Hammond v. Comm'r of Internal Revenue

• Decision Date: 08 December 1942
• Docket Number: Docket No. 100456.
• Citation: 1 T.C. 198
• Parties: JAMES HAMMOND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

1 T.C. 198

JAMES HAMMOND, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 100456.

Tax Court of the United States.

Promulgated December 8, 1942.

Petitioner sold shares of stock for a total price of $965,000, receiving in the year of sale a cash payment of $74,000 from the vendee. In addition, he received, from a creditor who was also a party to the agreement of sale, cash in the amount of $280,000 and the cancellation of a prior indebtedness in the sum of $150,000, for which petitioner gave the creditor his notes for $430,000 payable only from the payments to be made by the vendee. Held, petitioner may not report the sale upon the installment basis since the initial payments exceeded 30 percent of the selling price. Sec. 44(b), Revenue Act of 1938. W. G. Boone, Esq., for the petitioner.

Frank M. Thompson, Esq., for the respondent.

OPINION.

ARUNDELL, Judge:

The Commissioner determined income tax deficiencies for the years 1935 and 1936 in the amounts of $8,006.35 and $151,204.84, respectively, together with penalties for the respective years of $400.32 and $7,560.24. Upon stipulation of the parties a decision was entered on October 2, 1940, that there was a deficiency in income tax of $2,561.85 and a penalty of $128.09 for the year 1935. We are presently concerned with the deficiency for 1936. The parties have stipulated that petitioner is not liable for the penalty, or any part of it, determined by respondent as to the year 1936.

The petition raised seven issues with respect to the year 1936. Six of them have been settled by stipulation, leaving the single question of whether petitioner's gain from the sale of certain stock may be reported on the installment basis. The facts are embodied in a stipulation, which is hereby adopted as our findings.

Petitioner, a resident of Germantown, Shelby County, Tennessee, filed his return for the year 1936 upon the cash receipts and disbursements basis with the collector at Nashville, Tennessee.

In October 1936 petitioner sold all the stock that he owned in the Tennessee Co. (1,230 shares) for a total consideration of $965,000. The stock had no cost basis in his hands. An initial payment of $74,000 was paid during 1936. Petitioner contends that this sum was the only part of the purchase price received in 1936 and, since it was much less than 30 percent of the total selling price, that he is entitled to report the sale upon the installment basis. Respondent's position, however, is that by reason of the peculiar circumstances of the transaction petitioner actually or constructively received an additional amount of $430,000, or a total of $504,000, and, consequently, may not use the installment basis. It is stipulated that the difference of $461,000 between the total selling price of $965,000 and the amount of $504,000 is not taxable income to petitioner for 1936 but is income to petitioner as, when, and to the extent collected. Since the parties are agreed that the initial payment of $74,000 is taxable and that the balance of $461,000 is not, our attention is directed solely to the sum of $430,000 which respondent has determined was received by petitioner in 1936. For a clear understanding of the issue raised, it will be well at the outset to point out the relationships existing between the corporations and individuals involved.

The W. W. Hawkins Co., the Roy W. Howard Co., and the E. W. Scripps Co. are personal holding companies owning stock in various corporations which publish newspapers in different cities of the country. These personal holding companies, with others, exercise control of the various newspaper publishing corporations through a pooling of interests under a voluntary agreement known as the ‘Scripps-Howard Newspapers.‘ H. E. Neave is treasurer of the central fund of the Scripps-Howard Newspapers, with offices in Cincinnati, Ohio. The E. W. Scripps Co. owns a majority of the stock of the Memphis Press-Scimitar Co., and the newspaper published by the latter is generally known as a Scripps-Howard newspaper.

In 1933 petitioner and the Hawkins Co. entered into an agreement whereby the Hawkins Co. was to organize a company to be known as the Tennessee Co., with an authorized capital of 3,000 shares of stock. The Tennessee Co. was to acquire all the stock of the Memphis Commercial Appeal, Inc., which at that time was owned by an outside company that was in receivership. The necessary funds were to be supplied by the Hawkins Co., and petitioner agreed to terminate his position as manager and publisher of the Detroit Times and to become publisher and general manager of the Memphis Commercial Appeal and president of the Memphis Commercial Appeal, Inc. Provision was also made for the transfer of some of the Tennessee Co. stock to petitioner by the Hawkins Co. The agreement also provided that a contract would be executed by the Tennessee Co., Memphis Commercial Appeal, and Press-Scimitar, to the effect that Commercial Appeal would discontinue the publication of an evening paper and Press-Scimitar would refrain from publishing a morning paper in Memphis.

The Tennessee Co. was organized and it acquired the stock of Commercial Appeal. By a supplemental agreement the Howard Co. loaned funds to the Tennessee Co. Petitioner had become the owner of 51 percent (1,530 shares) of the Tennessee Co. stock by April 30, 1935. On that date a further agreement was executed by petitioner, the Howard Co., and the Hawkins Co. Under the terms of that agreement petitioner borrowed $250,000 from the Howard Co. for the purpose of paying his outstanding personal obligations. This loan was evidenced by eleven notes of $20,000 each and one note of $30,000, payable serially each three months, beginning August 1, 1935, with 6 percent interest. The notes were made payable to the order of H. E. Neave, trustee, or his successor, and petitioner pledged 1,230 shares of the Tennessee Co. stock as collateral. By the terms of the agreement petitioner sold to the Howard Co. 300 shares of the Tennessee Co. stock for a total consideration of $100. The agreement further provided that, if petitioner were unable for any cause to pay the principal or interest on any of the notes totaling $250,000 as they fell due, the Howard Co. would have the option to purchase petitioner's remaining 1,230 shares of Tennessee Co. stock at the price of $500,000, applying a part of such purchase price on the unpaid balance of the $250,000 loan.

On October 1, 1936, the balance due by petitioner to the Howard Co. was $150,000, represented by the last seven of the serial notes described above, maturing quarterly from November 1, 1936, to May 1, 1938, inclusive. An agreement was executed on October 1, 1936, by petitioner, Press-Scimitar, and the Howard Co. which recited that Press-Scimitar was the assignee of the Howard Co. under the contract of April 30, 1935, and that it desired to purchase and petitioner desired to sell all of his remaining 1,230 shares of Tennessee Co. stock. At that time petitioner was personally indebted to Commercial Appeal, Inc., all of the stock of which was owned by the Tennessee Co., in the amount of $280,000. The Howard Co. agreed to lend petitioner this amount in cash for the purpose of paying his debt. At the same time the Howard Co. canceled petitioner's seven notes remaining unpaid on the previous loan, and petitioner executed eleven new notes, the first in the amount of $30,000 and the other ten in the amount of $40,000 each, an aggregate of $430,000, equaling the total of the unpaid balance of the previous loan ($150,000) and the new loan ($280,000). The notes were payable on January 2 of each year from 1937 to 1947, inclusive, with 6 percent interest.

The selling price of the 1,230 shares of Tennessee Co. stock to Press-Scimitar was $965,000, payable as follows:

I. Amounts to be paid without interest ($535.000);

a. $74,000 in cash on or before October 9, 1936;

b. $66,000 in cash on April 1, 1937;

c. $295,000 in ten installments on January 2 of the years 1938 to 1947, inclusive, the first installments in the amount of $43,000 and the rest in the amount of $28,000 each; and

d. $10,000 on June 1 of the years 1938 to 1947, inclusive, if the net income of the Commercial Appeal, Inc. amounted to $250,000 each year or $2,500,000 for the ten-year period.

II. Amounts to be paid with interest ($430,000):

a. $430,000 in 11 installments on January 2 of the years 1937 to 1947, inclusive, the first installment being $30,000 and the rest $40,000 each, with interest at 6 percent per annum.

The agreement provided as follows:

Hammond shall give Press-Scimitar, or its nominee to be selected by Press-Scimitar in its entire discretion, an irrevocable Power-of-Attorney * * * to receive and receipt for all payments to Hammond under this contract (except the initial payment of Seventy-four Thousand ($74,000.00) Dollars) and to use the proceeds of the payments of interest and principal installments of said Four Hundred and Thirty-Thousand ($430,000.00) Dollars to be paid Hammond over said eleven year period to make the interest and principal payments due on * * * notes * * * made by Hammond to the order of The Roy W. Howard Company, bearing interest at the rate of six (6%) percent per annum payable quarterly, * * * so that interest shall be paid on all of said notes as the same fall due out of the interest receipts on the unpaid principal balance of said total sum of Four Hundred and Thirty Thousand ($430,000.00) Dollars and so that the principal payments received and paid will be as shown on the following schedule:

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