Penn v. Robertson
| Decision Date | 07 October 1940 |
| Docket Number | No. 4611.,4611. |
| Citation | 115 F.2d 167 |
| Parties | PENN et al. v. ROBERTSON, Collector of Internal Revenue. |
| Court | U.S. Court of Appeals — Fourth Circuit |
COPYRIGHT MATERIAL OMITTED
L. P. McLendon, of Greensboro, N. C. (A. L. Brooks, of Greensboro, N. C., Paul P. Cohen, of Niagara Falls, N. Y., and Norman Block, of Greensboro, N. C., on the brief), for appellants and cross-appellees.
Joseph M. Jones, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Sp. Asst. to Atty. Gen., and Carlisle W. Higgins, U. S. Atty., and Bryce R. Holt, Asst. U. S. Atty., both of Greensboro, N. C., on the brief), for appellee and cross-appellant.
Before PARKER and DOBIE, Circuit Judges, and CHESNUT, District Judge.
The Commissioner of Internal Revenue made deficiency assessments for individual income taxes against the estate of Charles A. Penn of North Carolina in the amount of $12,369.50, plus interest for the calendar year 1930; and in the amount of $83,641.42, plus interest for the calendar year 1931 to October 22, when Charles A. Penn died. The executors of the estate paid these taxes, duly but unsuccessfully petitioned for a refund, and thereafter filed suit to recover them from the Collector in the Middle District of North Carolina. The district judge, sitting without a jury, found for the Collector with respect to the 1930 tax, except for a minor item; but found for the plaintiff with respect to the 1931 taxes; and entered judgment for the taxpayers in the amount of $93,226.06, with interest. Both parties have appealed.
A minor part of the tax controversy related to deductions from income made by the taxpayer in the amount of $14,725 for the year 1930, and $12,271 for 1931, for travel and entertainment expenses. The district judge determined that these items were properly allowable as deductions for the respective years, and the Collector does not now further question them. The matter still in controversy is whether the taxpayer received any taxable income as the result of a transaction entered into between him and the American Tobacco Company, a New Jersey corporation, with respect to the allotment or purchase of 10,000 shares of stock of the Company, initiated in 1929 but rescinded by the mutual agreement of the parties in 1931 on the basis of no profit or loss to either party. The circumstances of this transaction will now be stated in more detail.
The American Tobacco Company is a large and financially successful corporation having a national and international business in the manufacture and sale of cigarettes and other forms of tobacco. For many years prior to 1929, Charles A. Penn had been and until his death continued to be an active vice-president and director of the Company, principally in charge of production. For some years before his death he received a very large fixed salary and in addition, under a by-law of the Company applicable to himself and other officers, a contingent interest in the net profits of the business. His aggregate salary, fixed and contingent, from the Company and its subsidiary, amounted to $372,654.29 for 1930 and $587,171.29 for 1931. With other officers and employes he had participated prior to 1929 in an "employes' stock benefit fund" originally created by the directors of the Company in 1914. The nature and operation of this fund is not here important except to note that Penn was in receipt of large pecuniary benefits therefrom. This fund had been originally created and continued by the directors with amendments apparently without authority from the stockholders, although by Chapter 175 of the New Jersey Laws of 1920, N.J.S.A. 14:9-1 et seq., it was provided that a plan for the participation of employes in the purchase of stock or in the profits of the corporation must be first formulated by the directors and approved by two-thirds of each class of stockholders represented and voting thereon.1
On October 16, 1929, the directors of the Company passed a resolution for the allotment or sale of a further amount of stock of the Company to officers and employes. This was known as the stock allotment plan of 1929 which is involved in the present controversy. By the resolution, the president of the Company was authorized to allot 60,000 shares of the common stock of the Company among "valued employes" on the basis of selling the stock to the allottees at the previous cost price thereof to the Company. This cost price was then estimated to average not more than $175 per share, while the then market price of the stock was $222 per share. The allotment was to be made by the president "to such officers and * * * such employes and upon such terms as may in his opinion be deemed to the best interest of the Company in promoting and encouraging greater efficiency, more harmonious and enthusiastic cooperation and greater endeavors toward the welfare of the Company". Pursuant to this resolution the president of the Company immediately allotted 51,750 shares of the stock, of which 5,250 shares were allotted to employes who were not directors, 7,250 shares to directors who were not present at the meeting, and 37,250 shares to the directors present at the meeting, including about 15,000 shares allotted by the president to himself. The market price for the stock so allotted to the directors present at the meeting (the president not voting) was nearly two million dollars greater than the allotment price. This employes' stock allotment plan was never submitted to the stockholders for their approval.
Under the plan the president allotted 10,000 shares of the stock to Charles A. Penn. The transaction was put in the following form: Penn signed a demand note to the treasurer of the Company for $1,722,500 with 6% interest, and deposited the certificates for the stock in his name endorsed in blank with the treasurer as collateral. The note provided that upon Penn's death or termination of official relations to the Company it should mature. In a contemporaneous letter from the president to Penn, the latter was advised that he would be charged with interest on the note at a fair rate to be decided by the treasurer, and the dividends on the stock would be credited to the note. Penn was at liberty to pay the amount due on the note and take up the stock, but he was further advised by the letter that so long as he allowed the stock to remain with the treasurer the note would be further credited with "the amount proportionately accruing to you from the employes' stock purchase fund" above referred to; and if the stock was withdrawn, Penn's participation in the fund would cease at the end of the calendar year preceding the withdrawal. It further appeared from testimony in the case that it was the definite understanding of all the allottees of the stock that their notes given for the purchase price would in due course of time be fully paid from the credits on the note arising from dividends on the stock and benefits accruing from the employes' stock purchase fund; and further that a sale of the stock by an allottee would doubtless result in his prompt dismissal as an employe of the Company.
In June 1930 the directors of the Company proposed another and further stock subscription plan for officers and employes which was submitted to and approved by the requisite vote of the stockholders on June 28, 1930. Under this on January 28, 1931, the directors authorized a sale of 56,712 shares of stock of the par value of $25 per share, the market price thereof then being $112. .2
On February 16, 1931, Richard Reid Rogers, a stockholder of the Tobacco Company, filed a suit in a New York State Court which attacked the validity of the 1930 plan; and on February 20, 1931, he instituted in the same court a second suit with the same objective in which Penn was named as a party defendant. In consequence of these suits the directors of the Company deemed it advisable to modify the form of the 1929 plan by substituting the Guaranty Trust Company of New York in place of the treasurer of the company as payee of the stock purchase notes given by Penn and others under the 1929 plan. Pursuant thereto Penn signed a new demand note to the Guaranty Trust Company dated March 30, 1931, in the amount of $1,377,025.58 with interest at 4% secured by the stock as collateral; but it was understood that the prior arrangement between Penn and the Company with respect to credits on the note should continue. When this transfer of the note was made the treasurer of the Company for "accounting convenience" calculated the amount due from Penn on the note as of December 31, 1930, and adjusted the dividend credit and interest charge to March 30, 1931, and paid to Penn by check the difference in his favor in the amount of $31,498.14.
After March 30, 1931, additional actions were instituted by Rogers attacking the validity of other bonus and stock purchase plans of the Company. Six suits in all were instituted by him. One of these filed October 23, 1931, against the Tobacco Company and its president directly attacked the 1929 plan and demanded that the president account for benefits received by him thereunder. Two of these suits were removed to the Federal Court in New York and subsequently were considered by the Supreme Court on certiorari, resulting in a direction to the District Court to decline jurisdiction in the suits without prejudice to their reinstitution in the courts of New Jersey. Rogers v. Guaranty Trust Co., 288 U.S. 123, 53 S.Ct. 295, 77 L.Ed. 652, 89 A.L.R. 720. See also the same cases in the District Court and in the Circuit Court of Appeals for the Second Circuit; 60 F.2d 106 and 60 F.2d 114; and the related cases in Rogers v. Hill, 53 F.2d 395, and Id., 60 F. 2d 109.
As a result of the...
To continue reading
Request your trial
-
Lewis v. O'MALLEY
...requires the determination of income at the close of the taxable year without regard to the effect of subsequent events." Penn v. Robertson, 4 Cir., 115 F.2d 167, 175. This court has not pursued that declaration to the extremity of disregarding altogether and in every relation events transp......
-
Helvering v. Cannon Valley Milling Co.
...as they had been before that time. Guaranty Trust Co. v. Commissioner, 303 U.S. 493, 498, 58 S. Ct. 673, 82 L.Ed. 975; Penn v. Robertson, 4 Cir., 115 F.2d 167, 173; Griffin v. Smith, 7 Cir., 101 F.2d 348, certiorari denied, 308 U.S. 561, 60 S.Ct. 73, 84 L.Ed. 471; Saunders v. Commissioner, ......
-
Scallen v. Commissioner
...rescinded and the taxpayer accepts reconveyance of the property and returns the buyer's funds. Penn v. Robertson 40-2 USTC ¶ 9707, 115 F.2d 167 (4th Cir. 1940). We agree with respondent's statement of the law, but we do not agree that a rescission occurred on these Under Minnesota law, resc......
-
Anderson v. Bowers
...The opinion of the Circuit Court of Appeals, 170 F.2d 676, 678, after quoting the above, said: "We applied this rule in Penn v. Robertson, 4 Cir., 115 F.2d 167, where it was held that a taxpayer must include as taxable income monies received or credited to him in the tax year under a stock ......
-
Before It's Too Late: Reconsidering The IRS Relief For Madoff Losses
...right, which perfectly describes reported phantom income under a Ponzi scheme. Rev. Rul. 68-153, 1968-1 C.B. 371. 22Penn v. Robertson, 115 F.2d 167 (4th Cir. 1940). See also Barker v. Magruder, 95 F.2d 122 (D.C. Cir. 1938) (claim of right doctrineapplies to an accrual of income though legal......
-
The Income Tax Rescission Doctrine - The Codes 'Etch-A-Sketch' Tax Planning Tool
...under the terms of the contract of sale constituted a successful rescission for federal income tax purposes. Relying on Penn v. Robertson, 115 F.2d 167 (4th Cir. 1940), the IRS concluded, where the rescission placed the seller and buyer at the end of the taxable year of sale in the same pos......
-
EXECUTIVE PAY CLAWBACKS AND THEIR TAXATION.
...million bonus. But it is likely that this technique would have the same tax consequences as explicit repayment. (60.) Penn v. Robertson, 115 F.2d 167, 175 (4th Cir. 1940) ("rescission" of money received "before the close of the calendar year[] extinguished what otherwise would have been tax......
-
Erasing the Past Tax Rescission and the Ability to Undo Completed Transactions for Federal Tax Purposes
...and Revenue Ruling 80-58 The tax rescission doctrine owes its foundational roots to the Fourth Circuit’s decision in Penn v. Robertson, 115 F.2d 167 (4th Cir. 1940). In Penn, the board of directors of American Tobacco Company approved a stock benefit fund for officers without shareholder ap......
-
Executive compensation, fringe benefits and employee business expense reimbursements.
...60-31, 1960-1 CB 174. (20)Sec. 457. (21)IRS Letter Ruling 9104039 (10/31/90). (22)Rev. Rul. 80-58, 1980-1 CB 181. See also Stella E. Penn, 115 F2d 167 (4th Cir. 1940)(25 AFTR 940, 40-2 USTC [P] 9707). (23)William G. Campbell, 8th Cir., 1991 (68 AFTR2d 91-5425, 91-2 USTC [P] 50,420), aff'g a......
-
Presto Change-o: Unwinding Transactions in the Face of Uncertainty; It's all about the rescission doctrine.
...in this article are those of the authors and are not necessarily those of Alvarez S Marsal Taxand and/or its clients. Endnotes (1) 115 F.2d 167 (4th Cir. (2) 1980-1 C.B. 181. (3) Revenue Procedure 2021-3 Section 3.02(8). (4) See, for example, Crellin's Estate v. Comtrir, 203 E2d 812 (9th Ci......