*830 Held that the interest of petitioners in corporate stock had not been acquired more than two years prior to the date of sale on February 1, 1928, and was not a capital asset.
*1235 The respondent determined deficiencies in income tax for the year 1928 in these proceedings as follows:
| Petitioner | Docket No. | Deficiency |
| H. H. Campbell | 54507 | $6,423.43 |
| R. A. Shillinglaw | 54573 | 1,230.47 |
| W. T. Hale, Jr | 54576 | 1,599.33 |
| P. D. Houston | 54577 | 1,710.35 |
| Geo. A. Shwab | 54578 | 5,208.04 |
| Whitefoord R. Cole | 54579 | $5,807.54 |
| H. G. Hill, Sr | 54580 | 6,323.39 |
| J. J. Gray, Jr | 54581 | 4,184.81 |
| R. W. Hale | 54591 | 2,097.34 |
By agreement of the parties, evidence was taken in the case of R. A. Shillinglaw, Docket No. 54573, that evidence to apply to all of the petitioners and the decision in that case to govern decisions in the others. One issue only is submitted for decision in*831 each case, namely, whether or not respondent erred in determining that profits realized on the sale of stock were not taxable at capital gain rates.
*1236 FINDINGS OF FACT.
The petitioners are individuals, who in 1926 were officers or directors of the American National Co., a Tennessee corporation. The American National Co. was an investment affiliate of the American Trust Co. and American National Bank, both of which were engaged in business at Nashville, Tennessee.
Two other investment houses in Nashville were competitors of the American National Co. in 1926, one of which was Caldwell & Co., headed by Rogers Caldwell, and the other was the First & Third National Co., the president of which was James Caldwell, father of Rogers Caldwell.
On January 2, 1926, Rogers Caldwell entered into a contract with M. E. Singleton for the acquisition of a controlling stock interest in the Missouri State Life Insurance Co. That insurance company had a capital stock of 200,000 shares of the par value of $10 each. In the contract Singleton represented that he and his family owned 86,000 shares of the stock, which he agreed to sell and Caldwell agreed to buy, subject to other conditions*832 of the contract, at $100 per share. Among the other conditions set out was one that Singleton was to offer to other holders of stock the right to sell their stock to Caldwell, up to an amount of 64,540 shares, at $75 per share. In any event, Caldwell was to be under no obligation to take any of the stock unless and until he was assured of acquiring a minimum of 100,540, his purpose, expressed in the contract, being to acquire the control of the insurance company. It was provided that Singleton should have 30 days in which to deliver his stock and to afford an opportunity to other stockholders to deliver theirs, "and the date of the final closing shall be February 1, 1926." It was also provided that Caldwell should have 30 days to complete an examination of the condition of the insurance company, which was to be made by an actuarial accountant, and in the event the examination could not be completed by February 1, Caldwell was to have a further period of not more than 15 days to procure the accountant's certificate, and if no substantial variation was shown in the amount of surplus as represented by Singleton, "the transaction shall be closed as of February 1, 1926, with interest*833 adjusted accordingly."
Under the heading of "terms and conditions of payment" it was provided that "as to the first 100,540 shares" Caldwell was to pay $2,000,000 "in cash at the time of delivery thereof, as herein provided." Additional payments were to be made annually over a period of years. The payments in the first three years were to aggregate $7,540,502. The stock, "if, as, and when the sale * * * is consummated", was to be delivered to a trust company, endorsed in blank, to be held by the trust company as depositary and trustee *1237 "until all payments required by this agreement have been fully made, including interest on deferred payments." The contract contained a number of representations of fact by Singleton as to the property and financial condition of the insurance company, and it was provided that at the time of making the initial payment of $2,000,000 Caldwell would furnish his written statement that he had caused a check to be made of all representations of fact and they were found to be true "and the Trustee shall not otherwise accept such payment."
Caldwell was unable to finance the purchase of the insurance company stock without aid. Between January*834 2 and January 15, 1926, he approached Paul M. Davis, vice president of each of the companies known as the American National group, namely, the American National Bank, American Trust Co., and American National Co., and inquired whether he would take over a half interest in the contract. Davis felt that it would be to the advantage of his companies to have an interest in the insurance company in order to provide an outlet for securities. He discussed the matter with his associates in the American National Co., and they orally agreed to join with the American National Co. in the formation of a syndicate to purchase a one-half interest in the contract for the acquisition of the insurance company stock. Davis determined the amount to be paid in by each of his associates and they agreed with his allocation. Before any money was paid in, Rogers Caldwell again approached Davis and stated that his father, James Caldwell, wanted a third interest in the insurance company contract. Davis at first objected, but after discussions over a few days an agreement was reached that a one-third interest would be taken by each of the three groups headed by Rogers Caldwell, James Caldwell, and Paul M. *835 Davis. The subscriptions of the Davis group were made up on that basis and between January 15 and January 25 Davis allocated to his group the following amounts to be paid into the syndicate to meet the initial payment under the contract:
| Paul M. Davis | $50,000 |
| J. W. Carter | 50,000 |
| J. J. Gray | 50,000 |
| H. H. Campbell | 75,000 |
| W. T. Hale | 50,000 |
| W. R. Cole | 50,000 |
| J. C. Bradford | 50,000 |
| American National Co | 250,000 |
| G. A. Shwab | 50,000 |
| R. A. Shillinglaw | 25,000 |
| Robert Orr | $35,000 |
| P. D. Houston | 25,000 |
| Horace Hall | 50,000 |
| Paul Stumb | 10,000 |
| V. J. Alexander | 10,000 |
| E. E. Murray | 10,000 |
| Parks Armistead | 10,000 |
| Total | 850,000 |
On being advised that the Davis syndicate had been completed, Rogers Caldwell went to New York, and there on January 29, 1926, he and M. E. Singleton joined a letter addressed to the Guaranty *1238 Trust Co. of New York. That letter, as far as necessary to be described here, set out in the opening paragraph that Singleton as the "Seller" and Caldwell as the "Buyer" "do jointly deposit" stock of the Missouri State Life Insurance Co. The 86,000 shares of Singleton's stock was to be listed on one schedule, and the stock of others, *836 which was to be not less than 14,540 shares and not more than 64,540 shares, was to be listed on another schedule, and both schedules were to be furnished on or before February 10, 1926.
The letter recited in paragraph 1, in part, as follows:
The stock contained in both Schedules "A" and "B" has been purchased by the "Buyer" from the "Seller" acting in the several capacities hereinabove stated, at the price of One Hundred Dollars ($100.00) per share as respects the stock described in Schedule "A" and at the price of Seventy-Five the "Buyer" agreeing to pay to you, on the 15th day of February, 1926 on the "Buyer" agreeing to pay to you, on the 15th day of february1926 on account of such purchase the sum of Two Million ($2,000,000) with interest at five and one quarter per cent (5 1/4%) per annum from February 1st, 1926 * * *.
The same paragraph set forth the subsequent payments to be made and the manner in which they were to be disbursed by the trust company. Paragraphs 2 to 9, inclusive, contained miscellaneous provisions as to anticipation of payments, the voting of the stock and disbursement of dividends, and similar matters which are not here material except that in paragraph*837 8 the trust company was directed "as a matter of convenience to designate the First National Bank in St. Louis, St. Louis, Mo. as your agent to receive the original deposit of the shares of stock herein and the initial payment of money to be made herein." Paragraph 10 provided as follows:
This depositary agreement shall become effective and operative immediately upon deposit with the said First National Bank in St. Louis by the "Seller" the members of his family of the eighty-six thousand (86,000) shares to be listed on Schedule "A" and deposit and delivery to said First National Bank in St. Louis of at least fourteen thousand, five hundred forty (14,540) shares of said stock by the persons listed on Schedule "B", and upon payment to the said First National Bank in St. Louis by the "Buyer" of the sum of Two Million Dollars ($2,000,000) with interest at five and one-quarter per cent (5 1/4%) per annum from February 1st, 1926, said deposit and delivery of the said shares of stock and said moneys being as complete acknowledgment by the respective parties that all prior representations of the parties respectively have been checked, examined and found complied with and that all prior*838 negotiations are merged and completed.
The remaining paragraphs, 11 to 15, inclusive, contained miscellaneous provisions which are not here material.
On January 29 or 30, 1926, Caldwell telephoned from New York to Davis at Nashville that the letter of January 29 had been signed.
Prior to February 1, 1926, a total of 100,540 shares of Missouri State Life Insurance Co. stock was deposited with the First National *1239 Bank in St. Louis as agent for the Guaranty Trust Co. of New York, which stock was still on deposit with that bank, the First National Bank in St. Louis, on February 1, 1926.
On February 5, 1926, a contract was entered into between the First National Co., American National Co., and Caldwell & Co., as parties of the first part, and Rogers Caldwell as party of the second part. It recited that Caldwell desired to have his obligations under his contract of January 2, 1926, with Singleton financed by the three named first parties, and that the first parties were willing to do so on condition that Caldwell would assign the contract to them when they should so require. The first parties agreed therein to pay $2,100,000 to the First National Bank in St. Louis*839 prior to February 15, 1926, for the purpose of meeting the payment due to Singleton on that date. The contract further provided that in order to meet subsequent payments they would organize a corporation and cause its stock and/or notes or bonds to be issued and sold, or form a syndicate for the purpose of raising funds which might be later merged into a corporation.
On or about February 11, 1926, Rogers Caldwell and Davis went to St. Louis and met Singleton. Prior to that Davis had received reports from an investigator, on the basis of which he concluded that the mortgages held by the insurance company were not what he and Caldwell "thought they should be." Therefore, they attempted to get Singleton to reduce the price of the insurance company stock. After negotiating for a day or two they succeeded in getting Singleton to reduce the price by $500,000, which reduction was to come out of the portion of the proceeds applicable to Singleton's stock.
On February 12, 1926, Singleton and Rogers Caldwell addressed a letter to the Guaranty Trust Co. of New York advising it of the reduction in price and of the consequent changes to be made in the depositary agreement of January 29, 1926. *840 The letter of February 12 contained the following paragraph:
In consideration of this receipt from the Seller, the Buyer, Rogers Caldwell, hereby specifically acknowledges that he has caused a check to be made of all representations of fact made by the Seller in this transaction, and specifically all representations made in a certain contract in writing between the parties dated January 2, 1926, and same are found to be true and complied with in every particular.
On February 12, 1926, Davis issued a draft on the American National Co. for something over $600,000, representing a one-third part of the initial payment of $2,000,000, plus interest from February 1. The draft was paid by the American National Co. on February 13. All of the persons who had agreed in January to go in on the deal paid the amounts allotted to them by Davis as above set out. Later in 1926 certificates were issued by the American National Co. to the *1240 members of the Davis group, entitled "Certificate of Interest in Purchase of stock of Missouri State Life Insurance Company." Each certificate set forth the amount paid by the holder.
In 1927 the balance of the purchase price of the insurance*841 company stock was paid, this being accomplished by borrowing from various banks, with the stock deposited as collateral. On February 1, 1928, the members of the American National, or Davis, group sold their interest in the stock to the two Caldwells. The American National group included the petitioners in these proceedings, each of whom realized a gain on the sale. The gain so realized was reported by each as a capital gain, and was treated by respondent as ordinary income.
OPINION.
ARUNDELL: In 1926 the petitioners in these proceedings paid in certain sums to the American National Co. for the purpose of participating in the acquisition of stock of the Missouri State Life Insurance Co. On February 1, 1928, they sold out their interests in the venture for sums in excess of the amounts paid in. The only matter in dispute is whether the gain realized on the sale in 1928 is capital gain or ordinary income.
The applicable statute is section 101 of the Revenue Act of 1928, which, in brief, permits the computation of tax on capital gains at 12 1/2 percent, and defines "capital gain" as the "taxable gain from the sale or exchange of capital assets consummated after December 31, 1921." *842 Further, subsection (c)(8) provides that: "'Capital assets' means property held by the taxpayer for more than two years * * *."
In these cases there is no dispute as to the time of sale or the amount of gain realized. The question is whether or not the property was held for moer than two years, and as the date of sale is agreed on, the question resolves itself into the narrow one of the date of acquisition.
It is not clear just what the petitioners here acquired and sold. The cases were tried on the theory that they bought and sold stock of the Missouri State Life Insurance Co., yet it is conceded that they never received stock certificates. They did receive "Certificates of Interest" in the purchase of the stock which were issued by the American National Co., and it appears from a revenue agent's report in evidence that in 1927 a holding company was formed and its stock issued to the participants in the venture. However this may be, the asset here involved is the stock of the Missouri State Life Insurance Co., and, whether acquired by petitioners directly or through others as their agents, the date of its purchase from Singleton is the fact to be decided.
*1241 *843 It is the position of the petitioners that the signing of the contract by Singleton and Rogers Caldwell on January 29, 1926, coupled with delivery of the stock to the First National Bank in St. Louis and the definite commitment of the Davis group to Caldwell, definitely fixed the rights of the parties and constituted a sale of the shares of stock on that date. The so-called contract of January 29 is the letter of that date to the Guaranty Trust Co. of New York. We take it that petitioners mean that that constituted a contract of sale. The respondent's view is that title did not pass until February 13, 1926, when the initial payment of $2,000,000 was made.
Much of the testimony in these cases was directed to the negotiations and conferences preceding the acquisition of the stock, and to showing the practice of the petitioners and their associates in making up stock pools or syndicates. The purpose of this testimony was to establish that even though the promises of the petitioners to participate were oral, they were nevertheless regarded as binding commitments under their method of operation. Whatever may have been their views as to the binding effect of their agreements to participate, *844 it is obvious that the petitioners' interests in the insurance company stock can not antedate the acquisition of the stock by Rogers Caldwell, for their interests were derived from his.
The letter of January 29, 1926, contained a clause stating that "The stock contained in both Schedules 'A' and 'B' has been purchased by the 'Buyer' from the 'Seller' * * *." That is all that there is in the letter indicating a sale as of that date. Other provisions indicate that it was not the intent of the parites that title should pass at that time. "* * * the rule has become clearly recognized that * * * the transfer of the property depends upon the intention of the parties * * *." Williston on Sales, 2d Ed., § 261. "As between the parties * * * the question of whether or not title has passed to the buyer, and, if so, when, depends on the intentions of the parties manifested at the time of the transaction or the making of the bargain." 55 C.J. § 531; . The letter of January 29 contained in paragraph 10 the provision quoted in the findings that the agreement was to become effective upon deposit of at least 100,540 shares of stock "and*845 upon payment * * * by the Buyer of the sum of Two Million Dollars * * *." Unless and until both of those acts were performed the agreement was not effective and there was no sale. Had Caldwell failed to make the required deposit there would have been no question as to the right of Singleton to withdraw the stock from the depositary. The payment of the initial deposit of $2,000,000 was a condition precedent to the vesting of title under both the contract of January 2 and *1242 the depositary agreement of January 29, 1926. The parties were careful to withhold transfer of title until Caldwell had time to investigate the condition of the insurance company. The contract of January 2 allowed 30 days to make an examination and, if needed, 15 days more. Under that agreement Caldwell was to certify to the trustee that he had found Singleton's representations of fact to be true, otherwise the trustee was not to accept payment. This certification was not filed until February 12, when drafts for the $2,000,000 were delivered. There is evidence that the investigation of the insurance company being made on behalf of Caldwell and Davis was not completed until some time after January*846 29. Until the investigation was completed Caldwell withheld both certification and payment of any money, both of which were essential to a consummation of the sale. We are of the opinion that the depositary agreement contained in the letter of January 29, 1926, was not intended to and did not transfer title to the stock to Caldwell. Transfer of title did not take place until February 12, when the conditions precedent were complied with by the purchaser.
It follows that the petitioners here did not acquire an interest in the insurance company stock until after February 1, 1926, and it was not a capital asset in their hands when sold on February 1, 1928.
Decision will be entered for the respondent.
Footnotes
1. By agreement of counsel for the parties the proceedings of the following petitioners were consolidated with the above entitled case for hearing and report: H. H. Campbell; W. T. Hale; P. D. Houston; George A. Shwab; Whitefoord R. Cole; H. G. Hill, Sr.; J. J. Gray, Jr., and R. W. Hale. ↩