Heiner v. Gwinner

• Decision Date: 23 December 1940
• Docket Number: 7031.,No. 7025,7025
• Citation: 114 F.2d 723
• Parties: HEINER, Former Collector of Internal Revenue, v. GWINNER. GWINNER v. HEINER, Former Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Third Circuit

114 F.2d 723 (1940)

HEINER, Former Collector of Internal Revenue, v. GWINNER.

GWINNER v. HEINER, Former Collector of Internal Revenue.

Nos. 7025, 7031.

Circuit Court of Appeals, Third Circuit.

September 9, 1940.

Writ of Certiorari Denied December 23, 1940.

John A. McCann, W. A. Seifert, William Wallace Booth, and Thomas P. Johnson, all of Pittsburgh, Pa. (Reed, Smith, Shaw & McClay, of Pittsburgh, Pa., of counsel), for plaintiff.

George Mashank, U. S. Atty., and Elliott W. Finkel, Asst. U. S. Atty., both of Pittsburgh, Pa., Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Michael H. Cardozo, IV, Sp. Assts. to the Atty. Gen., for defendant.

Before MARIS, JONES, and GOODRICH, Circuit Judges.

Writ of Certiorari Denied December 23, 1940. See 61 S.Ct. 396, 85 L.Ed. ___.

MARIS, Circuit Judge.

These cross-appeals are from a judgment of the District Court for the Western District of Pennsylvania, in a suit brought by the plaintiff to recover income tax alleged to have been overpaid by him for the year 1930. We shall consider first the defendant's appeal. The pertinent facts involved in it are as follows:

In 1930 Duquesne Steel Foundry Company, hereinafter called Duquesne, and two other corporations reorganized and transferred their assets to Continental Roll & Steel Foundry Company, hereinafter called Continental. The plaintiff owned 625 shares of Duquesne stock which he had acquired prior to March 1, 1913. On that date it had a fair market value of not less than $127.50 per share which was greater than its cost to the plaintiff. In accordance with the reorganization plan the plaintiff received for each share of his Duquesne stock $96.33 in cash. In addition certificates for preferred and common stock of Continental were issued in his name and delivered to an escrow agent. Endorsed upon these certificates was the legend that the stock could not be sold nor exchanged for a period of one year unless the restriction was terminated by mutual consent of all the parties. Later, but in the same year, the plaintiff was permitted to pledge the preferred stock for a bona fide indebtedness, but the restriction against sale or exchange remained in force.

The plaintiff made his income tax returns on the cash receipts and disbursements basis. In computing his income tax for 1930 he treated the Continental preferred stock as having a fair market value of $94 per share and the common stock as having a fair market value of $27.50 per share. Based upon these valuations he reported in his income tax return for 1930 a capital gain as a result of the exchange of his stock for cash and securities in the new corporation.¹

Thereafter the plaintiff filed a claim for refund alleging that no gain resulted from the stock transaction for two reasons: first, that the Continental stock had no fair market value because of the restriction upon its free transfer, and, second, that the Continental stock was not income to him in 1930 for tax purposes, since it was delivered to the escrow agent and not to him. The Commissioner denied the refund. The district court sustained the taxpayer's contention that the Continental stock had no market value because of the restrictive agreement.

Upon the defendant's appeal the plaintiff relies upon both grounds to sustain the judgment in his favor. In a suit to secure the refund of taxes previously paid the presumption is that the taxes were rightly collected upon assessments correctly made by the Commissioner. The burden is upon the taxpayer to prove all the facts necessary to establish the illegality of the collection. Niles Bement Pond Co. v. United States, 281 U.S. 357, 361, 50 S.Ct. 251, 74 L.Ed. 901. The assessment in the present case was based upon market values reported by the taxpayer in his return. The burden was upon him in the district court to show either that no market value in fact existed or that the values thus reported by him were excessive. He sought to sustain the former proposition by offering in evidence the restrictive agreement to which we have referred.

The courts have on several occasions allowed proof of the fair market value of stock despite the fact that there was a restriction upon its free transfer. Fesler v. Commissioner, 7 Cir., 38 F.2d 155, certiorari denied, 281 U.S. 755, 50 S.Ct. 409, 74 L.Ed. 1165; Newman v. Commissioner, 10 Cir., 40 F.2d 225, rehearing denied, 10 Cir., 41 F.2d 743, certiorari denied, 282 U.S. 858, 51 S.Ct. 33, 75 L.Ed. 760; Wright v. Commissioner, 4 Cir., 50 F.2d 727, certiorari denied, 284 U.S. 652, 52 S.Ct. 32, 76 L.Ed. 553. The restriction upon the sale or exchange of stock of course postpones the right of the owner of the stock to transfer title until the expiration of the period or its earlier termination and as a practical matter results in limiting the number of prospective purchasers to those who do not desire immediate delivery. In our opinion, however, it does not operate of and by itself to deprive the stock of a market value. If the assets and business of Continental appeared to prospective investors to be such as to make an investment in Continental lucrative there is no reason to believe that they would have been unwilling to pay some fair price for the stock, even though its delivery must necessarily have been postponed a year.

The plaintiff relies upon Helvering v. Tex-Penn Co., 300 U.S. 481, 57 S.Ct. 569, 81 L.Ed. 755; Propper v. Commissioner, 2 Cir., 89 F.2d 617, and Schuh Trading Co. v. Commissioner, 7 Cir., 95 F.2d 404, as decisive authority for the position he takes that a restriction upon the free sale of stock deprives it of a fair market value. In the Tex-Penn case, however, there was an element present which was deemed essential to the court's conclusion and which is lacking in the present case, namely, that the stock encumbered by the restriction was of a highly speculative character. In that case Mr. Justice Butler said (300 U.S. page 499, 57 S.Ct. page 577, 81 L.Ed. 755): "The court is also of opinion that the judgments must be affirmed upon the ground that in the peculiar circumstances of this case, the shares of Transcontinental stock, regard being had to their highly speculative quality and to the terms of a restrictive agreement making a sale thereof impossible, did not have a fair market value, capable of being ascertained with reasonable certainty, when they were acquired by the taxpayers."

There is no evidence in the present case that the Continental stock was speculative or hazardous in character. We do not think that the Tex-Penn case requires us to hold that a mere restriction against sale for one year, without more, as a matter of law deprives stock of all market value. The restriction in the Propper case was for five years and there were other facts present in that case which sufficiently distinguish it from this one. Insofar as the Schuh Trading Company case may be considered as authority for the plaintiff's position we find ourselves unable to follow it, for the reasons already stated.

To sustain his alternative claim the plaintiff offered...