Crowell v. Commissioner of Internal Revenue

• Decision Date: 06 December 1932
• Docket Number: No. 6002,6003.,6002
• Citation: 62 F.2d 51
• Parties: CROWELL v. COMMISSIONER OF INTERNAL REVENUE. LITTLE v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

62 F.2d 51 (1932)

CROWELL v. COMMISSIONER OF INTERNAL REVENUE.

LITTLE v. SAME.

Nos. 6002, 6003.

Circuit Court of Appeals, Sixth Circuit.

December 6, 1932.

I. W. Sharp, of Cleveland, Ohio (F. X. Cull and Bulkley, Hauxhurst, Inglis & Sharp, all of Cleveland, Ohio, on the brief), for petitioners.

A. G. Divet, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, C. M. Charest, and Arthur Carnduff, all of Washington, D. C., on the brief), for respondent.

Before MOORMAN, HICKENLOOPER, and SIMONS, Circuit Judges.

SIMONS, Circuit Judge.

Both appeals are from decisions of the Board of Tax Appeals based upon one set of findings, and by stipulation here consolidated. The controversy involves the test that, under the applicable statute and regulations, must be applied to determine value for income tax purposes of shares of stock received as compensation for personal services, and the effect of the presumption that the commissioner's determination is correct.

The petitioners were respectively chairman of the board of directors and president of the Crowell & Little Construction Company, an Ohio corporation, engaged in the building construction business during the year 1923. Each received a cash salary of $12,000, and, in addition, stock in the corporation of the par value of $6,000. The stock was issued pursuant to a plan applicable to officers and more important employees to supplement their cash salaries. In its tax return for 1923 the corporation treated the stock issued to the petitioners as of par value, and took deductions therefor as salary paid. In their individual returns for the same year the petitioners did not include the stock in their income at any value, although they disclosed its receipt. The commissioner added the amount of $6,000 to the income of each, and the deficiencies here involved are on account of such additions. Upon review, the Board of Tax Appeals found that the evidence was not sufficient to justify a finding contrary to the commissioner's determination.

Section 213 (a) of the Revenue Act of 1921 (42 Stat. 237) defines gross income as including gains, profits, and income derived from salaries, wages, or compensation for personal service "of whatever kind and in whatever form paid," and provides for including such items in gross income for the taxable year in which they are received. It would seem clear from the terms of the statute that stock received by way of salary, if it has value, is income, taxable in the year received. The Treasury Department, however, by Regulation 62, Article 33, set up a formula by which the value of such stock is to be determined. In so far as applicable it is printed in the margin.¹ It is argued from this that stock received as compensation for personal service is taxable in the year received only if (1) it has a market value, and (2) if that market value is readily realizable, and that if no market exists, or if the fair market value is not readily realizable, no taxable income results from its receipt.

We think this position cannot be sustained. The mandate of section 213 (a) of the act which requires inclusion in gross income of all compensation in whatever form paid, is clear and unambiguous. The only purpose of a regulation in respect to it is to provide a reasonable method whereby the value of property received as compensation may be fairly determined. This, Regulation 62 purports to do. It must be read, however, in the light of the act, and so read any seeming confusion of its terms is at once resolved. Readily realizable market value may well be considered the best, if not a conclusive, measure of value. If such standard of value exists, it is, under the regulation, to be applied. It is not, however, an exclusive standard, the nonexistence of which compels a determination of no value. If services are rendered at an agreed price, such price is presumed to be the fair value of the compensation, in the absence of evidence to the contrary. Evidence of intrinsic value, of market value, or readily realizable market value, might well constitute such contrary evidence, challenging the presumption. With specific reference to stock paid by a corporation to an employee, the regulation provides that it shall be treated as though sold at market value, and the employee paid in cash. Whether we consider this test as exclusive in relation to stock, or merely an alternative test to be applied when no readily realizable market value or agreed price can be established is immaterial. The measure of compensation received in stock is its market value, whether readily realizable or not.

We see no help for the petitioners in the provisions of section 202 of the statute (42 Stat. 229). That section provides a basis for determining whether an exchange of property results in gain or loss, or leaves the taxpayer where he was with respect to income. The difference in the purposes of the two sections fully accounts for the difference in terms. Section 213 (a) provides for inclusion in income of compensation for personal service. All compensation is income if value can be put upon it. Section 202 sets up a test for recognizing whether upon exchange of property any income results. If the exchange leaves the taxpayer where he was before, under the doctrine of Eisner v. Maccomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, he has received no income. Therefore, the importance of making readily realizable market value the basis upon which the existence of gain or loss may be recognized is clear. And in any event there appears no ambiguity in section 213 to be dispelled by importing into it the language of section 202.

Nor do we attach any importance to the fact that respondent in his deficiency letter seemingly indicated that his determination of value was based upon the existence...