*737 Where taxpayer, because of the provisions of a certain "underwriting agreement" in which he participated as a principal, actually purchased his allocable part of the underwritten stock from the issuing corporation, held, the transaction was a mere purchase of the stock by the taxpayer and no loss was sustained upon such acquisition.
*568 This proceeding involves an income tax deficiency of $78,526.79 of the petitioner for the calendar year 1929. The sole issue is petitioner's right to deduct an asserted loss of $327,775, which it is alleged he sustained in the tax year, as an "underwriter" of certain Grigsby-grunow Co. stock.
*569 FINDINGS OF FACT.
1. Bertram J. Grigsby, petitioner herein, is an individual residing at Barrington, Lake County, Illinois. His principal office and place of business is at 1820 Foreman State National Bank Building, Chicago, Illinois. Petitioner's income tax return for the calendar year 1929 was duly filed pursuant to an extension, on May 15, 1930, with*738 the collector of internal revenue for the first collection district of Illinois at Chicago, Illinois.
2. Petitioner was the president of Grigsby-Grunow Co., an Illinois corporation, from its incorporation in 1921 until 1929, when he became chairman of the board. Grigsby-Grunow Co. was engaged in the manufacture of radio sets.
3. From the early part of 1928 until the summer of 1929, Grigsby-Grunow Co.'s business grew very rapidly. During the fiscal year June 1, 1927, to May 31, 1928, gross sales were approximately $5,500,000. During the next 12-month period ending May 31, 1929, sales had increased to more than $40,000,000. By the spring or summer of 1929 a considerable increase in plant space, factory equipment and working capital had become necessary.
4. A comprehensive plan of expansion was approved by the directors at a special meeting on October 14, 1929. This plan included the purchase from Yellow Coach & Truck Manufacturing Co. of certain real estate and improvements in Chicago then occupied under lease by Grigsby-Grunow Co. and also some parcels of adjacent property, for $2,468,000, the erection of additional plants, an increase in manufacturing equipment and*739 facilities, and provision for additional working capital. About $9,000,000 of new capital, in all, was required for these purposes. It was contemplated that production capacity, then 6,500 sets per day, would be increased to a maximum of 10,000 sets per day in 1930.
5. Grigsby-Grunow Co.'s capitalization in October 1929 consisted of 1,748,160 shares of no par common stock authorized and outstanding, and 251,840 shares authorized but unissued. To obtain the additional capital, it was resolved by the directors on October 14, 1929, to offer 249,737 of the unissued shares of the company's capital stock for sale to the existing stockholders. It was calculated that the subscription price of $40 per share, less an underwriting commission of $4 per share, would yield Grigsby-Grunow Co. the sum of $8,990,532 or approximately the amount of new capital required. On October 16, 1929, notice was given of the warrants to be issued and the expansion plan was outlined in a circular letter to the stockholders.
6. To assure the company the needed capital, to avoid delay and cost in carrying out the objects for which the additional capital was desired, and for other reasons hereinafter mentioned, *740 it was considered *570 essential by Grigsby-Grunow Co. that the sale of the 249,737 shares of new stock to the stockholders be underwritten or insured by responsible underwriters. The purchase price of the land and building to be purchased from Yellow Coach & Truck Manufacturing Co. was payable early in December 1929. Before the Yellow Coach contract was closed Grigsby-Grunow Co. had the agreement of the bankers that they would see to the underwriting of the stock. At the meeting of October 14, 1929, the directors authorized the underwriting contract with John Burnham & Co., investment bankers, Chicago, Illinois, and it was executed on the same day. Grigsby-Grunow Co. thereupon entered into a contract with Henry Erickson Co. for the erection of a new building, payment to be in cash. Both the Yellow Coach contract and the Erickson contract were entered into by Grigsby-Grunow Co. in reliance on the underwriting agreement.
7. The underwriting agreement of October 14, 1929, between Grigsby-Grunow Co. (referred to therein as "Company") and John Burnham & Co. (referred to therein as "Banker") provided:
Company agrees to sell to Banker at the price of $40 per share and Banker*741 agrees to buy from Company at said price such number of the 249,737 shares of the common stock of no par value of Company as are not purchased by the holders of stock subscription warrants therefor to be issued November 1, 1929 and to expire on November 15, 1929 in the due exercise thereof; and Company agrees to pay to Banker for its services in underwriting the sale of said 249,737 shares, a commission of four dollars ( $4) per share on each of said 249,737 shares, or a total of nine hundred ninety-eight thousand nine hundred forty-eight dollars ($998,948); settlement to be made on November 18, 1929 between Banker and Company for the stock which Banker becomes entitled to receive and is required to pay for by reason of the expiration of warrants unexercised and for Banker's commission as aforesaid.
It is understood that Banker will have associates in the underwriting herein provided for and Company consents to the assignment of this agreement in part to such associates, provided that the assignment in part, or other written agreements in respect thereof, shall provide that the agreement is made for the benefit of Grigsby-Grunow Company and is enforcible directly by it, as well*742 as for the benefit of the parties thereto.
Banker's agreement to purchase is subject to the approval of counsel for Bankers as to the validity, authorization and issuance of the above mentioned 249,737 shares.
8. On October 15, 1929, John Burnham & Co. wrote petitioner stating that John Burnham & Co. was forming a syndicate to underwrite the offering by Grigsby-Grunow Co. to its stockholders, of 249,737 shares of its common stock and confirming the allotment to petitioner of a participation of 18,730 shares in the syndicate. Petitioner duly accepted this participation and assumed his pro rata share of the underwriting. On October 18, 1929, the agreement between John Burnham & Co. and Grigsby-Grunow Co. was amended to provide that the stock purchase warrants should expire on November *571 21, 1929, instead of November 15, 1929, and that settlement between the parties should be made on November 25, 1929, instead of November 18, 1929. On the same day, petitioner was advised of this extension and assented thereto.
9. In addition to the reasons heretofore stated, the underwriting agreement was made necessary by the requirement of the New York and Chicago stock exchanges*743 that the additional stock be either underwritten or completely sold before listing. The application to the New York Stock Exchange, dated October 26, 1929, included a summary statement of the terms of the underwriting. The subscription warrants or rights to purchase issued to the stockholders were freely assignable and were listed and traded in on both of these exchanges.
10. Pursuant to authorization at the directors' meeting of October 14, 1929, transferable warrants dated November 1, 1929, were issued to all the existing stockholders of Grigsby-Grunow Co. at that date, evidencing the right of each such stockholder or his assignee to subscribe, on or before November 21, 1929, at $40 per share, to a specified number of shares of the new stock to be issued by Grigsby-Grunow Co. at the rate of one new share for each seven shares already held. Petitioner was a stockholder of Grigsby-Grunow Co. on November 1, 1929, and received warrants evidencing subscription rights to an aggregate of 12,776 new shares.
11. Throughout 1929 prior to the time of the underwriting agreement, the market price of Grigsby-Grunow Co. stock was substantially more than $40 per share. The lowest price*744 for that period was $55.50 per share, recorded in August, and in September the stock reached $70 per share. During the week ended October 18, 1929, when the underwriting agreement was made and petitioner agreed with John Burnham & Co. to participate therein, the price ranged from $59 to $66 per share. Then the stock began to decline. On October 23, the stock closed at $43 1/8 per share, and on October 24 the stock sold as low as $30 per share and closed at $32 1/2. From October 25 to 28, the stock ranged from $41 1/2 to $30 1/2 per share, closing at the latter price. These declines led directly into the stock market crash and the prolonged depression which followed. Throughout the remainder of the year, the price was at all times considerably below $40 per share. During the life of the warrants, November 1 to 21, the price ranged from $34 7/8 to $14 1/4 per share. On December 31, the price was $21 to $21 7/8 per share. In November 1933 the company went into receivership.
12. With respect to the warrants received by him as a stockholder of Grigsby-Grunow Co., petitioner intended to wait until the latter part of the subscription period and then decide whether or not to exercise*745 them, depending upon market conditions at that time. The warrants at the outset sold on the market at about $2.50, but at the *572 close of the subscription period they had no value. During the subscription period, petitioner and all other stockholders of Grigsby-Grunow Co. could have purchased stock on the open market for less than the price of $40 per share specified by the warrants. In view of this fact, none of the warrants (including those received by petitioner) were exercised, and petitioner and the other underwriters became obligated to pay to Grigsby-Grunow Co. the entire subscription price of $9,989,480 less their underwriting commission of $4 per share ($998,948) or a net of $8,990,532, and in consequence of such payment, became entitled to receive the entire 249,737 shares of the new stock.
13. On November 25, 1929 (the settlement date specified by the underwriting agreement as amended), John Burnham & Co. delivered to petitioner a notice stating that he was obligated under his participation agreement, to pay for 18,730 shares, the full extent of his participation, at $40 per share, and requesting him to accept delivery of the stock directly from Grigsby-Grunow*746 Co. and make payment therefor, upon which he would be entitled to receive $4 per share from Grigsby-,Grunow Co. as an underwriting fee. It was further stated that such payment would discharge all of petitioner's obligations to John Burnham & Co. and to Grigsby-Grunow Co. under his participation in the underwriting. This notice was signed by John Burnham & Co., and was signed and accepted by Grigsby-Grunow Co. and by petitioner. Thereupon petitioner delivered his check for $749,200, which was duly presented and paid, in payment of his participation in the underwriting, and received from Grigsby-Grunow Co. 18,730 shares of its common stock and its check for $4 a share commission on the 18,730 shares. The fair market value of the 18,730 shares of stock when thus acquired on November 25, 1929, was $346,505 or $18.50 per share.
14. Petitioner did not dispose of the 18,730 shares during 1929. Most of this stock was sold by him in 1933 at $1 to $2 per share or less. In computing the loss on these sales in 1933, petitioner used $18.50 per share as his basis for the stock.
15. The underwriting contract of October 14, 1929, was awarded to John Burnham & Co. by virtue of an option*747 as to future financing which had been granted to that company by Grigsby-Grunow Co. in a previous underwriting contract dated March 17, 1928, covering a prior issue of additional stock. On that occasion Grigsby-Grunow Co. sold outright to the underwriters 29,000 shares of its capital stock at $32 per share. The underwriters resold this stock outright to a selling group at a price in excess of $3i per share and the selling group sold the stock outright to investors at $40 per share.
16. Between the time of the execution of the contract and November 25, the date for performance, neither John Burnham & Co. nor *573 petitioner took any steps whatsoever, to sell the new stock or to handle any part of the issue. When the subscription period expired and it appeared that the stockholders or their assigness had not taken the new issue, John Burnham & Co. notified the other participants in the underwriting contract that they would be called upon to make payment of their obligation and accept their proportionate shares of the issue. No dealers' organization was ever assembled and no stock was sold by the underwriting syndicate. The syndicate members took their respective portions*748 of the stock and the syndicate cate was dissolved. Nor did petitioner sell or make any arrangements with anyone else to sell any of the stock of Grigsby-Grunow Co. involved in the underwriting until a much later date in 1933.
17. Petitioner was informed as to the market price of Grigsby-Grunow Co. stock at the time he agreed to participate in the 1929 underwriting. Had the market not declined as a result of the stock market crash or otherwise, it would have been advantageous to the stockholders or their assignees to exercise the warrants and subscribe for the new stock, thereby acquiring at $40 per share, stock which had a higher price in the open market. Had all the subscription rights been exercised, petitioner would not have been permitted or required to take up any stock by virtue of his participation in the underwriting.
18. The underwriting in 1929 was a transaction entered into by petitioner for profit.
OPINION.
LEECH: The ultimate question presented is whether petitioner's acquisition of 18,730 shares of the common stock of Grigsby-Grunow Co. in 1929 was a transaction upon which loss was then realized and recognized for income tax purposes. If it was, petitioner's*749 asserted loss was sustained in that year. If that transaction was not closed by petitioner's receipt of those shares of stock, but continued open until his admitted sale of them in a later year, then petitioner sustained no loss by reason of their mere receipt during 1929, the year here in dispute.
Petitioner argues the transaction was a mere loan of credit, or a contract of insurance or indemnity - completely executed and closed, as to petitioner, by his acquisition of the stock. He contends the stock so acquired was analogous to salvage received by an insurer from an insured upon performance of an insurance contract - the gain or loss on the disposition of which salvage must await its disposition - but that the insurance transaction, separate from that involving the disposition of the salvage, is completely closed by payment under the insurance contract and the acquisition of the salvage, and, that, upon his acquisition of the 18,730 shares of Grigsby-Grunow stock, petitioner here sustained a loss - in the amount of *574 the difference between the amount he paid the Grigsby-Grunow Co. upon acquisition of that stock and its fair market value when thus received in the tax*750 year.
Respondent's position is that the disputed transaction was merely a purchase of the stock by petitioner, and that petitioner's loss is not deductible until the later years when, and not before, for income tax purposes, the transaction was closed by the admitted sale of the stock.
The intent of the parties to the present "underwriting agreement" is decisive of its legal effect. The best evidence of that intent, of course, is the agreement itself, construed as a whole ; ; and by what the contracting parties did thereunder, First National Bank in , affirming ; certiorari denied, .
Though not in itself determinative (), it is important to note that the written records of the Grigsby-Grunow Co., covering the transaction, as well as the underwriting contract to which petitioner became a party, and the notice of John Burnham & Co., syndicate managers and participants, calling for petitioner's performance under*751 the contract, clearly denominated it under an underwriting agreement of purchase or sale. (Vt.). In one instance only, which appears in the resolution of the Grigsby-Grunow directors authorizing the contract, was it referred to as anything else, and then as "for the purpose of insuring the sale."
Clearly the contract was not a mere loan of credit. ; certiorari denied, ; .
The primary purpose of the present underwriting contract was the sale of the new Grigsby-Grunow common stock. Such a contract is fundamentally different from underwriting as used in insurance, and is so treated by the courts. (Wash.); It is true, the definitions there given of underwriting agreements, substantially similar to that here, include the terms "guaranty" and "sale." *752 ;But, that "guaranty" means, apparently, only the assurance or guarantee of performance a seller and buyer receive upon the execution of an absolute contract of purchase and sale. If the agreement between the syndicate and Grigsby-Grunow Co. had been unconditional, its character as a simple purchase and sale contract would be undoubted. The interposition of the right to bring about a sale of the stock to others does not change that identity. Nor *575 did the provision which entitled the syndicate members to $4 per share on the stock underwritten. True, it was, in its inception, contingent upon failure in the sale of the stock to others during the contract period. But it became absolute, as obviously contemplated by the parties, when that contingency occurred. And, upon that occurrence, in accordance with the expressed and unambiguous provisions of the underwriting contract, the disputed stock was, in fact, purchased by petitioner. *753 That the purchase price was in excess of the then market does not change that fact. . As intended and executed, we conclude the transaction in 1929 was simply a purchase and sale. ; (Mass.); ;;As the Circuit Court of Appeals for the Seventh Circuit in , stated:
All the parties hereto agree that this agreement is an underwriting contract, and that by its terms Caldwell & Co. agreed, for a valuable and sufficient consideration, to sell the bond issue of the hotel company or to purchase it in case it failed to sell the issue. It has been decided, without exception, we think, that such an instrument is not an agreement to loan money, but it is a guaranty either to sell or to buy the bonds, and the underwriter is in fact considered the ultimate purchaser*754 of the bonds. [Emphasis supplied.]
Another inquiry, possibly implicit here, is whether this sale constituted a distribution of rights to purchase the stock, to petitioner, from an underwriting syndicate, upon which no loss was sustained until the later years when the stock, acquired in the exercise of these rights, was sold. Cf. .
The disposition of this question depends upon "whether participants and managers are one, and this determination in turn [depends] upon the measure of control which the former have relinquished to the latter. * * * Where the managers are no more than mere agents, the participants stand in the relation of partners or joint venturers, at all times able to deal as they please with their own property. A distribution by managers to subscribers in such circumstances passes nothing to the latter, therefore, which they did not have before. . But where the measure of control given the managers is unfettered, so that their investment, sale, reinvestment and general disposal of the subscribers' stock or cash temporarily entrusted to them is beyond the power*755 of the subscribers to forbid or to regulate, the managers in the person of the syndicate assume a corporate will and entity independent of the contributors." Cf. .
*576 The pending agreement is rather brief. It provides:
As Managers, we shall have full control and discretion in all syndicate affairs, and to do all things which in our unrestricted judgment are for the best interest of the syndicate, including the right to trade in shares of the Company or subscription warrants to be issued in connection with the proposed issue. provided, however, that the total commitment in such trading, either for long or short account, shall at no time exceed 15% of the maximum syndicate obligations.
But it then stipulates:
This agreement is made for the benefit of Grigsby-Grunow Company as well as for the benefit of yourselves and ourselves, and shall be enforcible by Grigsby-Grunow Company. [Emphasis supplied.]
This underscored provision seems to indicate clearly that petitioner held himself out to and here contracted with the Grigsby-Grunow Co. as a principal for whom John Burnham*756 & Co., syndicate managers, as well as a participant, was acting only as an agent. Cf.
In any event, it was petitioner's burden to establish the fact that the underwriting syndicate was intended and treated as a separate entity. ; certiorari denied, .
Petitioner does not sustain that burden on this record.
Thus, petitioner received nothing from the syndicate that he did not have before, as a principal. The stock was, in fact, purchased from the Grigsby-Grunow Co. by petitioner.
Thus, since the disputed transaction was a mere sale of the stock to petitioner, no deductible loss was sustained on its acquisition - that must be deferred until its later admitted sale.
Reviewed by the Board.
Decision will be entered for respondent.