Helvering v. Bartlett

• Citation: 71 F.2d 598
• Decision Date: 11 June 1934
• Docket Number: No. 3625.,3625.
• Parties: HELVERING, Com'r of Internal Revenue, v. BARTLETT.
• Court: U.S. Court of Appeals — Fourth Circuit

71 F.2d 598 (1934)

HELVERING, Com'r of Internal Revenue, v. BARTLETT.

No. 3625.

Circuit Court of Appeals, Fourth Circuit.

June 11, 1934.

Lucius A. Buck, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for petitioner.

J. Kemp Bartlett, of Baltimore, Md. (Bartlett, Poe & Claggett and C. Ross McKenrick, all of Baltimore, Md., on the brief), for respondent.

A. Mitchell Palmer, of Stroudsburg, Pa., Wm. D. Harris, of Washington, D. C., and Francis V. Barstow, of Boston, Mass., amici curiæ.

Before PARKER and NORTHCOTT, Circuit Judges, and PAUL, District Judge.

PARKER, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals. The Commissioner of Internal Revenue made a deficiency assessment against J. Kemp Bartlett based on the addition to his income for the year 1929 of the sum of $21,246.60, being the value of 20,830 "rights" to subscribe to stock in the United States Fidelity & Guaranty Fire Corporation, which were allotted him as a stockholder in the United States Fidelity & Guaranty Company. The Board of Tax Appeals disallowed the assessment, and the Commissioner has filed this petition for review. The facts of the case were accurately and succinctly stated by the Board as follows:

"On January 15, 1929, the petitioner Bartlett owned 20,830 shares of common stock of the United States Fidelity & Guaranty Co., hereinafter referred to as the Guaranty Co., a Maryland corporation engaged in the business of issuing fidelity and surety bonds and casualty insurance policies. Stock of the Guaranty Co. was widely distributed throughout the United States and Canada and business was done over that territory through approximately 6,000 agents. In the latter part of 1928 the directors of the Guaranty Co. determined to organize a fire insurance company, since it was not chartered to do such a business, to sell fire insurance through the Guaranty Co.'s agents and to its stockholders. It was determined to organize the new corporation with a capital of $1,000,000 and a paid-in surplus of $3,000,000 by selling stock having a par value of $10 per share at $40 per share. The plan called for selling 100,000 shares of stock, 25,000 of which would be purchased by the Guaranty Co., 25,000 by the stockholders of the Guaranty Co., 25,000 by its agents, and the remaining 25,000 by certain financial institutions and individuals who were to serve as directors of the new company. The plan agreed upon was carried out and on November 27, 1928, the United States Fidelity Fire Corporation, hereinafter referred to as the Fire Co., was chartered under the laws of Maryland.

"At a meeting of the board of directors of the Guaranty Co. on November 21, 1928, the following resolutions were adopted:

"Resolved, that the Company purchase fifty thousand (50,000) shares of the capital stock of the United States Fidelity Fire Corporation of the par value of ten dollars ($10.00) per share, at and for the price of forty dollars ($40.00) per share; and be it further

"Resolved, that there be offered to the stockholders of the company of record as of the 15th day of January 1929, pro rata rights to purchase from the Company twenty-five thousand (25,000) shares of the capital stock of said United States Fidelity Fire Corporation of the par value of ten dollars ($10.00) each, at and for the price of forty dollars ($40.00) per share; and be it further

"Resolved, that the officers of the company be and they are hereby authorized and empowered to do all things necessary in connection with the purchase of said fifty thousand (50,000) shares of such stock and the offering for sale of twenty-five thousand (25,000) shares of said stock to the stockholders, in accordance with the above resolutions.

"On February 5, 1929, the Guaranty Co. paid $1,000,000 to the Fire Co. to cover its subscription to 25,000 shares of stock. Certificates for such stock were issued by the Fire Co. to the Guaranty Co. on April 11, 1929, in blocks of 500 shares each. On February 15, 1929, the financial institutions and individuals paid $1,000,000 to the Fire Co. for 25,000 shares of its stock while on the same day the agents of the Guaranty Co. paid their subscription for 25,000 shares of the Fire Co. stock. The remaining 25,000 shares were purchased by the stockholders of the Guaranty Co. for a total price of $1,000,000 in the following manner: The Guaranty Co. addressed a circular letter to its stockholders, inclosing a subscription warrant entitling the stockholders to subscribe to stock of the Fire Co. The letter set forth the resolutions of the board of directors of the Guaranty Co. on November 21, 1928, and explained that the rights must be exercised on or before February 15, 1929. On or before that date the Guaranty Co. received subscriptions and payment for stock of the Fire Co. in the total amount of 25,000 shares. On February 15, 1929, $1,000,000 was paid over to the Fire Co. by the Guaranty Co. and 25,000 shares of stock were issued by the Fire Co. directly to the subscribing stockholders. The Fire Co. received $4,000,000 for its 100,000 shares of capital stock and started business on March 1, 1929.

"No certificate or certificates were ever issued to the Guaranty Co. representing the 25,000 shares of stock of the Fire Co. which were purchased by the former's stockholders. Lists of such subscribers showing the name and address were prepared by the Guaranty Co. and delivered to the Fire Co. and certificates were issued directly to the subscribers. Those persons who exercised "rights" remitted to the Guaranty Co. and the total amount received by it was then paid over to the Fire Co.

"Rights to subscribe to stock of the Fire Co. were traded in on the Baltimore Stock Exchange prior to February 15, 1929, at prices ranging from 83 cents to $1.20. The petitioner Bartlett exercised his rights to subscribe for shares at a price of $40 per share."

To this statement it should be added that the Commissioner found the fair market value of the "rights" as of the date of the receipt thereof to be $1.02 each, or a total of $21,246.60, and ruled that this amount must be included in the taxpayer's gross income. On January 17, 1933, when the taxpayer testified before the Board of Tax Appeals, he still held the stock in the Fire Company which he had purchased; no dividend had ever been declared or paid upon same; and the shares for which he had paid $40 each were then worth only $6.50. The Board held that the taxpayer had realized no taxable profit or dividend because of the allotment to him of the "rights" to purchase the stock which he had purchased.

We think that this holding of the Board was clearly right. We are not dealing with a case where a stockholder who has received rights to purchase stock sells the rights and thus realizes a profit. If the taxpayer here had sold the rights allotted him, the amount received on such sale would, of course, have been taxable as income. Miles v. Safe Deposit & Trust Co., 259 U. S. 247, 42 S. Ct. 483, 66 L. Ed. 923; Metcalf's Estate v. Commissioner (C. C. A. 2d) 32 F.(2d) 192. But he did not sell the rights. He exercised the option which they conferred upon him to purchase stock in the fire company; and he has as yet realized no profit upon this transaction. The rights were nothing but options to purchase stock, and the fact...