Timberlake v. Commissioner of Internal Revenue

• Decision Date: 08 December 1942
• Docket Number: No. 5012.,5012.
• Citation: 132 F.2d 259
• Parties: TIMBERLAKE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

132 F.2d 259 (1942)

TIMBERLAKE v. COMMISSIONER OF INTERNAL REVENUE.

No. 5012.

Circuit Court of Appeals, Fourth Circuit.

Argued November 20, 1942.

Decided December 8, 1942.

Richard E. Thigpen, of Charlotte, N. C., for petitioner.

William A. Clineburg, Sp. Asst. Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Helen R. Carloss, Sp. Assts. Atty. Gen., on the brief), for respondent.

Before PARKER and SOPER, Circuit Judges and COLEMAN, District Judge.

SOPER, Circuit Judge.

This petition for a review of a decision of the Board of Tax Appeals raises the question whether J. E. Timberlake, the taxpayer, received taxable income in 1936, when he purchased from a closely held corporation, of which he was a stockholder, shares of stock in another corporation at less than their fair market value.

Thomas and Howard Company of Columbia, South Carolina, hereinafter called the Columbia Company, bought 775 shares of the stock of Thomas and Howard Company of Charleston, South Carolina, engaged in the wholesale grocery business, hereinafter called the Charleston Company, for $77,500 in 1928, and thereafter carried its investment on its books at cost. On November 5, 1936, the directors of the Columbia Company formally authorized the sale of this stock to its stockholders at $100 per share, and four days later the sale was consummated and the stock was transferred to four persons, who owned all of the Columbia stock, in substantial proportion to their holdings, varied only to avoid the issuance of fractional shares. In this transaction the taxpayer herein, who was one of the stockholders of the Columbia Company, bought 184 shares of the stock of the Charleston Company for $18,400. The Commissioner of Internal Revenue held that the stock was worth $200 per share at that time, and that by the acquisition thereof the taxpayer in legal effect received a taxable dividend from the Columbia Company in the sum of $18,400. On review of this decision, the Board approved the Commissioner's determination in principle, but found as a fact that the value of the stock at the time of the purchase was $150 per share, and accordingly reduced the taxpayer's deficiency.

The Commissioner also found that the Columbia Company had a substantial surplus on January 1, 1936 and on December 31, 1936, out of which dividends could have been paid; and the Board specifically found that on December 31, 1936 the Company, after the payment of cash dividends and federal income tax, had a surplus of $263,618.43.

The taxpayer contends, in the first place, that the value of the stock did not exceed the purchase price at the time of the sale, resting his position largely on the opinion of a witness engaged in a similar business who was familiar with the operations of the corporations involved in this case. He based his opinion in large measure upon the average earning of the Charleston Company of $10,575.09 for the years 1928 to 1936, and a book value of the company on December 31, 1936 of $168.44 per share, consisting in great part of accounts receivable of uncertain value. But it cannot be denied that there was, to say the least, substantial evidence to support the Board's finding on this point, for the evidence showed that the Charleston Company paid a 10% cash dividend in January, 1936 and a 40% cash dividend in December, 1936; that its stock had a book value of $200 per share in November, 1936; that 68 of its 1000 shares were sold for $150 per share in February, 1937; and that the November sale at $100 per share, now under consideration, represented a transfer of corporate assets at cost by the Columbia corporation to the four persons who held all of its stock. These findings of fact are binding on this court, and hence we direct our attention to the Board's conclusion that this transfer of assets by the Columbia Company at less than their market value involved a distribution to its stockholders in the nature of a taxable dividend. The sweeping definition of gross income in § 22(a) of the Revenue Act of 1936, Ch. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 825, which finds its counterpart in other revenue acts, includes gains, profits and income from dividends or from any source whatsoever. Treasury Regulation 94, Article 22(a)-1 provides in part as follows:

"Art. 22 (a)-1. What included in gross income.

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"If property is transferred by a corporation to a shareholder, or by an employer to an employee, for an amount substantially less than its fair market value, such shareholder of the corporation or such employee shall include in gross income...