Priddy v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 06 December 1940
• Docket Number: 96049,Docket No. 93255,97845.
• Citation: 43 BTA 18
• Parties: WALTER M. PRIDDY AND SWANNANOA H. PRIDDY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. PHILLIP HARRY LIPSTATE AND GERTRUDE FABER LIPSTATE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. C. C. CREWS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

43 B.T.A. 18 (1940)

WALTER M. PRIDDY AND SWANNANOA H. PRIDDY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PHILLIP HARRY LIPSTATE AND GERTRUDE FABER LIPSTATE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

C. C. CREWS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 93255, 96049, 97845.

Board of Tax Appeals.

Promulgated December 6, 1940.

Harry C. Weeks, Esq., and R. B. Cannon, Esq., for the petitioners.

D. D. Smith, Esq., and F. H. Wigsell, Esq., for the respondent.

The respondent has determined deficiencies in income tax for the years 1935 and 1936 as follows:

                ------------------------------------------------------------------------------
                                                          | Docket No. |   1935     |  1936
                ------------------------------------------|------------|------------|---------
                Walter M. Priddy and wife _______________ |     97845  | $3,969.50  |  $958.14
                Phillip Harry Lipstate and wife _________ |     93255  |    631.73  | ________
                C. C. Crews _____________________________ |     96049  |    332.35  | ________
                                                          |            |            |
                ------------------------------------------------------------------------------
                

One issue is common to all three petitioners, namely, whether the respondent erred in including in their taxable income, as additional compensation for services rendered, the fair market value of certain shares of stock which were delivered to them in 1935 by their employer, the Sabine Royalty Corporation. Two additional issues are presented in the petition of Walter M. Priddy: First, whether he sustained a deductible loss in 1935, either ordinary or capital, as the result of a sale under foreclosure of certain real property which he had previously conveyed to creditors in 1927 or 1928; and, second, whether the respondent erred in disallowing the deduction of a portion of certain business expenses claimed by him to have been incurred and paid in 1935 and 1936. One other issue is presented in the petition of Phillip Harry Lipstate, namely, whether he reported in his taxable income all of the commissions received by him in 1935.

FINDINGS OF FACT.

All of the petitioners are residents of the State of Texas. The petitioners Priddy and Crews filed their income tax returns with the collector for the second district of Texas at Dallas, Texas.

On or about October 1, 1931, the Sabine Royalty Corporation was chartered under the laws of the State of Delaware, with authorized capital of 50,000 shares of no par value common stock. It was organized by the petitioners Walter M. Priddy, Phillip Harry Lipstate, and C. C. Crews and several other individuals, for the purpose of acquiring oil properties, oil royalties, and oil payments and to trade therein. Its office and principal place of business is at Tyler, Texas.

At the organization meeting held by its directors on October 8, 1931, a resolution designated as "Motion No. 12" was offered and adopted, which reads as follows:

Mr. Chairman, I move that it be spread upon the minutes of this, our first directors' meeting, the understanding with Mr. W. M. Priddy, who is taking the leading part in organizing this company, that ten per cent of the first authorized common stock issue be held in the treasury to be issued to him, or as he may direct, as a carried interest, as soon as the common stock dividends pay us, the original investors, our cost of $4 per share.

At the time this resolution was adopted it was mutually understood by the interested parties that out of the shares of stock to be thus held in the treasury for the petitioner Priddy, certain of the said shares, if and when issued, would be delivered to other individuals who were assisting in the organization and promotion of the corporation. It was agreed that petitioner Lipstate would be entitled to receive 1,000 shares, provided he put forth his best efforts in promoting the business of the corporation, became its secretary and treasurer, and served on its executive committee. It was also agreed that petitioner Crews would be entitled to receive 300 shares, provided he served as president of the corporation, as a member of the executive committee, and used his influence in promoting the business of the corporation. Several other individuals who were assisting in the organization were to receive smaller amounts of stock.

Also at the organization meeting another resolution was adopted directing that after one-half of the authorized common and preferred stock of the corporation had been sold the original subscribers would be given an opportunity to subscribe pro rata for the remaining one-half of the common stock at the original price of $4 per share before it was offered to others, even though the stock at that time might be regarded as worth much more.

At a meeting of the stockholders of the Sabine Royalty Corporation of Delaware held on May 12, 1932, the following resolution was offered and adopted:

It appears that Motion 12 of the minutes of the meeting of the organizing directors held October 8, 1931, was not clear. For the purpose of clearing up the matter, I move that it be understood that the ten per cent carried interest referred to will apply only in proportion to the amount of outstanding common stock, and such ten per cent carried interest shall not be subject to delivery until the dividends of the original investors and the carried interest shall amount to $4 per share, or until W. M. Priddy pays in sufficient to make the total of dividends and cash payments to apply on the carried interest to amount to $4 per share. All purchasers of common stock prior to June 1, 1932, are to be regarded as original investors.

On February 2, 1933, there had been issued and on that date there were outstanding 28,777 shares of common stock of the Sabine Royalty alty Corporation of Delaware. This did not include the shares of stock to which petitioners and the other individuals would be entitled upon the happening of the contingencies referred to in the above resolutions. Those shares remained unissued.

On February 24, 1933, the Sabine Royalty Corporation was incorporated under the laws of the State of Texas, with the same character privileges as had been granted to it by the Delaware charter. All of the assets of the Delaware corporation were transferred to and all of its liabilities were assumed by the new Texas corporation. The stockholders of the Delaware corporation surrendered their certificates of stock and received in exchange an equal number of shares in the Texas corporation. The declared or stated value of the no par value common stock of the new corporation was fixed at $2 per share, resulting in a total declared or stated capital of $100,000. The authorized but unissued stock in the Delaware corporation remained authorized but unissued by the Texas corporation.

On November 10, 1933, a meeting of the executive committee of the Sabine Royalty Corporation of Texas was held, at which time the following resolution was offered and adopted, subject to the ratification by and approval of the board of directors and stockholders:

WHEREAS, W. M. Priddy of Wichita Falls, Texas, was largely instrumental in the organization of the Sabine Royalty Corporation, and it was understood that he should receive, conditioned upon the performance of the work which he was to do, certain common stock; and whereas the Sabine Royalty Corporation, Texas, took over the affairs of said original company, in recognition of the rights of said W. M. Priddy, and whereas there has never been a resolution adopted by the directors of the Sabine Royalty Corporation, Texas, expressing such agreement, now be it resolved that there shall be held in the treasury 10 percent of the first authorized common stock, to remain the property of the corporation until the time and upon the contingency hereinafter mentioned, to be delivered to W. M. Priddy only upon full compliance with the following conditions: That he will continue the management of the affairs of the Sabine Royalty Corporation upon a nominal salary to be fixed from time to time, and if and when the common stock dividends paid to the original investors have equaled the sum of $4 per share, said 10 per cent of the stock shall be delivered to W. M. Priddy, provided that said W. M. Priddy shall continue as aforesaid until such time that said dividends shall equal $4 per share, but provided, however, that should the said W. M. Priddy die, or become physically or mentally unable to further perform his duties in looking after affairs of said Sabine Royalty Corporation, so that the failure so to do shall not be due to any fault on his part, said stock shall nevertheless be delivered to his then living children, if and when the dividends aforesaid equal the sum of $4 per share to the original investors.

This resolution was subsequently ratified and approved by the board of directors and stockholders.

Prior to February 24, 1933, the Sabine Royalty Corporation of Delaware had paid cash dividends aggregating 90 cents per share upon issued and outstanding stock. Thereafter the Texas corporation continued to pay cash dividends monthly or oftener. On July 31, 1935, it paid a cash dividend of 10 cents per share, which brought the aggregate amount of the dividends per share paid to that date on the stock of both the Delaware corporation and the Texas corporation to a total of $3.95. Under date of August 31, 1935, the Texas corporation paid a further cash dividend of 10 cents per share, which brought the 1935 dividends up to 85 cents per share and made an aggregate of $4.05 in dividends paid upon issued and outstanding stock.

On August 29, 1935, the petitioner Priddy wrote a letter to the Sabine Royalty Corporation calling attention to the fact that the August dividend would bring the aggregate dividends up to $4.05 per share and that the 5,000 shares which were to be...