Graney v. United States

• Decision Date: 13 September 1966
• Docket Number: No. 2476.,2476.
• Citation: 258 F. Supp. 383
• Parties: Patrick C. GRANEY and Thelma Graney, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of West Virginia

258 F. Supp. 383

Patrick C. GRANEY and Thelma Graney, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 2476.

United States District Court S. D. West Virginia, Charleston Division.

September 13, 1966.

William H. Deck, Washington, D. C., for plaintiffs.

John B. Jones, Jr., Acting Asst. Atty. Gen., Dept. of Justice, Washington, D. C. and Milton J. Ferguson, U. S. Atty., Charleston, W. Va., for defendant.

MEMORANDUM OPINION

FIELD, Chief Judge.

In this action the plaintiffs seek to recover the sums of $10,770.04 and $10,368.98 representing the amount of the income taxes allegedly overpaid by them for the years 1955 and 1956, respectively. Thelma Graney is involved as a plaintiff only because a joint return was filed by her and her husband and for the purposes of this opinion the plaintiff, Patrick Graney, will be referred to as taxpayer. The principal question presented is whether a certain transaction entered into between the taxpayer and his corporate employer in the year 1953 constituted a contract of sale which should have been taxable in full in that year, or whether the transaction was merely an option which required the taxpayer to recognize the taxable incidence in the year or years in which the option was exercised.

The taxpayer was president and a member of the board of directors of Gulf Mining Company as well as a member of the board of directors of West Gulf Coal Company prior to the merger of West into Gulf on June 30, 1953. The directors of the two companies felt that a merger was desirable, and prevailed upon the taxpayer to accept the presidency of Gulf, the surviving corporation in the merger. Incident to their efforts to persuade the taxpayer to continue his participation in the management of the merged corporations, the two corporations Gulf and West, entered into an agreement with the taxpayer dated May 1, 1953, effective on June 1, 1953, permitting the taxpayer to purchase 500 shares of post-merger Gulf Mining stock at the price of $25 per share. The board of directors of Gulf ratified this agreement by resolution in which they set forth the details of the form of the agreement, the resolution providing among other things: "* * * that there be given to P. C. Graney the exclusive right and option to purchase 500 shares of the stock of the merged corporation, at the price of $25 cash, per share, during the period of five years commencing June 1, 1953, in whole or in part, * * *." The resolution further ratified, approved and confirmed the stock option agreement which had been entered into between Gulf and West Gulf and the taxpayer under date of May 1, 1953.

The agreement had been prepared by Charles Mahan, the taxpayer's personal attorney, after thorough consultation with the taxpayer. Mr. Mahan had also been present at the meetings of the boards of directors at which the proposed agreement was discussed.

The agreement, itself, was termed "THIS STOCK OPTION AGREEMENT." By its terms it granted unto the taxpayer "the exclusive right and option to purchase, during the period and upon the terms and provisions * * * FIVE HUNDRED (500) shares of the capital stock of Gulf Mining Company, the surviving corporation, * * *." It provided that the option should be effective for a period of five years commencing June 1, 1953, and that the taxpayer should have the right to exercise the option at the rate of 100 shares per year in each option year, or at his election should have the right to exercise it, in whole or in part, at any time during the five-year option term. It further provided that Gulf, immediately after the merger, was to issue 500 shares of stock in the taxpayer's name and that such shares were to be delivered to the Bank of Mount Hope to be held in escrow subject to the terms of the option agreement.

The agreement further provided that the taxpayer, his successors and assigns, should thereafter have the right to vote the stock, and to exercise all stockholder's rights with respect thereto and to receive all benefits therefrom during the life of the option. Paragraph SIXTH of the agreement reads as follows:

"Upon the exercise of this option in whole or in part by the payment of the purchase price to the Bank of Mount Hope for the account of the parties of the first part * * * the said Bank of Mount Hope shall release and deliver unto the party of the second part taxpayer * * * the number of shares so paid for."

Paragraph SEVENTH of the agreement provided in part as follows:

"Any stock which shall not have been purchased and paid for pursuant to this option on or before the 31st day of May, 1958, shall be by the Bank of Mount Hope returned to the parties of the first part, their successors or assigns, for cancellation or other disposition, as it or they shall direct."

On July 1, 1953, following the consummation of the merger between Gulf and West, five certificates for 100 shares each were issued by Gulf in the name of the taxpayer in accordance with the terms of the agreement. They were signed by the secretary of the...