88 F.2d 559 (1st Cir. 1937), 3100, Commissioner of Internal Revenue v. Palmer

Docket Nº:3100.
Citation:88 F.2d 559
Case Date:February 12, 1937
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

Page 559

88 F.2d 559 (1st Cir. 1937)




No. 3100.

United States Court of Appeals, First Circuit.

February 12, 1937

Appeal from Board of Tax Appeals.

Ellis N. Slack, Sp. Asst. to Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Sewall Key and Norman D. Keller, Sp. Assts. to Atty. Gen., on the brief), for the Commissioner.

Robert G. Dodge, of Boston, Mass. (A. Mitchell Palmer and William D. Harris, both of Washington, D.C., and Francis V. Barstow, of Boston, Mass., on the brief), for Bradley W. Palmer.

Before BINGHAM, WILSON, and MORTON, Circuit Judges.

Page 560

MORTON, Circuit Judge.

This is a petition by the Commissioner of Internal Revenue to review a decision by the Board of Tax Appeals which was adverse to the government. The tax involved is an additional (or deficiency) assessment of income taxes for the year 1929. The facts are stipulated in great detail. The case was heard by the Board on the stipulation and the documentary exhibits.

The taxpayer, Mr. Palmer, was a shareholder in the American Superpower Corporation. That corporation acquired a large block of the capital stock of the United Corporation. By proper corporate action, it offered this stock for sale to its own stockholders at $25 per share, in the proportion of one share of United to each two shares of Superpower. This offer was made to the stockholders of the Superpower Corporation in the form of 'Purchase Certificates' or rights to purchase United stock, two rights being required in order to buy one share of United. The rights had to be exercised by a certain date or they lapsed. They were actively traded in on the New York Curb Exchange at prices which varied from day to day, the lowest being 11 5/8 and the highest 21. The cost of a share of United Corporation bought from the Superpower Corporation under them would of course be $25 plus the cost of two rights.

After the sales under this first offer had been completed and that transaction closed, Superpower made to its stockholders in May, 1929, a second offer of United stock. This offer was similar to the first, except that the price at which United stock was offered was $30 instead of $25, and four rights instead of two rights were required to buy a share. Thereafter Superpower made a third offer to its stockholders of a different stock that of the Commonwealth & Southern Corporation. This offer was similar in principal to the others, differing as to purchase price, number of rights required, dates, etc. On these later offers rights were issued as on the first offer; and that later rights were traded in on the New York Curb as the others had been; they were freely bought and sold and, until they lapsed, had substantial value. Mr. Palmer sold none of his rights under any of the offers. He exercised them all, paid Superpower the required amounts, and took the stock so purchased.

As to the first offer: The Commissioner held that, as the stock to which the rights related was not stock of the corporation which issued them, and as the rights were salable, the amount for which Mr. Palmer might have sold them--though he never did so-- constituted income. The Commissioner imposed additional taxes accordingly. The Board of Tax Appeals set aside his action, holding that the price of $25 per share as of January, 1929, was 'a fair market price' for the United stock; that the offer was not intended as a cloak for the payment of a dividend; and that the mere receipt of rights, although they had salable value, did not constitute income.

Two principal questions are involved: (1) Whether the Board's findings of fact were unsupported by any substantial evidence or were based on erroneous rulings of law, and therefore should be set aside; and (2) whether the mere receipt of rights which were not sold but were held and exercised constituted income. The first question calls for a somewhat fuller statement of the facts as they appear in the stipulation and in the Board's findings and of the way in which the Board dealt with the matter.

Several different corporations and firms which owned large amounts of stock in certain public utility corporations formed a plan for bringing their holdings into a common ownership through a holding company. The United Corporation was formed for this purpose on or about January 7, 1929. The persons and corporations interested in its organization transferred to it large blocks of public utility stocks and received in payment therefor shares of the new corporation. The Superpower Corporation was one of the organizers. It turned in shares of utility stocks and received therefor, inter alia, 2,210,853 shares of the common stock of the United Corporation, and also 1,000,000 'option warrants,' each of which entitled the holder of it to purchase from the United Corporation at any time one share of its common stock for $27.50. The management of Superpower, for the purpose of strengthening its cash position and establishing a market for the new United stock, decided to offer to sell part of its United stock to its own stockholders as above stated. The offer was formally made to the stockholders by vote of the directors of Superpower on January 23, 1929, and resulted in the issue of the rights here...

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