Chisholm v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 28 February 1934 |
| Docket Number | Docket No. 61664,61665. |
| Citation | 29 BTA 1334 |
| Parties | GEORGE H. CHISHOLM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HARRY L. CHISHOLM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Joseph H. Morey, Esq., and W. W. Spalding, Esq., for the petitioners.
Mason B. Leming, Esq., for the respondent.
The respondent determined deficiencies in income taxes of the petitioners for the year 1928 in the following amounts: George H. Chisholm (Docket No. 61664), $60,753.19; Harry L. Chisholm (Docket No. 61665), $60,686.97.
The several errors alleged in each petition present but one question, that is, whether petitioners were the vendors of a block of stock and subject to tax on the gain based on their cost, or whether as the result of their passing title to the purchaser through a partnership organized by them the partnership is to be regarded as the real owner and vendor of the stock.
FINDINGS OF FACT.
Each of the petitioners is an individual, resident of Buffalo, New York.
More than two years prior to the year 1928 each of the petitioners acquired 300 shares of the capital stock of the Houde Engineering Corporation of Buffalo, New York, at a cost to each of $8,000.
On September 26, 1928, each of the petitioners was owner and holder of said 300 shares of stock. Petitioner George H. Chisholm was then vice president of the Houde Engineering Corporation, and petitioner Harry L. Chisholm was treasurer.
On September 26, 1928, the petitioners, George H. Chisholm and Harry L. Chisholm, together with certain other stockholders of the Houde Engineering Corporation, executed and delivered to Krauss & Co. of Buffalo, New York, the following written option:
September 26th, 1928.
IN CONSIDERATION of $1.00 receipt of which is hereby acknowledged, we the undersigned stockholders of the Houde Engineering Corporation, hereby give to Krauss & Company for a period of thirty (30) days from the date hereof, the right to purchase all the stock of the Houde Engineering Corporation at a price of ($4,000,000) Four Million Dollars in total. This option can only be exercised by the payment of cash before its expiration.
It is understood that the net assets of the Houde Engineering Corporation, when, as, and if this option shall be exercised will be at least equivalent to the position as set forth in its balance sheet dated August 31st, 1928, and any accrual in these net assets occurring since the close of business August 31st, 1928, shall adhere to the vendors in this option.
Inasmuch as Krauss and Company will act as a broker in this transaction, it is also understood that in the event of the sale of said stock being consummated, Krauss and Company will be entitled to a commission from the purchase price of 3%.
If stockholders owning not more than a total of 265 shares of said stock, who do not sign this option, refuse to join in the sale at the price aforesaid, there shall be a reduction made in the purchase price of $1,640.19 per share for each share of said stock which the undersigned shall be unable to deliver to the purchasers.
It is understood that the name of A. B. Shultz is signed hereto in pursuance of verbal authority given by him to negotiate a sale of said stock.
A. B. SHULTZ GEO. H. CHISHOLM HARRY L. CHISHOLM B. D. SCHULTZ J. SCULLY
Krauss & Co. was a partnership consisting of officers of the Manufacturers & Traders-Peoples Trust Co. of Buffalo, New York, which acted as nominee for the bank, and an affiliated corporation of the bank and for customers of the bank. The above option was never changed or modified.
No consideration was actually paid for the option, not even the $1 consideration mentioned therein.
The bank, through Krauss & Co., obtained this option with the idea of obtaining a purchaser for the stock and reselling it, for which it would receive a commission, and the bank had various negotiations after obtaining the option, endeavoring to obtain a purchaser for the stock.
Just prior to October 11, Krauss & Co. approached the New York Car Wheel Co., of Buffalo, to buy the stock at the option price.
On October 11 three of the officers of the bank, Wurst, Harriman and Rea, executed a written agreement with Fred B. Cooley, who was president of the New York Car Wheel Co., as individuals, in which they agreed that they would form a syndicate to take over from the New York Car Wheel Co. a substantial amount of the stock to be purchased by the New York Car Wheel Co., and that in the event of Cooley's death or disability before the syndicate was formed they as individuals would assume the obligations of the New York Car Wheel Co. in respect to the purchase of the stock, and upon this agreement Cooley then agreed with these three individuals to purchase the stock on behalf of the Car Wheel Co.
The Car Wheel Co.'s financial responsibility was approximately $1,000,000. The financial responsibility of the three individuals who signed the agreement with Cooley was not sufficient to enable them as individuals to purchase the stock at the option price, but the group that was to comprise the syndicate for the resale of the stock was amply able to finance the purchase.
At the same time, on October 11, 1928, Krauss & Co. sent the following letter to the petitioners and other stockholders who signed the option of September 26:
Messrs. A. B. Schultz, George H. Chisholm, Harry Chisholm, B. Schultz and J. Scully:
DEAR SIRS:
Referring to the option dated September 26, 1928, which you have given us for the purchase of all of the stock of Houdaille Engineering Corporation, at a price of $4,000,000.00, we beg to advise that we have secured as a purchaser the New York Car Wheel Company, of this city, which has agreed to purchase said stock upon the terms of our option, and has made available in our hands the sum of $4,000,000.00 therefor.
We accordingly notify you that we elect to exercise our option as of this date, and tender you payment in full upon delivery to us of all the stock of the Houdaille Engineering Corporation, duly endorsed for transfer, less a possible maximum of 265 shares all as provided in the option. We shall be glad to suit your convenience as to time and place of delivery, and payment prior to October 25th, and suggest that you promptly arrange with us for an early closing.
Yours very truly Signed KRAUSS & COMPANY By T. CANTWELL.
No money or check or cash accompanied this letter.
No money or check or draft or any part of the purchase price was ever actually produced or offered to be paid to either of the petitioners, or to any of the other stockholders signing the option before October 24, 1928, as hereinafter related.
No demand for payment of the stock was made by either of the petitioners prior to October 24, 1928.
At the time the letter of October 11 was sent, no one had in fact deposited any money with Krauss & Co. or the Manufacturers & Traders-Peoples Trust Co., with which to purchase the stock.
On October 20, 1928, petitioners executed an agreement wherein they constituted themselves a partnership under the name of H. L. & G. H. Chisholm. The purpose of the partnership was stated to be that of purchasing, investing, and dealing in stocks and other securities. It was to commence on October 22, 1928, and continue for 10 years. The capital contribution of each of the partners was stated to consist of 300 shares of Houde Engineering Corporation stock at a market value of $492,057. The petitioners were the only members of the partnership and they were to share equally in the profits and losses. On October 22, 1928, they acknowledged, before a notary public, their signatures to the partnership agreement.
The petitioners had considered the advisability of forming a partnership several months prior to this time, but had taken no steps to that end. It was formed at this particular time upon advice of their attorney for the purpose of avoiding income tax on the profit on the prospective sale of their Houde Engineering stock.
On October 20, 1928, each of the petitioners endorsed his 300-share certificate over to H. L. & G. H. Chisholm. On the same date each of the petitioners executed a written assignment to the partnership of his 300 shares of stock and of his interest in "a certain outstanding option contract for the sale of said stock bearing date, September 26th, 1928." The assignments were made expressly subject to the option which the partnership by the acceptance thereof agreed to observe and perform.
On October 22, 1928, the petitioners, signing individually and as copartners, gave a written notice to Krauss & Co. and the New York Car Wheel Co. of the assignment to the partnership, and stated that the partnership stood ready to fully perform its part of the option contract of September 26. On the same date a certificate for 600 shares of Houde stock was issued in the name of H. L. & G. H. Chisholm, and on the same date it was endorsed over to Fred B. Cooley. It was then, on the same date, delivered to the Manufacturers & Traders-Peoples Trust Co., which gave a receipt therefor containing a provision that the stock was to be delivered to the New York Car Wheel Co. or its nominee pursuant to the terms of the option of September 26.
Prior to October 20, 1928, no other stock had been deposited with the bank, but all of the stock subject to the option was deposited on or before October 24, 1928.
Monthly reports of the financial condition of the Houde Engineering Corporation were made up and furnished to the treasurer, Harry L. Chisholm, but at October 22 no report had been prepared giving the earnings after August 31, 1928.
On October 23 an outside firm of accountants, having been requested to do so, submitted a report to the Manufacturers & Traders-Peoples Trust Co., setting forth the estimated accrued earnings of the corporation for the period September 1 to October 11, inclusive. The amount of earnings...
To continue reading
Request your trial