1919, does not show that the $45,000 was to be received as part1929 BTA LEXIS 2877">*2887 payment for the assets to be sold by Derschug and Wilkinson. It clearly was not so understood by the petitioner. To secure the $45,000 the petitioner parted with nothing. True, he had undertaken for a consideration named to do certain things on January 2, 1920, that is, to transfer certain assets to the Syracuse Washing Machine Corporation for a named consideration. For a breach of such agreement the petitioner would undoubtedly have been liable for damages. But this does not mean that the $45,000 received was a part payment for the assets sold. It was no part of the consideration named to be received in exchange for assets. If the $45,000 was income to the petitioner, we think it was income in the year 1919 when the petitioner received it and placed it to his credit upon his own books of account.
The second point in issue is whether the 10,010 shares of class A common stock of the Syracuse Washington Machine Corporation received by the petitioner in 1920 had a fair market value in 1920 and, if so, how much. In his income-tax return for 1920 and petitioner 15 B.T.A. 306">*311 returned the stock as having a value of $1 per share. Presumably this was predicated upon the fact that1929 BTA LEXIS 2877">*2888 6,000 shares of the stock were sold on January 2, 1920, for $6,000. The petitioner now contends that the stock had no ascertainable fair market value at the date of receipt within the meaning of section 202(b) of the Revenue Act of 1918, which provides in part as follows:
When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.
The transaction between the petitioner and the Syracuse Washing Machine Corporation was more than an exchange of stock for stock. The petitioner exchanged his shares of stock in the Syracuse Washer Corporation and undertook to perform certain services for the new corporation in exchange for cash1929 BTA LEXIS 2877">*2889 and a certain number of shares of class A common stock of the new corporation. The transaction is governed by the first clause of section 202(b) of the 1918 law, above quoted. If the value of the shares of stock received in exchange was in excess of the basis laid down by the statute the excess, in our opinion, constituted taxable income of the petitioner of 1920.
The evidence with respect to the value of the class A common stock at the date of receipt by the petitioner is in detail. The Syracuse Washer Corporation had obligated itself to purchase supplies for manufacture beyond its immediate needs. It had likewise obligated itself to employ the petitioner and Wilkinson on five-year contracts at large salaries. In order to produce a surplus upon its balance sheet it had set up good will at a value of $200,000 and had appreciated its patent account to the extent of nearly $300,000. There were no sales of the class A common stock of the new corporation in the open market during 1920 and one holder of 30 shares of the stock acquired by inheritance could find no market for it. Soon after the beginning of 1920 operating conditions became bad and it was questionable whether the1929 BTA LEXIS 2877">*2890 corporation could escape receivership. The corporation sold 6,000 shares of its common stock at $1 per share on January 2, 1920. We think that this evidence indicates that the fair market value of the common stock was $1 per share at the date of receipt. Petitioner's tax liability for 1920 should be redetermined accordingly.
Judgment will be entered under Rule 50.