Stanton v. Commissioner of Internal Revenue, 6060.

• Decision Date: 28 July 1938
• Docket Number: No. 6060.,6060.
• Citation: 98 F.2d 739
• Parties: STANTON et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

98 F.2d 739 (1938)

STANTON et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 6060.

Circuit Court of Appeals, Seventh Circuit.

July 28, 1938.

Herbert Pope and Benjamin M. Price, both of Chicago, Ill., for petitioners.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Warren F. Wattles, Sp. Assts. to Atty. Gen., for respondent.

Before SPARKS and TREANOR, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

This petition for review of a decision of the Board of Tax Appeals raises the question of the year in which a gain was realized from the exchange of certain securities by petitioners' decedent. The Board found that the exchange took place in 1924 rather than in 1923 as claimed by petitioners, hence the transaction must be taxed according to the law in effect for the year 1924. Petitioners are the executors of the estate of the taxpayer, George C. Rew, who died June 10, 1924.

We state the facts as found by the Board. In 1923, decedent was the owner of a block of 6,150 shares of the preferred stock of the Calumet Baking Company, having a cost base of $57,370, which he knew were to be retired in January, 1924, for approximately $650,000. He consulted counsel to determine whether there was any way of avoiding the payment of the large income tax which might result from the transaction. He was advised that if the stock were exchanged for securities which had no "readily realizable market value," the transaction would be non-taxable under the Revenue Act of 1921, applicable to income of 1923. On December 31, 1923, he endeavored to effect such an exchange, but since the day was practically a holiday it was impossible to work out all the details of the exchange. In contemplation of it, however, he endorsed and delivered to a firm of investment bankers, hereafter referred to as Peabody, his certificates for the shares in Calumet, and Peabody signed an agreement pertaining to the exchange. This agreement which had been prepared by decedent's attorney provided that "Rew agrees to exchange the shares of stock" for "certain securities detailed in the attached schedule designated as `Schedule A.'" The original schedule could not be located at the time of the hearing, nor was a copy available, but the evidence as to its contents indicated that it contained block designations of approximately thirty different kinds or issues of bonds which Rew would accept in exchange for his stock, "`a general designation to be later superseded by details as to numbers and maturity and amounts.'" In order to secure the performance of its part of the agreement to deliver to decedent blocks of securities which would yield a 7% return on his investment, Peabody Company further agreed to transfer to decedent's account for safekeeping with it, three blocks of bonds having an aggregate par value of $678,500. This was shown on its books as having been done, but in fact, the bonds were not physically set aside for decedent, and no bonds were actually deposited in safekeeping for him on that date or at any time prior to January 15, 1924, although Peabody did have in its inventory an amount of each of the bonds in excess of the amounts it agreed to deposit in safekeeping. The transaction was entered on the books of Peabody as an exchange on December 31, 1923, of decedent's certificate for three blocks of bonds, and the stock was listed among its assets in its inventory as of that date. But it was understood that decedent was not to retain those bonds but was to return them when he received the bonds originally contemplated.

The preferred stock of Calumet was called for retirement January 15, 1924. Meantime, the certificate had not been surrendered for transfer on the books of the company, hence the check for $650,000 to cover the retirement, and a second check for $10,762 for accrued dividends were issued to decedent on January 15, 1924, and he thereupon endorsed both to Peabody. On that same date, Peabody wrote decedent as follows: "We take from you the following bonds: (listing the three blocks it had agreed to hold in his name as security)" and "in exchange for same we give you certain other bonds as listed on following pages (listing the thirty blocks of bonds then delivered to decedent)." On that date, Peabody entered a sales voucher in its records showing on its books for the first time the transfer to decedent of the thirty securities, most of which were also shown in the schedule attached to the agreement of December 31, 1923. The securities shown in the sales voucher had a fair market value on January 15, 1924, of $660,272, including accrued interest. The communication of January...