Stegall v. Commissioner , 24 B.T.A. 1231 ( 1931 )

ALBY W. STEGALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Stegall v. Commissioner

Docket No. 27869.

United States Board of Tax Appeals

24 B.T.A. 1231; 1931 BTA LEXIS 1522;

December 22, 1931, Promulgated

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1. EXCHANGE OF STOCK FOR OTHER STOCK AND CASH. In a reorganization in 1923 of a corporation in which petitioner held 116 shares of stock, given her in 1922, 91 shares of which were acquired by her donor before and 25 shares (the latter at a cost of $6,883.35) after March 1, 1913, she received the same relative proportion of the capital stock of the new corporation that she had in the old, together with $69,600 in cash. The Commissioner determined that the new stock received had a readily realizable or fair market value of $69,600 and that the March 1, 1913, value per share of the 91 shares was $440,574 ($40,092.13), which determinations are not rebutted by any evidence adduced. Held, that the difference between the $139,200 (fair market value of new stock and cash) and March 1, 1913, value of the 91 shares, plus cost to donor of the 25 shares, is gain to petitioner, but under the provisions of the latter part of section 202(e) of the Revenue Act of 1921, as amended by Act of March 4, 1923, only the $69,000 cash is taxable gain to the petitioner.

2. Held, further, that such gain was not entitled to the rate applicable to a capital gain, as petitioner can not include the time such stock was held by her donor in computing the two-year ownership period required by section 206(a)(6) of the Revenue Act of 1921.

J. Sydney Salkey, Esq., and Wilbur B. Jones, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

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SEAWELL

The Commissioner determined a deficiency in income tax for the year 1923 in the amount of $15,445.53. The petitioner alleges that the respondent erred (a) in determining as taxable income the entire cash received by her from an exchange of stock for other stock, together with cash, and (b) in failing to determine the tax, if any, against petitioner under the capital gain section of the 1921 Revenue Act.

FINDINGS OF FACT.

The petitioner is a resident of Missouri. The Union Biscuit Company, a corporation of that State, had in 1923 a capital of $100,000, composed of 1,000 shares, each of the par value of $100.

In 1922 the petitioner received from her husband, Harry W. Stegall, as a gift, 116 shares of the capital stock of the Union Biscuit Company of Missouri. Her husband was then and had been for many years the secretary, treasurer and directing executive of the company and remained such throughout its existence. Of the stock given the petitioner, 91 shares had been acquired by the donor prior to March 1, 1913, and the remaining 25 shares had been acquired by him subsequent to that date, at a cost of $6,883.35.

A small group of stockholders owned all the stock of the corporation during its entire existence, the majority of the stock being owned by the members of one family, the petitioner and her husband being among the minority holders of stock. During the existence of this corporation there were few transfers of stock, practically all such being between stockholders or in effecting distributions on account of deceased stockholders. There is no evidence indicating at what price sales of such stock, if any, were made.

In 1923 the Union Biscuit Company, a Delaware corporation, was organized and on July 11, 1923, acquired all the capital stock of the Missouri corporation, the husband of petitioner being the secretary and treasurer of the new corporation. The Delaware corporation had the same name as the Missouri corporation, but had an authorized capital stock of $600,000, 7 per cent preferred, and $600,000, no par value, common. TheDelaware corporation issued six shares of 7 per cent preferred stock, six shares of no par value common stock and paid the sum of $600 in cash for each share of stock of the Missouri corporation.

The petitioner at the date of this reorganization owned the 116 shares of stock of the Union Biscuit Company of Missouri given her by her husband, for which she received stock in the Delaware corporation on the basis and at the rate above indicated, together with $69,600 in cash. Upon the completion of the reorganization the new, or Delaware corporation, had the same stockholders as its predecessor, Missouri corporation, each stockholder of the former owning the same relative proportion of its capital stock that he or she had owned in the latter corporation. In 1925, the banking firm of Frazier & Company of New York bought the 6,000 shares of common stock and the 6,000 shares of preferred stock of the Union Biscuit Company of Delaware for the sum of $1,452,000 and $19,964.37 accrued dividends, paying $150 a share for the common stock and $92 a share for the preferred.

The average tangible assets of the Union Biscuit Company of Missouri for the five years preceding March 1, 1913, were $148,853.46, and its average annual earnings for that period were $32,122.98.

The average annual net earnings of the Union Biscuit Company of Delaware and its predecessor company, the Union Biscuit Company of Missouri, for the five years prior to the sale of the capital stock of the former company in 1925, were $141,383.66. The tangible net worth of the Union Biscuit Company of Delaware as of December 31, 1925, was $723,257.10. The average tangible net worth of the Union Biscuit Company of Delaware and its predecessor company, the Union Biscuit Company of Missouri, for the five years prior to 1925, as shown by the balance sheets, was $680,490.16.

The Commissioner asserted the deficiency appealed from by determining a readily realizable or fair market value of par or $69,600 for the 7 per cent preferred stock of the Delaware corporation received by the petitioner in 1923 and a total value of cash and stock received by her in that transaction of $139,200.

In respect to the stock of the Missouri corporation exchanged by petitioner, the Commissioner determined the fair market price or value for the 91 shares acquired by her donor prior to March 1, 1913, to be $440.574 a share, or $40,092.23, to which he added the $6,883.35, cost of the 25 shares acquired by petitioner's donor subsequent to 1913, making a total of $46,975.58, as the cost basis of this stock in the hands of the petitioner or a gain on the transaction of $92,224.42. To such gain the Commissioner applied the limitation embodied in the latter part of section 202(e) of the Revenue Act of 1921, as amended, and accordingly included the amount of cash, $69,600, in petitioner's gross income as a taxable gain.

The petitioner insists that the Delaware corporation stock received by her in 1923 had then no readily realizable market value and as a consequence the $69,600 cash received should be charged against the March 1, 1913, fair market value of the 91 shares plus the $6,883.35, cost of 25 shares of the 116 shares of the stock exchanged by her.

So far as shown by any evidence, the stock of neither corporation was ever "listed" on any stock exchange and no actual attempt was ever made to sell or dispose of petitioner's stock in either corporation prior to the sale of the entire stock of the Union Biscuit Company of Delaware to Frazier & Company of New York.

The evidence adduced by the petitioner relative to the lack of any readily realizable market value or fair market value of the stock of the Delaware corporation received by her in exchange for her stock in the Union Biscuit Company of Missouri is the opinion testimony of several witnesses and is not based on their actual knowledge of the assets and liabilities of the corporation, its earnings, nor the price at which the stock was sold to Frazier & Company in 1925, but based on the fact that the stock was not "listed," and was the stock of a closely held corporation, and that petitioner and her husband were minority stockholders, the latter holding in the company the positions heretofore stated. The witnesses expressed the opinion that the stock of any such closely held corporation, where the stock was not listed, would have no readily realizable or fair market value.

OPINION.

SEAWELL: The applicable law in the instant case is found in section 202(e) of the Revenue Act of 1921, as amended by the Act of March 4, 1923, effective January 1, 1923, and is as follows:

Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2) and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.

The petitioner insists that the stock of the Delaware corporation received by her in 1923 had at that time no readily realizable or fair market value. Such contention is supported by the opinions of several witnesses, based on grounds indicated in our findings of fact, but which do not convince us of their correctness. In the light of other evidence and especially the fact that the average annual net earnings of the Delaware company and its Missouri predecessor company for the five years prior to the sale of the capital stock of the former in 1925 were $141,383.66, it appears unreasonable to us that the stock of the Delaware company had at the time of the exchange of stocks no readily realizable or fair market value. There is certainly evidence to sustain the presumption of the correctness of the respondent's determination that it had such, and the opinion evidence and other evidence adduced by petitioner is not, in our opinion, sufficient to prevail over the presumption of the correctness of the respondent's determination and the evidence supporting that determination as to the readily realizable and fair market value of the Delaware company's stock at the time of the exchange.

In , the court said:

* * * Opinion evidence, to be of any value, should be based either upon admitted facts or upon facts, within the knowledge of the witness, disclosed in the record. Opinion evidence that does not appear to be based upon disclosed facts is of little or no value. The opinion witnesses here were almost wholly without facts to support their conclusions, and it was within the province of the Board to disregard the opinion evidence and base its opinion upon the facts in the record before it. ; . * * * [See also W.; .

We are of the opinion that the respondent did not err in determining that the entire cash ($69,600) received by the petitioner, as stated in our findings of fact, is taxable income to the petitioner for 1923. This conclusion is supported by the decision of the Board in .

The petitioner further insists that the capital-gain provision of section 206 of the Revenue Act of 1921 should be applied in determining her tax liability, if any, since her stock in the Union Biscuit Company ofMissouri was owned by her donor and herself for a combined period of more than two years. The pertinent provision of section 206 of the act applicable to such issue provides:

(a) That for the purpose of this title:

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(6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years. * * *

The provision quoted requires that the stock must be held by the taxpayer, in this instance the donee, for profit or investment for more than two years and this Board has so held in , and , affd., . The petitioner acquired her stock by gift from her husband in 1922 and held such stock less than two years and does not, therefore, come within the provisions of the statute.

Judgment will be entered for the respondent.