Clements v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 24 March 1937
• Docket Number: No. 10751.,10751.
• Citation: 88 F.2d 791
• Parties: CLEMENTS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

88 F.2d 791 (1937)

CLEMENTS v.COMMISSIONER OF INTERNAL REVENUE.

No. 10751.

Circuit Court of Appeals, Eighth Circuit.

March 24, 1937.

Chase Morsey, of St. Louis, Mo., for petitioner.

Warren F. Wattles, Sp. Asst. to the Atty. Gen. (Robert H. Jackson, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to the Atty. Gen., on the brief), for respondent.

Before SANBORN, WOODROUGH, and BOOTH, Circuit Judges.

WOODROUGH, Circuit Judge.

This is a petition by Kate E. Clements to review the decision of the Board of Tax Appeals(July 2, 1935, unreported) affirming a deficiency in tax of $5,978.56 assessed against her for the calendar year 1929.It appears that the petitioner inherited 265 shares of the stock of the Christy Fire Clay Company and 15 shares of the stock of the Ellenwood Land Company, both "family concerns," upon the death of her husband in March, 1897.Following her husband's death, and under direction of the probate court having jurisdiction over his estate, the petitioner paid $10,000 for 100 more shares of Christy Fire Clay Company stock for which her husband had subscribed during his life.

On June 26, 1907, the two corporations, together with a third corporation and two individuals, conveyed various properties to one Russell, who, on the same day, conveyed them to a new corporation, Laclede-Christy Clay Products Company, for shares of its stock issued to the stockholders of the corporate transferors of the property and to the two individual transferors.For her stock interest in the two companies the petitioner received 2,180 shares of the 6 per cent. cumulative preferred stock and 394.2 shares of the common stock of the Laclede-Christy Clay Products Company, each of the shares having a par value of $100.

By July 1, 1911, the Laclede-Christy Clay Products Company had become indebted to the holders of its preferred stock for three and a half years unpaid dividends in the amount of $525,000 and desired to change its capital structure.At that time, and continuously since the corporation's organization in 1907, there were 25,000 shares of the corporation's preferred stock and 12,500 shares of its common stock outstanding.The amount of the unpaid dividends upon the petitioner's preferred stock by July 1, 1911, was $45,780.In January, 1912, the Laclede-Christy Clay Products Company was recapitalized.Each stockholder surrendered his old stock to the corporation and received new stock.For each share of old common stock so surrendered he received two-fifths (40/100) of a share of new common stock, and for each share of old preferred stock, and in satisfaction of the accumulated balance of unpaid dividends thereon, he received two-fifths (40/100) of a share of the new 7 per cent. noncumulative preferred stock and 68/100 of a share of the new common stock of the company.All the new stock had a par value of $100 per share.The result of the 1912 recapitalization was that the Laclede-Christy Clay Products Company thereafter had outstanding 10,000 shares of noncumulative 7 per cent. preferred stock and 22,000 shares of common stock.The cumulative preferred stock was withdrawn and the proportion of preferred to common stock was reduced.The petitioner received 157.68 shares of new common stock for her 394.2 shares of old common, and 872 shares of new preferred, plus 1,482.4 shares of new common, for her 2,180 shares of old preferred.

In 1929the petitioner sold 1,000 shares of the common stock of the Laclede-Christy Clay Products Company for $100,000 and the Commissioner, having valued the shares at $50,000 at March 1, 1913, concluded there was a gain of $50,000 and determined deficiency accordingly.The petitioner had reported loss instead of gain upon the sale of the 1,000 shares.She petitioned the Board of Tax Appeals for redetermination on the ground that the cost to her of the 1,000 shares of stock acquired by her in 1912 and sold in 1929 was greater than the value of such stock at March 1, 1913.Revenue Act of 1928, c. 852,45 Stat. 791, 818, 821, § 113(b)(1, 2), 26 U.S.C.A. § 113 note.

The Board of Tax Appeals held that the cost to her of the 1,000 shares of common stock was to be determined by ascertaining the fair market value of the old stock she surrendered in the 1912 recapitalization.That would show the cost to her of the total of both classes of new stock she acquired.The Board held further that an apportionment of the total cost of both classes of stock had to be made on the basis of the respective value of the two classes of new stock so as to allocate to each stock its particular cost.

It appeared that up to the recapitalization of the Laclede Christy Clay Products Company in January, 1912, all of the stocks of the company were "closely held" and "there was no free market for the stock."After the change in the capital structure, the stock "was listed and then it became more active."But there is no evidence of general dealing in the stocks at at any time close to 1913.

The Board found that there had been some sales of the old common and old preferred stock and it determined on the basis...