Chicago, Indianapolis & Louisville Ry. v. Commissioner

CHICAGO, INDIANAPOLIS & LOUISVILLE RAILWAY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Chicago, Indianapolis & Louisville Ry. v. Commissioner Docket No. 11152. United States Board of Tax Appeals 10 B.T.A. 1143; 1928 BTA LEXIS 3961; March 1, 1928, Promulgated *3961 Cost of certain stock acquired in 1915 ascertained for the purpose of determining gain upon the sale of such stock in the year 1917. R. Kemp Slaughter, Esq., and Hugh C. Bickford, Esq., for the petitioner. A. H. Murray, Esq., M. N. Fisher, Esq., and E. C. Algire, Esq., for the respondent. SMITH *1144 A deficiency in the amount of $8,544.65 has been determined for the calendar year 1917. The only issue is the amount of profit realized upon the sale of certain stock of the Indiana Coke & Gas Co., in the year 1917. FINDINGS OF FACT. The petitioner is an Indiana corporation with its principal office at 608 South Dearborn Street, Chicago, Ill. In the year 1915 the petitioner was the owner of 2,500 shares of the outstanding capital stock of the Monon Coal Co., which it carried in its books at a cost of $1. It was also guarantor for the payment of interest upon certain bonds of the Monon Coal Co. in respect of which it had paid out $440,000. This amount was carried in petitioner's books as an account receivable from the Monon Coal Co. On March 15, 1915, in pursuance of a plan of reorganization, the petitioner entered into a*3962 written agreement with one Alfred M. Ogle, the Monon Coal Co., and the stockholders and holders of notes of the Monon Coal Co., which provided in part as follows: FIRST: The Coal Company shall make, execute and deliver to Ogle a lease in the form annexed hereto marked "Schedule A" of its coal properties and of the coal properties operated by it under lease from Shirley Hill Coal Company, and shall procure the execution by said Shirley Hill Coal Company of a consent to the subletting of its properties substantially in the form hereto annexed marked "Schedule B." SECOND: Ogle agrees to enter into the said lease, hereto annexed marked "Schedule A," and to assign said lease to Vigo Mining Company, hereinafter referred to, by an instrument of assignment in the form hereto annexed marked "Schedule C." THIRD: Ogle agrees to cause to be organized forthwith under the laws of the State of Indiana for the incorporation of mining companies, a corporation to be called Vigo Mining Company, or such other appropriate name as may be agreed upon (hereinafter called the "Mining Company"), which shall have an authorized common capital stock of fifty thousand dollars ($50,000), all of which, except*3963 Directors' qualifying shares, shall, when issued, be transferred to Indiana Coke & Gas Company hereinafter mentioned. The expenses of organization of said Vigo Mining Company shall be paid by said Company when organized. FOURTH: Ogle agrees to cause to be organized forthwith under the laws of the State of Indiana for the incorporation of manufacturing companies, a corporation to be called Indiana Coke & Gas Company (hereinafter termed the Coke Company) with an authorized capital stock of $2,500,000, consisting of shares of the par value of $100 each divided into $1,000,000 par value of Seven Per Cent. Cumulative First Preferred Stock and $500,000 par value of Six Per Cent. Non-Cumulative Second Preferred Stock and $1,000,000 par value of Common Stock. The charter of said Company shall contain substantially the following provisions, to wit: * * * EIGHTH: Ogle agrees that the Coke Company will execute and deliver to him for and in consideration of the stocks and agreements above referred to and *1145 other considerations, $300,000 par value of its First Preferred Stock, $500,000 par value of its Second Preferred Stock, and $1,000,000 par value of its Common Stock, all*3964 to be issued as fully paid non-assessable stock. NINTH: Ogle further agrees that when he shall have received said stock of the Coke Company, he will transfer and deliver the following amounts of stock to the following parties: (1) To the Noteholders or their nominess three hundred thousand dollars ($300,000) par value of the First Preferred Stock; (2) To the Railway Company one hundred and fifty thousand dollars ($150,000) par value of the Second Preferred Stock; (3) To the Treasury of the Coke Company three hundred thousand dollars ($300,000) par value of the Second Preferred Stock, to be used for securing subscriptions to the First Mortgage Bonds and First Preferred Stock of the Coke Company; (4) To the Treasury of the Coke Company seven hundred and fifty thousand dollars ($750,000) par value of the Common Stock, to be delivered by the Coke Company to all such stockholders of the Coal Company as may transfer and deliver to the Coke Company their holdings of stock of the Coal Company, at the rate of four shares of the stock of the Coal Company in exchange for three shares of the common stock of the Coke Company; and (5) To himself, fifty thousand dollars ($50,000) par*3965 value of the Second Preferred Stock, and two hundred and fifty thousand dollars ($250,000) par value of the Common Stock of the Coke Company. TENTH: The Noteholders agree that they will accept the said First Preferred Stock of the Coke Company to be delivered to them pursuant to the preceding paragraph in full satisfaction and discharge of all promissory notes of the Coal Company held by them, which notes shall be canceled and surrendered to the Coal Company. ELEVENTH: The Railway Company agrees that it will convert two hundred thousand dollars ($200,000) of the amount of the indebtedness due to it from the Coal Company (not including in such indebtedness amounts due for freight and for payments for fuel coal) into two hundred thousand dollars ($200,000) par value of six per cent cumulative preferred stock of the Coal Company of an issue of such preferred stock which shall be limited to such amount, and shall be created pursuant to unanimous consent of all the common stockholders of the Coal Company, and shall not be preferred as to assets in the event of liquidation or dissolution of the Coal Company, but shall have the sole right of voting, to the exclusion of the common stock, *3966 at all meetings of stockholders so long as any part of the accrued dividends thereon remains unpaid. The Railway Company further agrees that in full satisfaction and discharge of the balance of said indebtedness to the Coal Company (not including in such indebtedness amounts due for freight and for payments for fuel coal), it will accept two hundred and forty thousand dollars ($240,000) face value of Second Mortgage Bonds of the Coal Company of an issue which shall be limited to $1,000,000 and shall be secured by a second mortgage on all the property of the Coal Company. The Coal Company agrees that it will execute and deliver such mortgage in such form and to such trustee or trustees as shall be approved by the Railway Company, and that said mortgage shall provide that the bonds thereby secured shall become due and payable on June 1, 1936, with interest at the rate of 6% per annum, payable semi-annually, and shall further provide that it may not be foreclosed for any default in the payment of interest during the continuance of the lease hereto annexed marked "Schedule A." and of the renewal term of two years therein provided for, so long as the royalties under *1146 said*3967 lease are duly paid, but that thereafter it may be foreclosed in the event that interest shall remain in default for a period of two years, or in the event that the lessee of said coal properties shall be in default under its lease, or in the event that action shall have been taken by parties other than the Railway Company to foreclose the first mortgage of the Coal Company. * * * FOURTEENTH: The Stockholders agree that they will transfer and deliver to the Coke Company all shares of the common stock of the Coal Company held by them, respectively, in exchange for shares of the common stock of the Coke Company at the rate of four shares of the common stock of the Coal Company for three shares of the common stock of the Coke Company. The Stockholders further agree that, in case the current assets of the Coal Company mentioned in the preceding paragraph, together with its cash in bank and on hand, and any other sums which may be collectible by it, shall be insufficient to make the payments mentioned in the preceding paragraph, they will make good the deficiency to an amount not exceeding $10,000, by contribution pro rata according to the number of shares of stock of the Coal*3968 Company held by each of them and will fully release and discharge the Coal Company from any liability for the repayment of any amounts so paid by them. After the execution of this agreement and during the year 1915, the petitioner received 1,872 shares of the common stock and 1,750 shares of the second preferred stock of the Indiana Coke & Gas Co. The additional 250 shares of second preferred stock above the 1,500 mentioned in the contract were issued as a bonus for a subscription to certain bonds of the Indiana Coke & Gas Co. The petitioner received 28 additional shares which were not accounted for. The preferred stock of the Monon Coal Co. mentioned in the agreement, part 11, was intended to protect certain voting rights which the petitioner had in the monon Coal Co. by virtue of its holdings of the common stock, which, under the agreement, it was to surrender. This stock, however, was never received by the petitioner. In March, 1917, Ogle purchased from the petitioner 1,872 shares of common stock and 1,778 shares of second preferred stock of the Indiana Coke & Gas Co. for $150,000. The petitioner thereupon entered in its books in profit and loss account $149,998. *3969 After the sale of the stock in the year 1917 a dispute arose between Ogle, the purchaser, and the petitioner as to whether the $150,000 received for the stock should be credited against the indebtedness of the Monon Coal Co. The controversy was raised by Ogle who contended that, according to the oral agreement between himself and H. R. Kurrie, president of the petitioner, the 1,500 shares of second preferred stock were to be applied as a credit to the Monon Coal Co. indebtedness and that the proceeds from the sale of such stock should be so credited. There was no reference in the written agreement to any cash transaction nor any understanding between the parties in respect thereof. *1147 The matter was finally submitted for arbitration to an attorney, Guy Cary, of New York City, who had assisted in preparing the agreement of March 15, 1915, and was familiar with all of the details of the transaction. It was awarded by the arbitrator that of the $150,000 received for the common and second preferred stock the petitioner should apply $100,000 to the indebtedness of the Monon Coal Co. Pending settlement of the dispute the petitioner had transferred the item of $149,998*3970 in its books from profit and loss account to suspense account. In the year 1919, after the award was made, the petitioner credited in its books $100,000 to the Monon Coal Co. indebtedness. OPINION. SMITH: The petitioner contends that the $150,000 par value of second preferred stock of the Indiana Coke & Gas Co., which, together with the 1,872 shares of common stock, it sold in March, 1917, for $150,000, was acquired as consideration for the cancellation of $100,000 of the indebtedness of the Monon Coal Co. and that there was a profit of only $50,000 realized upon the sale. The respondent contends that the petitioner acquired both the common stock and the second preferred stock of the Indiana Coke & Gas Co. in exchange for stock of the Monon Coal Co., which it carried upon its books at a cost of $1, and therefore realized a profit of $149,999 upon its sale in 1917. It is admitted that the written agreement of March 15, 1915, does not provide for the cancellation of any part of the indebtedness of the Monon Coal Co. to the petitioner as consideration for the stock in question, but the petitioner contends that there was a preliminary oral agreement between its president and*3971 Ogle, parties to the written agreement, that the 1,500 shares of second preferred stock of the Indiana Coke & Gas Co. should be applied to the indebtedness of the Monon Coal Co., and that the written agreement having failed so to provide was properly modified by the subsequent agreement to conform to the actual intent of the parties. While the courts generally are reluctant to sanction the alteration of written instruments by parol agreements (see ), we believe that the rule is not strictly applicable in the instant case. The parties here are not in fact seeking to alter or modify the written agreement for any purpose of avoidance. The dispute arose after the contract had been fully performed and involved a question not definitely ascertainable from the contract itself. Under such circumstances it was entirely proper to inquire into the intent of the parties in regard to the acts already performed in pursuance of the contract, for the purpose of establishing their respective rights growing out of such acts. *1148 The cardinal rule for the interpretation of all contracts is to discover*3972 the intent and meaning of the parties from the language in the contract, if possible. ; . The contract here specifies, part 9, paragraph 2, that there should be delivered to the petitioner $150,000 par value of second preferred stock, but does not specify any consideration for such stock. The contract further provides, part 11, that for the $440,000 indebtedness of the Monon Coal Co. the petitioner should receive $200,000 par value of 6 per cent preferred stock of the Monon Coal Co., of an issue to be limited to such amount, and for the balance of such indebtedness should receive $240,000 face value of second mortgage bonds of the coal company of an issue to be limited to $1,000,000, secured by a second mortgage on all the property of the coal company. For some reason not explained the petitioner never received the $200,000 par value of the 6 per cent preferred stock of the Monon Coal Co. It did receive the common stock of the Indiana Coke & Gas Co. in exchange for its stock in the Monon Coal Co. in the ratio stated in the contract of three shares of the*3973 former for four of the latter, and also received the 1,500 shares of second preferred stock of the Indiana Coke & Gas Co. It is obvious that either the written contract did not carry out the intent of the parties or that the parties agreed to a modification of the written contract before its complete performance. Whether we say that the subsequent agreement reached by the arbitration proceedings, that $100,000 of the $150,000 received from the sale of the stock should apply to the Monon Coal Co. indebtedness, modified the written contract of March 15, 1915, or repudiated a part of the old contract and substituted a new provision, the result in either case is to fix the actual cost to the petitioner of the 1,500 shares of second preferred stock at $100,000. The courts have long favored arbitration as being an expeditious and inexpensive means of settling private disputes and will make all fair presumptions in order to sustain the award. . In the absence of bad faith, of which there is no indication here, the award of the arbitrator should be accepted as clearly settling the questions submitted. *3974 The award fixes the cost of the stock sold in 1917 for $150,000 at $100,000. The petitioner, therefore, realized a profit of $50,000 upon the sale. Judgment will be entered on 15 days' notice, under Rule 50.