Burns v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 30 BTA 163 |
| Decision Date | 27 March 1934 |
| Docket Number | 36793-36797,36799,37042,Docket No. 36661,36805,36800,36807,37758. |
| Parties | WILBUR F. BURNS, PETITIONER, ET AL., v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Louis B. Eppstein, Esq., for the petitioners in Docket Nos. 36661. 36793-36797, 36799, 36800, 36805, 36807, 37042.
Ewing Everett, Esq., for the petitioner in Docket No. 37758.
W. Frank Gibbs, Esq., for the respondent.
The Commissioner determined deficiencies in income taxes of the respective petitioners for the year 1923 as follows:
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Docket | Petitioner | Deficiency
No. | |
-------|----------------------------|-----------
36661 | Wilbur F. Burns __________ | $18,010.91
36793 | Elizabeth B. Dickson _____ | 9,181.63
36794 | Edgar W. Bassick _________ | 85,100.54
36795 | Tracy C. Dickson, Jr _____ | 447.24
36796 | Marshall M. Bassick ______ | 8,934.52
36797 | William A. Schenck _______ | 7,321.71
36799 | William Roscoe Bassick ___ | $14,447.41
36800 | F. C. Bassick ____________ | 18,243.81
36805 | Edgar Webb Bassick, Jr ___ | 8,981.83
36807 | Jessie S. Perkins ________ | 1,685.99
37042 | Francis E. Bade __________ | 2,778.64
37758 | Norman W. Cummins ________ | 3,345.06
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The proceedings have been consolidated. The parties have stipulated most of the facts, although the testimony of several witnesses and certain documentary evidence also were introduced. Some of the issues raised by the pleadings are disposed of by the agreed facts and require no discussion. The principal question remaining for consideration is whether, under the provisions of section 202 of the Revenue Act of 1921, any gain shall be recognized on an exchange by the petitioners in 1923 of common stock of the Bassick Co. for cash, bonds, and promissory notes in amounts admitted to be the equivalent of cash, and certificates of deposit and voting trust certificates representing shares of the common stock of the Bassick-Alemite Corporation; and, if so, the amount thereof. This issue is common to all of the proceedings. In Docket No. 36661 a separate issue is presented of the amount to be reported by Burns on the installment basis as profit realized by him from a subsequent sale of certificates of deposit received in the exchange. A summary of the stipulated facts will be sufficient for present purposes.
Edgar W. Bassick (hereinafter referred to as Bassick) and the other petitioners were in 1922 and 1923 holders of common stock of the Bassick Co. Its outstanding capital stock consisted of $1,274,000 of preferred stock and 30,364 common shares, each having a par value of $100. The common shares owned by the petitioners had a basis of cost to them of $90 per share, except that 118 of the shares owned by Bassick had a total cost basis to him of $4,580. In 1922 and 1923 the Bassick Manufacturing Co. had outstanding capital stock consisting of 15,000 common no par value shares. The Bassick Co. owned 10,000 and D. F. Fessler and C. I. Overton owned 5,000 of these shares. In 1922 Bassick entered into negotiations with the Central Securities Co. (hereinafter referred to as the bankers) for the organization of a new corporation to acquire the 5,000 shares of Bassick Manufacturing Co. stock owned by Fessler and Overton and not less than 90 percent of the common shares of the Bassick Co. They agreed that the new corporation should acquire the 5,000 shares of the Bassick Manufacturing Co. from the bankers, who were to purchase them from Fessler and Overton, and that it should acquire the shares of the Bassick Co. from or through the efforts of Bassick, at a price of $131.75 per share, payable at the option of the Bassick Co. stockholders either all in cash, or one half in cash and one half in no par value common stock of the new corporation at $20 per share, which stock was to be stamped, or otherwise made subject to an agreement that it could not be marketed except through the bankers for a limited period, and with certain price restrictions, the details of which were later to be definitely fixed. Bassick procured from the holders of 95 percent of the common stock of the Bassick Co., including these petitioners, agreements to transfer their shares to the new corporation at a price of $131.75 per share, in which they indicated their preference for payment in cash in full, or one half in cash and one half in stock. He also procured for the bankers an option to purchase the 5,000 shares of the Bassick Manufacturing Co. Thereafter, on January 27, 1923, Bassick and the bankers entered into a contract in which they agreed: (1) That Bassick should organize a corporation in Delaware with an authorized capital stock consisting of preferred stock of the par value of $5,000,000, and 200,000 shares of common stock without par value; (2) that the new corporation should issue $1,250,000 in notes, payable over a period of years and secured by a collateral trust indenture to the Central Trust Co. of Illinois, as trustee, under which all of the stock to be acquired by it should be pledged; (3) that Bassick should assign to the new corporation at least 95 percent of the common stock of the Bassick Co. in exchange for the $1,250,000 of notes and the percentage of 147,500 common shares of the new corporation that the number of the Bassick Co. shares delivered bears to the total outstanding common shares of that company; (4) that the bankers should thereupon assign to the new corporation 5,000 shares of the Bassick Manufacturing Co. in exchange for 52,500 of the common shares of the new corporation; (5) that Bassick should then sell or cause to be sold to the bankers from 65,000 to 72,500 common shares of the new corporation at $20 per share, payable in cash as follows: $400,000 upon consummation of the agreement, $350,000 on January 1, 1924, and the remainder on July 1, 1924, the two deferred payments to be evidenced by interest-bearing promissory notes of the bankers, secured by a collateral trust agreement covering, in addition, a third note of the bankers payable to their nominee for $400,000, due January 1, 1924; the trust agreement to provide for the deposit of the 52,500 shares of the new corporation acquired by the bankers, subject to release to them upon payment of $20 per share, and to provide also for the pledge of the rights of the bankers under a certain syndicate agreement; (6) that the bankers should transfer and deliver to Bassick United States Government bonds of the market value at date of delivery of $1,050,000 in exchange for the $1,250,000 of notes of the new corporation; (7) that 50,000 of the shares of the new corporation received by the bankers, and 50,001 of such shares received by the stockholders of the Bassick Co. should be deposited under a voting trust agreement for the protection of the note holders; (8) that all of the stock of the new corporation acquired by Bassick or the stockholders of the Bassick Co. not sold to the bankers, should be deposited by them with a trust company, subject to an agreement that it should not come into their possession until January 1, 1924, without written consent of the bankers, to the end that it should not be placed upon the market for sale in the interim.
On February 7, 1923, Bassick organized the Bassick-Alemite Corporation (hereinafter referred to as the Alemite Co.) under the laws of Delaware, with an authorized capital stock consisting of preferred shares of the par value of $5,000,000, and 200,000 common shares without par value. On February 13, 1923, the Alemite Co. was authorized by its directors and stockholders to enter into a contract with Bassick for the acquisition from him and the other owners of 30,358 shares of the common stock of the Bassick Co. in exchange for 147,500 shares of the common stock and $1,250,000 of collateral trust serial gold notes of the Alemite Co. secured by a trust indenture to be executed by the latter to the Central Trust Co. The contract provided that 29,754 shares of the Bassick Co. should be delivered immediately, and that the remaining 604 shares should be delivered within 60 days, with the right on the part of Bassick, in the event he should be unable to acquire the 604 shares from the owners, to pay the Alemite Co. for each share not delivered $131.75, either in cash or in common stock of the Alemite Co. at $20 per share, or "partly in one way and partly in the other"; and that Bassick should assign 50,001 shares to trustees under a voting trust agreement, in order to carry out the covenants of the Alemite Co. contained in the trust indenture referred to above and to protect the note holders and secure a satisfactory management of the Alemite Co. The directors authorized the issuance to Bassick of the 147,500 shares of stock and $1,250,000 of notes, and the execution of a trust indenture to the Central Trust Co. pledging thereunder all of the stock of the Bassick Co. and the Bassick Manufacturing Co. acquired or to be acquired by the Alemite Co. They also authorized the entry of the Bassick Co. stock on the books at a value of $5,380,000.
On February 14, 1923, Bassick, on behalf of himself and other stockholders of the Alemite Co., entered into an agreement with the bankers and the Central Trust Co., whereby, in consideration of the purchase by the bankers from Bassick and such stockholders of certain shares of Alemite stock, the latter agreed to deposit certificates for 32,499 other shares of said stock issued in their names with the Central Trust Co., to be held by the latter as trustee for the term of the agreement, so that the said shares should not be sold, offered for sale, or otherwise placed on the market.
The agreement provided that the trustee should issue and deliver to each stockholder or depositor receipts or certificates...
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