Parker v. Commissioner

GEORGE S. PARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Parker v. Commissioner Docket No. 5602. United States Board of Tax Appeals 10 B.T.A. 854; 1928 BTA LEXIS 4017; February 17, 1928, Promulgated *4017 1. Stock received by the petitioner in exchange for patents for which stock there was no market held to have no fair market value. 2. Where the conditions in the securities market were such that junior issues of stock could not have been marketed for more than a nominal amount, such stock can not be said to have a fair market value equivalent to its intrinsic value. Otto A. Oestreich, Esq., P.J.E. Wood, Esq., and Hiram M. Nowlan, Esq., for the petitioner. W. F. Wattles, Esq., for the respondent. PHILLIPS *855 The Commissioner determined a deficiency of $4,869.47 in income tax for 1920. The petitioner instituted this proceeding for redetermination of such liability. He alleges that the Commissioner committed error by including in petitioner's net income for 1920 the amount of $12,450 as representing alleged profit on the transfer of an undivided one-half interest in certain patents in exchange for stock. FINDINGS OF FACT. The petitioner is an individual residing at Janesville, Wis. On or about July 1, 1920, petitioner transferred an undivided one-half interest in certain patents to The Parker Pen Co., a Wisconsin corporation, *4018 in exchange for $12,500 par value of the 8 per cent preferred stock, second issue, of the said The Parker Pen Co. The said one-half interest in such patents so transferred was acquired by the petitioner subsequent to March 1, 1913, at a cost of $50. The Commissioner determined that the fair market value of the stock received for such patents was $12,500, that the petitioner had realized a taxable income of $12,450, which amount the Commissioner added to other income of the petitioner and determined the deficiency accordingly. The stock so received by the petitioner had no fair market value at the date when so received OPINION. PHILLIPS: Section 202(b) of the Revenue Act of 1918 provides: When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any. The sole question presented for determination is the fair market value, if any, of the preferred stock, second issue, of The Parker Pen Co., at the time it was issued to the petitioner in July, 1920. The Commissioner determined the value to be $100 per share. The petitioner*4019 claims that such stock had no fair market value. This stock was issued to the petitioner in connection with the reorganization of The Parker Pen Co. At the same time $250,000 par value of the preferred stock, first issue, of The Parker Pen Co. was sold to brokers at $89 per share and was subsequently sold by them, after much difficulty, to the public at par. In order to make the preferred stock, first issue, as attractive as possible it was surrounded by numerous safeguards, many of which served to decrease crease *856 the attractiveness of the preferred stock, second issue, as an investment. Both issues provided for the payment of dividends at 8 per cent, which were cumulative. It seems self-evident that if the company could sell its preferred stock, first issue, for only $89 per share, the junior issue was not worth par, as determined by the Commissioner. There is in the record evidence of the book value of the assets of the company and some evidence of the intrinsic value of some of these assets. There is also evidence as to earnings of prior years. All of this evidence indicates that under normal circumstances the stock received by the petitioner had a substantial*4020 intrinsic value. In July, 1920, however, conditions were far from normal so far as they related to the marketability of stock issues. The best of investment stocks were selling far below what would have been their value in normal times. There was little, if any, market for junior issues of preferred stocks, such as that received by the petitioner, which did not participate generally in the profits of the business. We are satisfied that under the conditions that prevailed at the time the petitioner received his stock it could not have been marketed for more than a nominal amount and that because of such unusual conditions its fair market value can not be said to be measurable by either its intrinsic value under normal conditions or by earnings of past years. We do not agree with the opinion expressed by some of the witnesses called by petitioner that where there are no sales there can be no fair market value. Here, however, it appears that there was no market, either in existence or which could have been readily created, for such a stock as that received by the petitioner and we are of the opinion that in such circumstances it has no fair market value. Decision will be*4021 entered for petitioner, under Rule 50.