COMBINED SECURITIES CORPORATION v. A. Schrader's Son, 82.

• Decision Date: 07 November 1938
• Docket Number: No. 82.,82.
• Citation: 99 F.2d 804
• Parties: COMBINED SECURITIES CORPORATION v. A. SCHRADER'S SON, Inc.
• Court: U.S. Court of Appeals — Second Circuit

99 F.2d 804 (1938)

COMBINED SECURITIES CORPORATION v. A. SCHRADER'S SON, Inc.

No. 82.

Circuit Court of Appeals, Second Circuit.

November 7, 1938.

Wing, Lakin & Whedon, of New York City (Frederick J. Moses, of New York City, of counsel), for appellant.

Brennan, Flamman & Simpson, of New York City (John B. Sullivan, Jr., of Pittsburgh, Pa., of counsel), for appellee.

Before MANTON, L. HAND, and SWAN, Circuit Judges.

MANTON, Circuit Judge.

The stockholders of appellant sold to the Scovill Mfg. Co. all the stock — 3,845 shares — of appellant for $21,147,500 paid in Scovill's 5% debenture bonds. Appellant thereupon became a subsidiary of the Scovill Co.

Prior to Scovill's purchase of appellant, the latter was bound by employment contracts with two of its officers for their services from 1925 to 1934. These officers were to receive, as partial compensation, 30 shares of the appellant's stock each year, and if a majority of the appellant's stock was sold or disposed of during the term of the contract, all the balance of said shares not previously delivered should be then immediately turned over to them. Thirty shares were to be delivered in 1929, leaving 150 shares yet to be delivered. The contracts also provided that the officers were to be reimbursed by appellant for any Federal income taxes paid by them on any government valuation for income tax purposes in excess of $2,000 per share. The tax reimbursement obligation of appellant under the contracts threatened to be heavy because the sale of appellant's stock to Scovill was on the basis of more than $7,000 a share, and Scovill was unwilling to assume a burden which might amount to as much as $400,000. On the other hand, the undelivered 180 shares due the officers were part of the 3,845 shares of appellant which Scovill was purchasing. Since the fair value of the 180 shares would be deducted from the gross income of appellant, there would result, as an offset to the tax reimbursement liability, a corresponding reduction of appellant's Federal income taxes for 1929 and 1930. Since Scovill was purchasing appellant's shares, the delivery of the 180 shares would be without cost to either appellant or Scovill, but would fall upon appellant's stockholders. A compromise was reached and incorporated into the contract between appellant and Scovill, whereby appellee, a newly-formed corporation of appellant's old stockholders, would pay the officers on cancellation of their employment contracts $50,000 and would pay all the tax reimbursement liability of appellant under these employment contracts in excess of $150,000. Appellant agreed to pay not more than $150,000 of the tax reimbursement liability, unless "the amounts of federal income taxes paid by the company Schrader are less than the amount of such taxes that the company would have paid if it had not taken and been allowed certain deductions which we have described from its gross income for the years 1929 and 1930." In the latter case, appellant...