Weigl v. Comm'r of Internal Revenue
| Decision Date | 30 May 1985 |
| Docket Number | Docket Nos. 1707-73,1709-73,1726-73,1817-73,1827-73,3430-73,3431-73,953-74,8098-76. |
| Citation | 84 T.C. 1192,84 T.C. No. 66 |
| Parties | LOUIS A. and ALICE A. WEIGL, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
In 1965 through 1967, H. L. Federman & Co. underwrote the issuance of securities for certain companies for which it received commissions ranging from $13,624 to $75,000. At the time of each of the underwritings, H. L. Federman & Co. also received nonqualified options or warrants to purchase stock or other securities of the companies whose securities it was underwriting. The warrants were not traded on an established securities market. They were subject to various restrictions on transferability and generally were not exercisable for a certain period of time. Sometime after H. L. Federman & Co. acquired the warrants, it assigned most of them to its shareholders. In 1968 H. L. Federman transferred his interest in some of the warrants to a foreign situs trust, but he retained significant control over the trust property. HELD: H. L. Federman & Co. received the warrants as compensation for underwriting services rendered. HELD FURTHER, the validity of section 1.61-15(b) and section 1.421-6, Income Tax Regs., is upheld insofar as those regulations, for the years involved herein, provided rules for the valuation of warrants received by underwriters for services rendered. HELD FURTHER: The transfer to the shareholders of the warrants constituted a dividend, taxable to the shareholders at the time a fair market value for the warrants can be determined. HELD FURTHER: The transfer by H. L. Federman of warrants to a foreign situs trust constituted a transfer with a retained interest in the ownership and beneficial enjoyment of the warrants so that the income from the trust is taxable to H. L. Federman under the grantor trust rules of the Internal Revenue Code of 1954, as amended. BURTON W. KANTER, HAROLD J. LIPSTIZ, and CHARLES H. WINKLER, for the petitioners in Docket Nos. 1707-73, 1709-73, 1726-73, 1817-73, 1827-73, 3430-73, 3431-73, and 8098-76. JUDY JACOBS, for the respondent.
LOUIS STERNBACH, for the petitioners in Docket No. 953-74.
1 Cases of the following petitioners are consolidated herewith for trial, briefing and opinion: Joseph and Beatrice E. Mathes, Docket No. 1709-73; Walter C. and Alice C. Crawford, Docket No. 1726-73; H. L. Federman and Co., Incorporated, Docket No. 1817-73; Hyman L. Federman and Sylvia Federman, Docket No. 1827-73; Morris & Ann Leverton, Docket No. 3430-73; Morris & Ann Leverton, Docket No. 3431-73; Lawrence Eisele and Alma Eisele, Docket No. 953-74; and Hyman L. Federman and Sylvia Federman, Docket No. 8098-76.
*: Respondent determined deficiencies in and additions to petitioners' Federal income tax liabilities as follows:
+----------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦Sec. 6653(a)2 ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦Docket No.¦Year¦Deficiency ¦addition to tax¦
+-------------------------+----------+----+------------+---------------¦
¦Louis A. Weigl ¦1707-73 ¦1967¦$178.18 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦and Alice A. Weigl ¦ ¦1968¦1,141.56 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦Joseph Mathes ¦1709-73 ¦1967¦177.13 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦and Beatrice E. Mathes ¦ ¦1968¦1,645.06 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦Walter C. Crawford ¦1726-73 ¦1967¦2,896.81 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦and Alice C. Crawford ¦ ¦ ¦ ¦ ¦
+-------------------------+----------+----+------------+---------------¦
¦H.L. Federman & Co., Inc.¦1817-73 ¦1966¦- - - ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦ ¦1967¦- - - ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦ ¦1968¦1,445,483.79¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦Hyman L. Federman ¦1827-73 ¦1965¦163,241.88 ¦$8,162.09 ¦
+-------------------------+----------+----+------------+---------------¦
¦and Sylvia Federman ¦ ¦1966¦2,272.59 ¦113.63 ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦ ¦1967¦100,889.44 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦ ¦1968¦637,530.87 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦8098-76 ¦1969¦98,643.98 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦Morris Leverton ¦3430-73 ¦1967¦103,842.37 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦and Ann Leverton ¦3431-73 ¦1968¦90,230.97 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦ ¦ ¦1969¦- - - ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦Lawrence Eisele ¦953-74 ¦1969¦25,815.83 ¦- - - ¦
+-------------------------+----------+----+------------+---------------¦
¦and Alma Eisele ¦ ¦ ¦ ¦ ¦
+----------------------------------------------------------------------+
The issues for decision are: (1) Whether the warrants were received by H. L. Federman & Co. (hereinafter ‘Federman Inc.‘) in its own right or as agent and nominee for its shareholders; (2) whether the warrants were received by Federman Inc. solely as an investment in exchange for the purchase price thereof and not as additional compensation for underwriting services rendered; (3) if the warrants were received by Federman Inc. as compensation, when Federman Inc. must recognize and determine the amount of compensation with respect thereto; (4) whether the assignment by Federman Inc. of the warrants to its shareholders constituted the distribution of a dividend to the shareholders; (5) if so, when the shareholders must recognize and determine the amount of dividend income and the amount thereof; and (6) whether petitioner H. L. Federman is taxable on the income of a foreign situs trust under the grantor trust rules.
Questions regarding the valuation of the warrants involved herein have not yet been tried or briefed. If we conclude that the fair market value of any of the relevant securities must be determined, an additional trial session will be held for that purpose, unless a settlement is reached by the parties with regard to the valuation issues.
For clarity, we will first set out general findings of fact that pertain to the background of the issues to be decided. The general findings of fact will be followed by our separate findings of fact and our opinion as to each separate issue.
FINDINGS OF FACT
GENERAL FINDINGS
Some of the facts have been stipulated and are so found.
Federman Inc. had its principal place of business in New York City, when its petition was filed herein. Petitioners Lawrence and Alma Eisele resided in New Jersey when they filed their petition herein. Petitioners Morris and Ann Leverton resided in Switzerland when they filed their petitions herein. All other petitioners resided in the State of New York when they filed their petitions herein.
At all relevant times Federman Inc. was a Delaware corporation principally engaged in the business of underwriting security issues. It was a member of both the New York and American Stock Exchanges and regulations of the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD). The individual petitioners herein, H. L. Federman, Louis A. Weigl (Weigl), Joseph Mathes (Mathes), Morris Leverton (Leverton), Walter C. Crawford (Crawford) and Lawrence Eisele (Eisele), were shareholders of Federman Inc. and, with the exception of Leverton, were also employees of Federman Inc. More specifically, during the years at issue the stock of Federman Inc. was owned as follows:
+-------------------------------------------------------------------+
¦ ¦ ¦Date sold ¦Type of ¦Number of ¦
+-------------+-------------+----------+---------------+------------¦
¦Stockholder ¦Date acquired¦or retired¦stock ¦shares ¦
+-------------+-------------+----------+---------------+------------¦
¦ ¦ ¦ ¦Nonvoting ¦ ¦
+-------------+-------------+----------+---------------+------------¦
¦R. Mittman ¦5/15/63 ¦- - - ¦preferred (NVP)¦5 ¦
+-------------+-------------+----------+---------------+------------¦
¦L. Barber ¦6/15/63 ¦5/10/66 ¦NVP ¦5 ¦
+-------------+-------------+----------+---------------+------------¦
¦W. Crawford ¦6/15/63 ¦3/19/65 ¦Common ¦25 ¦
+-------------+-------------+----------+---------------+------------¦
¦H.L. Federman¦6/15/63 ¦- - - ¦Common ¦3 140/171.1¦
+-------------+-------------+----------+---------------+------------¦
¦I. Bloomberg ¦5/28/64 ¦6/30/66 ¦NVP ¦10 ¦
+-------------+-------------+----------+---------------+------------¦
¦H. Herrman ¦5/28/64 ¦6/30/66 ¦Common ¦85 ¦...To continue reading
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