1937 BTA LEXIS 805">*805 Stock received subject to a restriction against sale for a certain period had no fair market value capable of being ascertained with reasonable certainty at date of receipt.
35 B.T.A. 1056">*1056 The Commissioner determined a deficiency in income tax for the year 1929 in the amount of $26,053.81.
The issues are (1) whether the value of shares of stock issued in the name of the petitioner in 1929 for services in effecting a consolidation of certain corporations, and immediately deposited in escrow pursuant to agreements restricting sale of the shares for a period of one year, constituted taxable income for the year; and (2), if so, the fair market value of such shares at the time of their issuance.
FINDINGS OF FACT.
The petitioner, an attorney, filed his income tax return for the year 1929 with the collector for the third district of New York. He reported his income on the cash receipts and disbursements basis.
The Reliance Fireproof Door Co., the United Pressed Steel Products Corporation, the Knoburn Products Corporation, and Howell, Field & Goddard, Inc., 1937 BTA LEXIS 805">*806 (hereinafter sometimes referred to as Reliance, United, Knoburn, and Howell) were corporations engaged in 1929 in the manufacture of metal doors. They authorized the 35 B.T.A. 1056">*1057 petitioner to enter into negotiations for either their consolidation or the sale of their properties. J. A. Sisto & Co., investment bankers, agreed to aid in financing the transaction. The companies agreed to pay the petitioner for his services, upon the consummation of the consolidation or sale, 5 percent of the cash or stock of the proposed new corporation to be received for their properties.
The petitioner and certain bankers entered into a contract dated March 1, 1929, in which he agreed to procure from the four corporations contracts authorizing their consolidation and to assign the contracts to the new corporation for 12,500 shares of its common stock; and the bankers agreed to purchase all of those shares from the petitioner at 80 cents per share. The contract further provided:
It is further understood and agreed that the compensation of the undersigned [Kopple] shall be the sum of four thousand dollars ($4,000) in cash and three thousand (3,000) shares of said common stock, such payment1937 BTA LEXIS 805">*807 to be made upon closing by you [bankers] of the purchase of the stocks and debentures referred to in a proposed contract between you and the proposed New Company; and I shall be entitled to receive no other compensation from you or from the New Company, but nothing herein contained shall prevent my receiving remuneration from the vendors of the various plants whose assets will constitute in part the assets of the New Company.
As to the three thousand (3,000) shares of said common stock received by me as compensation, I agree that the same, as and when received, shall be deposited in escrow with a bank or trust company approved by you under an agreement by which the same shall not be sold by me for a period of one year from the date of payment by you for the stock and debentures of the New Company.
The contract was later modified so as to provide only for the consolidation of Reliance, United, and Knoburn, and it was agreed that the petitioner should procure an option to purchase the properties of Howell. The petitioner on April 13, 1929, entered into contracts with Reliance, United, and Knoburn to purchase their businesses and properties for cash and common stock of the new1937 BTA LEXIS 805">*808 corporation, and to assume their liabilities. The amounts of cash and stock to be received by each company were as follows:
| Cash | Shares of stock | |
| Reliance | $350,000 | 20,464 |
| United | 250,000 | 11,608 |
| Knoburn | 35,000 | 4,169 |
| Total | 635,000 | 36,241 |
The contracts contained the following provision:
FOURTH: The Seller agrees that any common stock of the New Company received by it or its stockholders under the terms of this agreement or distributable on any dissolution of the Seller, shall not be sold or resold in whole 35 B.T.A. 1056">*1058 or in part by the Seller or any stockholder thereof, to any person other than a stockholder of record of the Seller for a period of one year from the date of such issue and on the sale thereof to any stockholder, such stockholder shall agree to be bound not to sell the same or any part thereof during said period of one year from the date of issue. All of such stock shall be forthwith deposited with the Empire Trust Co. for the period of one year from the date of issue thereof for the purpose of preventing the transfer or retransfer of the stock except in accordance with the terms hereof. Such stock shall also be held by the Empire1937 BTA LEXIS 805">*809 Trust Co. for the purposes hereinafter specified in section seventh.
Each contract contained a schedule of the assets and liabilities of the selling company as of December 31, 1928, and in section seven it was provided that if it should appear that there was any liability for taxes in excess of the reserve set up therefor, or that there was any undisclosed liabilities, or that there was a deficiency in the net assets from those shown in the schedule, the seller should be liable for the amount thereof, and, upon notice, the stock to be received should be held by the escrow agent as collateral security for the payment of such additional taxes, undisclosed liabilities, and deficiencies. The contracts also provided that the authorized capital stock of the new corporation should be 200,000 shares, of which 68,741 should be reserved for future corporate purposes, 40,000 should be reserved for converting debentures to be issued as hereinafter stated, and 91,259 should be reserved for distribution to the sellers, for sale to procure additional working capital, and for payment of the bankers; and the bankers should purchase 26,259 of the last mentioned shares from the new corporation for1937 BTA LEXIS 805">*810 $360,626.
Prior to April 13, 1929, a tentative agreement between the proposed new corporation and the bankers was prepared. This agreement provided that the new corporation should acquire the contracts for the purchase of the businesses and assets of Reliance, United, and Knoburn, exercise an option obtained by the petitioner for the purchase of the business and assets of Howell, and issue $1,000,000 of 6 percent gold debentures, convertible into shares of its common stock; and the bankers should purchase all of the debentures at 90 percent of the principal amount thereof, plus interest, and purchase 26,259 shares of the common stock of the new corporation for $360,626. The obligation of the bankers to purchase the debentures and stock was expressly made subject, among other conditions precedent, to "the deposit in escrow of all of the shares of common stock of the Company deliverable under each of the said three purchase contracts", and that "the stock delivered to the selling companies * * * pursuant to the aforesaid three contracts shall be deposited immediately upon the closing with the Bankers * * * under an agreement in accordance with the provisions of said three 35 B.T.A. 1056">*1059 1937 BTA LEXIS 805">*811 contracts providing that said stock shall remain in escrow and not be sold for a period of one year from the date of issuance thereof."
Reliance, United, and Knoburn on April 15, 1929, deposited with the Empire Trust Co., as escrow agent, instruments transferring all of their business, property, assets, and good will to the new corporation, with instructions to deliver such instruments to the latter upon receipt of the cash and stock specified in their agreements of April 13, 1929.
The new corporation was organized on April 20, 1929, under the name of Reliance Bronze & Steel Corporation, and the tentative agreement referred to above was signed by it on that date.
The petitioner on April 26, 1929, assigned his contracts for the purchase of the businesses and assets of Reliance, United, and Knoburn to the new corporation, together with an option obtained by him on April 13, 1929, for the purchase of the business and assets of Howell.
Reliance, United, and Knoburn authorized the Empire Trust Co. on April 30, 1929, to receive, in satisfaction of their escrow instructions of April 15, 1929, the cash and the shares of stock due them under their contracts with the petitioner of1937 BTA LEXIS 805">*812 April 13, 1929, directed that the certificates for the stock be issued in the names of designated persons in specified amounts, and authorized delivery of the cash and all of the certificates to a designated corporate officer. These instructions authorized the issuance of certificates in the name of the petitioner as follows:
| Instructions of - | Number of shares |
| Reliance | 1,023 |
| United | 580 |
| Knoburn | 208 |
| Total | 1,811 |
The transaction was closed at the office of the Empire Trust Co. in New York on May 6, 1929. The Empire Trust Co. was the transfer agent for the stock of the new corporation. It caused to be prepared certificates of stock in the names of the persons and for the amounts designated in the various instructions and agreements. The shares to which the bankers were entitled were delivered to them. Certificates for 4,811 shares, including 3,000 shares received for the account of the bankers, were issued in the name of the petitioner, and certificates for the following aggregate number of shares were issued in the names of numerous individuals and corporations who were stockholders of Reliance, United, and Knoburn.
| Stockholders of - | Aggregate number of shares |
| Reliance | 19,441 |
| United | 11,028 |
| Knoburn | 3,961 |
1937 BTA LEXIS 805">*813 35 B.T.A. 1056">*1060 The petitioner delivered to the Empire Trust Co. a letter dated May 6, 1929, stating that, as the holder of record of 4,811 shares of the new corporation, he was delivering to it as escrow agent certificates for such shares, and instructing it as follows:
FIRST: You are hereby instructed and directed to retain the said certificates of common stock and each of them in your possession in the same form as they are delivered to you herewith, and to withhold the delivery of the same to any person, firm or corporation until and including May 5, 1930, unless on or prior to that date:
(a) (1) The undersigned shall deliver to you a written request to release and deliver all or any part of the said certificates owned by him to a person, firm or corporation designated in such request who shall have been on the 6th day of May, 1929, a holder of record of shares of stock of Reliance Fireproof Door Co. or United Pressed Steel Products Corporation or Knoburn Products Corporation, as shall appear from certificates of the respective secretaries thereof setting forth the holders of record of the shares of the respective companies on May 6, 1929, which certificates shall be accepted1937 BTA LEXIS 805">*814 by you as conclusive proof of the facts therein set forth.
AND
(2) The person, firm or corporation to whom delivery is requested by such undersigned shall become a party to this escrow agreement by signing at the foot hereof, and by delivering to you at the time of signature a certificate or certificates for a number of shares of such common stock equal to the number of shares so delivered and transferred, to be held by you for the purpose of this escrow;
OR
(b) The Bankers make a written request to you directing you to make a delivery of the same.
The instructions of the Bankers to deliver a portion of the said certificates shall not be deemed to satisfy this escrow agreement in its entirety but upon each subsequent release thereof a like consent from the said Bankers and the RELIANCE BRONZE & STEEL CORPORATION shall be required.
On May 6, 1930 you are instructed and directed to deliver such certificates so deposited, as shall remain in your hands to or upon the written order of the respective depositors thereof, hereto undersigned.
The Empire Trust Co. delivered to the petitioner a certificate of deposit as follows:
CERTIFICATE OF DEPOSIT for COMMON STOCK OF RELIANCE1937 BTA LEXIS 805">*815 BRONZE & STEEL CORPORATION
Deposited pursuant to the terms and conditions of an Escrow Letter from Morris D. Kopple to Empire Trust Company, dated May 6, 1929.
EMPIRE TRUST COMPANY, Depositary,
HEREBY CERTIFIES, that it has received from MORRIS D. KOPPLE, certificates representing 4811 shares of the Common Stock without par value of Reliance BRONZE & STEEL CORPORATION subject to the terms and conditions and deliverable 35 B.T.A. 1056">*1061 as provided in the said Escrow Letter. The holder hereof, by receiving this certificate, assents to and is bound by all of the provisions of the said Escrow Letter. This certificate and all rights and interests of the holder hereof hereunder are non-transferable and non-negotiable. Dated New York, May 6, 1929.
The stockholders of Reliance, United, and Knoburn at the same time signed and delivered letters containing provisions identical with those contained in the letter of the petitioner, and similar certificates were issued to them.
These letters, unlike the letter of the petitioner, further conditioned delivery of the stock at the request of the bankers upon delivery to the Empire Trust Co. of a surety bond "in an amount equal to the1937 BTA LEXIS 805">*816 value of the stock so delivered at $21.50 per share, which bonds shall be retained by you in lieu of such stock." They also instructed the Empire Trust Co. to retain the certificates after May 6, 1930, if prior to that date it shall be notified that certain taxes have not been paid and a reserve sufficient to pay them has not been set up, or that there are undisclosed liabilities or deficiencies in the net assets, and to hold the same as collateral security for the payment of said taxes, liabilities, and deficiencies until receipt of certificates of accounts that the amount thereof has been paid. The Empire Trust Co. was authorized to release the shares upon delivery to it before May 15, 1930, by the stockholders of a surety bond for the amount of the taxes, liabilities, and deficiencies, and if such bond was not given, the stockholders agreed to endorse the certificates in blank to be held as security for the benefit of the new corporation.
The new corporation purchased the business and assets of Howell on June 7, 1929, for cash, a purchase money mortgage, and 16,259 shares of common stock of the new corporation. The contract of sale contained provisions restricting the sale1937 BTA LEXIS 805">*817 of the stock substantially the same as those contained in the contracts for the purchase of the properties of Reliance, United, and Knoburn. The petitioner received from Howell for his services certificates for 813 shares of stock of the new corporation. He deposited them with the Empire Trust Co. on June 25, 1929, subject to the same conditions as those contained in his escrow letter of May 6, 1929, and he received a certificate of deposit similar to the one issued for the 4,811 shares.
The Empire Trust Co. delivered to the petitioner on May 8, 1930, certificates for the 4,811 shares of stock deposited on May 6, 1929, and the 813 shares deposited on June 25, 1929.
The stock deposited in escrow by the stockholders of Reliance, United, and Knoburn was not delivered to them in May 1930. The new corporation prior to that date had made claims that there were deficiencies in the net assets transferred to it on May 6, 1929, by Reliance, United, and Knoburn, and it had employed auditors to 35 B.T.A. 1056">*1062 make an examination and submit reports respecting the amount of the deficiencies. It also notified the Empire Trust Co. to withhold delivery of the stock deposited by the stockholders1937 BTA LEXIS 805">*818 of those companies, and delivery was withheld. There was dissension and bad feeling among the parties interested.
The auditors reported deficiencies as follows:
| Reliance | $118,267.83 |
| United | 178,248.31 |
| Knoburn | 35,695.57 |
At the same time an appraisal company reported an overappraisal of dies, etc., transferred by United in the amount of $135,378.80.
The deficiencies reported included items the collection of which the auditors regarded as doubtful. However, they certified only the following amounts as definitely determinable deficiencies:
| Reliance | $21,124.68 |
| United | 167,911.53 |
| Knoburn | 34,735.57 |
The differences between the amounts reported and the amounts certified consisted principally of accounts receivable, notes receivable, and investments, none of which, except about 25 percent in the case of Reliance, were collectible. The stockholders of the three corporations disputed the claims of the new corporation and the controversy was finally settled in August 1930. In the settlement the stockholders of Reliance paid or agreed to pay the new corporation $18,000 in cash and the stockholders of United and Knoburn, respectively, agreed to1937 BTA LEXIS 805">*819 surrender to the new corporation 6,196 and 1,750 shares of the stock held in escrow. The remainder of the stock held in escrow was released to the stockholders and delivered to them in the latter part of 1930.
Immediately after May 6, 1929, the stock of the new corporation was listed on the New York Curb Exchange and the bankers undertook to create a market for the stock. During the first three weeks sales averaged about 14,000 shares per week, for the next several weeks they amounted to from 2,000 to 2,700 shares, and from the end of that period until November 9, 1929, they averaged 1,100 shares per week. The quoted price of the stock during that period ranged from 20 1/2 to 23. The stock was not quoted thereafter until April 1930, when 300 shares were sold at 10, and December 1930, when 200 shares were sold at 4. The new corporation paid no dividends in 1929 or 1930. None of the stock held in escrow was transferred by the petitioner or any of the stockholders of the four selling corporations prior to May 6, 1930.
The petitioner made repeated efforts from July to October 1929, to sell the 5,624 shares or the certificate of deposit issued to him 35 B.T.A. 1056">*1063 to certain1937 BTA LEXIS 805">*820 stockholders of the selling corporations, to J. A. Sisto & Co., to a banking firm which assisted in underwriting the organization of Reliance, and to several curb brokerage houses, but no one would buy them.
The Reliance Bronze & Steel Corporation did not prosper. Its sales and earnings decreased. It had a substantial loss shortly after it began to do business. It discontinued business for several years and finally went into bankruptcy in 1936.
In his income tax return for 1929 the petitioner reported all of the cash received by him during that year. He did not report, as part of his income, the value of any of the stock or escrow certificates for stock. The respondent in determining the deficiency increased the income of the petitioner for 1929 by the amount of $126,849.06 to represent the value of the 5,624 shares of stock received by the petitioner in 1929.
The stock issued to the petitioner on May 6 and June 25, 1929, had no fair market value on those dates.
OPINION.
MURDOCK: A situation similar in most respects to that involved herein was considered by the Board in the case of 1937 BTA LEXIS 805">*821 . There stock of the Transcontinental Oil Co., a new corporation, was subjected to a restriction against sale for a limited period. The Board held that the restricted stock had a fair market value of $7 per share. Unrestricted shares were currently selling on the New York Curb Exchange at prices exceeding $47 per share. There was much other evidence which the Board considered in reaching its conclusion as to value. The Board was reversed, . The following is from the opinion of the Supreme Court:
In the peculiar circumstances of this case, the shares of Transcontinental stock, regard being had to their highly speculative quality and to the terms of a restrictive agreement making a sale thereof impossible, did not have a fair market value, capable of being ascertained with reasonable certainty, when they were acquired by the taxpayers.
The Court held that in the absence of such value no tax should be computed upon a gain at the time the shares were received. See sec. 202(b), Revenue Act of 1918.
The restriction placed upon the shares of the Reliance Bronze & Steel Corporation was not1937 BTA LEXIS 805">*822 materially different, so far as its effect upon fair market value is concerned, from that placed upon the Transcontinental shares. Unless the "highly speculative quality" of the latter distinguishes the two cases, the result in each should be the same. The Reliance Bronze & Steel Corporation was a new corporation. Although it was taking over established businesses, 35 B.T.A. 1056">*1064 nevertheless, its future was uncertain. As the petitioner described the experience of the company, "It started in a scrap and ended in bankruptcy." The evidence as a whole indicates that the "quality" of this stock was also "highly speculative." Following the decision of the Supreme Court in the Tex-Penn case, we hold that the stock when acquired by the petitioner did not have a fair market value, capable of being ascertained with reasonable certainty, and that no taxable gain should be computed upon its receipt in the year 1929. . It is thus not necessary to consider or decide the other issue raised.
Reviewed by the Board.
Decision will be entered for the petitioner.