Connolly's Estate v. Commissioner of Internal Revenue

• Decision Date: 06 April 1943
• Docket Number: No. 9195,9196.,9195
• Citation: 135 F.2d 64
• Parties: CONNOLLY'S ESTATE v. COMMISSIONER OF INTERNAL REVENUE. ANDERSON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

135 F.2d 64 (1943)

CONNOLLY'S ESTATE v. COMMISSIONER OF INTERNAL REVENUE.

ANDERSON v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 9195, 9196.

Circuit Court of Appeals, Sixth Circuit.

April 6, 1943.

Fred R. Angevine, of New York City, (Harvey A. Fischer, of Detroit, Mich., on the brief), for petitioners.

Bernard Chertcoff, of Washington, D. C., (Samuel O. Clark, Jr., and Sewall Key, both of Washington, D. C., on the brief), for respondent.

Before SIMONS, HAMILTON and MARTIN, Circuit Judges.

MARTIN, Circuit Judge.

The petitions for review in these two income tax cases have been heard and considered together, for the reason that, in each, the same questions are presented upon a similar set of facts. In one opinion, the Board of Tax Appeals (now the United States Tax Court) upheld the determination by the Commissioner of Internal Revenue of deficiences in the 1936 income taxes of Edward J. Connolly, now deceased, and A. A. Anderson.

Connolly was vice-president, Anderson was treasurer, and both were stockholders and directors of Hayes Body Corporation of Grand Rapids, Michigan. Each of them, pursuant to resolutions of the board of directors of the corporation adopted on February 19, 1935, and subsequently approved by the stockholders, were granted separate options, dated as of March 1, 1935, to purchase six thousand shares of par value two dollars each of the authorized but unissued capital stock of Hayes Body Corporation; whereof, two thousand shares could be purchased by each at fifty cents per share within one year, two thousand shares at one dollar per share within two years, and two thousand shares at $1.50 per share within three years from the date of the option. The effect of these options was that Connolly and Anderson could each purchase six thousand shares of the stock within one year from the date of the option, at an average price of one dollar per share. At the time the options were granted on March 1, 1935, the market value of the stock on the New York Stock Exchange was 2 3/8 dollars per share, three-eighths of a dollar per share above par value, or nearly two and one-half times the option price.

From the minutes of the meeting of the board of directors, at which the resolutions authorizing the options were adopted, it appears that Connolly and another officer, Hoagland, in an effort to curtail operating overhead to a minimum, had voluntarily reduced their fixed salaries during the five-year period preceding the meeting, and had been serving and were then serving the corporation at a rate of fixed compensation greatly disproportionate to the value of their services. The minutes recited further that, inasmuch as the terms of outstanding options to Hoagland and Connolly to purchase shares of stock in the corporation had prevented these options from effectuating adjusted compensation for their services, as had been intended by the board at the time the options were granted, a practical situation was presented in which the best interest of the corporation and its stockholders would be served by modification of the terms of the outstanding options "as adjusted compensation for services heretofore rendered and as an inducement to said Messrs. Hoagland and Connolly to continue in the employ of the corporation."

The February 19, 1935, resolution of the directors, granting the stock purchase options to Hoagland and Connolly in lieu of the options previously granted them by resolution of the directors adopted July 21, 1933, recited that the market-price range of the capital stock of the corporation which had prevailed since the original options were granted had rendered valueless the purchase rights under the options; and, consequently, that no adjusted compensation through the medium of the options, as intended to be accorded Hoagland and Connolly for services rendered by them to the corporation, had resulted. The resolution recited, moreover, that revision in the terms of the options was necessary if Hoagland and Connolly were, through the medium of options for purchases of stock of the corporation, to receive purchase rights which, "in any real sense," would constitute compensation for valuable services theretofore and then being currently rendered by them to the corporation.

The minutes of the same directors' meeting of February 19, 1935, set forth that petitioner Anderson, as treasurer and director, and Curley, Johnson, and Robison as directors, had devoted extraordinary time and effort beyond that reasonably required in the administration of the corporate affairs, and had displayed discretion and skill directly responsible for the corporation's remaining in business despite the extreme economic depression; that their services rendered had greatly exceeded in value any compensation received by them; and that the best interest of the corporation would be served by the "continued willingness of these persons to serve the corporation and to exercise in the administration of its affairs the same degree of time, effort and skill as heretofore, and that as an inducement to that end" the board of directors would be justified in granting them options for the purchase of shares of stock of the corporation "by way of adjusted compensation." The resolution authorizing the stock-purchase option to petitioner Anderson provided that the terms of his option should be the same as those provided with respect to the options granted to Hoagland and Connolly.

On January 30, 1936, Connolly and Anderson exercised their respective stock-purchase options, Connolly buying 5,400 shares of the Hayes Body Corporation stock at one dollar per share for a total cost of $5,400, and Anderson buying 6,000 shares of the stock at the same price for a total of $6,000.

It was...