Marks v. United States, 271.

• Decision Date: 18 July 1938
• Docket Number: No. 271.,271.
• Citation: 98 F.2d 564
• Parties: MARKS v. UNITED STATES.
• Court: U.S. Court of Appeals — Second Circuit

98 F.2d 564 (1938)

MARKS v. UNITED STATES.

No. 271.

Circuit Court of Appeals, Second Circuit.

July 18, 1938.

Smyth & Smyth, Jr., and Melvyn Gordon Lowenstein, all of New York City (Herbert C. Smyth, Jr., and George Natanson, both of New York City, of counsel), for appellant.

Lamar Hardy, U.S. Atty., of New York City (Clarence W. Roberts, Asst. U. S. Atty., of New York City, of counsel), for the United States.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The first cause of action, which alone concerns this appeal, is brought by a taxpayer to recover $9,298.41, with interest from December 15, 1930, being a portion of the tax paid on his 1929 income that is alleged to have been "illegally and wrongfully assessed and collected." The only item of income involved is that arising from a sale by the taxpayer in March, 1929, to Alfred Blumenthal of one-fourth of an additional membership in the New York Stock Exchange for the sum of $120,000, of which $100,080 is claimed to have been net profit for that year. The final payment on the 1929 income tax was made on December 15, 1930.

The taxpayer was a member of the New York Stock Exchange. On February 28, 1929, he entered into an agreement with Blumenthal for the sale of the one-fourth membership. Under the rules of the Exchange it was necessary that Blumenthal's membership be listed as fully paid. The transfer took place about March 22, 1929, and, to conform to the rules, the taxpayer issued his own certified check to Blumenthal for $120,000, the face amount of the purchase price, in return for which the latter gave his check to the taxpayer for the same amount. This complied with the rules and established the price of membership. The financial transactions, however, represented no more than an exchange of checks out of which the taxpayer who sold the seat realized nothing. The terms of sale were governed by a socalled subordination agreement which in effect created a purchase money mortgage in which the rights of the mortgagee were subordinated to Stock Exchange creditors. By it Blumenthal promised, subject to its terms, to repay the $120,000 "from time to time, with interest thereon, or on any unpaid balance thereof, at the rate of six per cent from the date hereof, and, in any event, thirty days after the applicant ceases to be a member of the said Exchange and all claims entitled to priority in payment, as herein provided, have been paid in full."

The taxpayer, described as the "lender", agreed with Blumenthal, described as the "applicant", that the lender's right to repayment of the loan "is subordinated to the payment in full of all claims against the applicant, or against any partnership registered on the New York Stock Exchange of which he may be a member, arising out of business transacted by him or by such partnership while he is a member of the New York Stock Exchange, and that in any proceeding involving the application of the assets of the applicant, or of such partnership, to the payment of his or its debts, the claims aforesaid shall be fully paid before the lender shall have a right to any payment on account of the said sum loaned as aforesaid, and that as long as the applicant is a member of the New York Stock Exchange and until all such claims are fully paid, the lender will not institute or maintain any suit or proceeding for the recovery of the said sum loaned as aforesaid or any part thereof."

The subordination agreement also provided that: "Nothing herein contained shall prevent the lender from accepting and retaining voluntary payments made by the applicant or by the partnership of which he may be a member on account of the sum loaned * * *, or as interest thereon, so long as the applicant and any such partnership are solvent and such payments do not impair the ability of the applicant or of such partnership to pay in full the claims entitled to priority in payment as hereinbefore provided."

In the year 1929 Blumenthal paid $45,000 on account of the purchase price of the seat and in 1930 paid the balance of $75,000. In the latter year the taxpayer's return showed a net loss of approximately $106,000 without taking into account any part of the item of $75,000, so that even if the $75,000 were wholly gain there would have been no tax if it was properly assessable only as 1930 income.

The taxpayer filed an income tax return for 1929 and paid a capital gain tax of $12,510 on the difference between the cost, or the value as of March 1, 1913, whichever was greater, of a one-fourth additional membership in the New York Stock Exchange and the price at which it was sold to Blumenthal. The return set forth the property on which the gain was calculated as a "sale of right to membership in N. Y. Stock Exchange". It stated that the property acquired in April, 1922, was sold in March, 1929, that the amount received on the sale was $120,000, that the cost or value as of March 1, 1913, whichever was greater, was $19,920, that the net gain was $100,080, and the tax at 12½% was $12,510.

On June 10, 1932, the taxpayer filed a claim for refund of the tax paid on his 1929 income in which he dealt with the sale on an instalment basis, calculated the gain as $37,530, instead of $100,080, and computed the tax at 12½% as $4,691.25. He stated his claim for a refund as follows:

"In March 1929 the taxpayer sold his right to one-fourth of an additional membership in the New York Stock Exchange for $120,000 reporting a capital gain of $100,080 on the transaction. The taxpayer received only $45,000 in cash during 1929, the balance of $75,000 being represented by a note of the purchaser.

"According to section 44 (b) of the Revenue Act of 1928, if (sic) in the case of a casual sale of personal property * * * for a price exceeding $1,000 where the initial payments do not exceed forty per centum of the selling price, the income may be returned on the installment basis. This basis permits the vendor to return as income that proportion of the installment payments actually received in the taxable year which the total profit realized or to be realized when the property...