Robins v. Commissioner

GEORGE S. ROBINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Robins v. Commissioner Docket No. 18072. United States Board of Tax Appeals 15 B.T.A. 1068; 1929 BTA LEXIS 2739; March 25, 1929, Promulgated *2739 1. Held, under facts presented, petitioner's sale of stock was not an involuntary conversion thereof within the meaning of section 214(a)(12) of the Revenue Act of 1921. 2. Held, under the facts presented, that the petitioner's sale of stock was not a transaction amounting to a reorganization such as to give rise to any gain or loss. George S. Robins pro se. Frank S. Easby-Smith, Esq., for the respondent. MILLIKEN *1068 This proceeding results from the determination of the respondent of a deficiency in income tax for the calendar year 1923 in the sum of $3,189.75. Petitioner contends that the respondent erred in failing *1069 to treat the proceeds received from the sale of capital stock as one resulting from the involuntary conversion of assets or that the sale of stock was merely a change in identity, form, or place of organization, being a reorganization transaction. FINDINGS OF FACT. Petitioner is an individual residing at 223 South Elm Avenue, St. Louis, Mo. He is a chemist utilizing his technical knowledge in the sale of chemicals for various chemical manufacturers to consuming insudstries in St. Louis and its*2740 trade territory. Prior to 1907 he was St. Louis manager of A. S. Barada & Co., a chemical sales organization of Kansas City and St. Louis. In 1917 a corporation was organized under the laws of the State of Missouri, Known as Thompson-Munro-Robins Chemical Co., which was the successor in business to A. S. Barada & Co. Petitioner was vice president and St. Louis manager of the former from February, 1917, to January 22, 1923. Thompson, Munro and Robins, through their personal efforts and technical chemical knowledge, built up a prosperous business. Munro, being unable to get along with Thompson, retired from the company in 1918 and his stock was purchased by Thompson and Robins, with the result that the former was left owning a majority of the stock of the Thompson-Munro-Robins Chemical Co. Disagreements arose between the petitioner and Thompson and the following correspondence passed between them: DEC. 24, 1920 DEAR STANLEY: Your note with regard to St. Louis territory and suggestions has been received, and I wish to tell you of course that this is impossible. If you want to quit, there is only one way to do it and that is to quit. We do not intend to withdraw from St. *2741 Louis and will use our resources to stay in this market, and if you have this idea firmly fixed in your mind, the sooner we get it settled the better it will be for all of us. And I frankly want to tell you that you will have to start out by your own self and build up your organization. We intend to use our accumulated good will to make and maintain our organization intact. We do not intend to dissipate our resources. Respectfully yours, (Signed) C. T. THOMPSON P.S. I want your final action promptly. Please remember this is a corporation not a partnership. ST. LOUIS, MO., December 23, 1920. Mr. C. T. THOMPSON, Kansas City, Mo. DEAR CHARLIE: Your letter citing Doc Heath as an instance has been received. The best thing for us to do under the circumstances, as long as you maintain the attitude which you seem to show, is to separate on a perfectly friendly basis according to the plan outlined below. In this way there will *1070 be no further room for argument and we will both be remunerated with the results of our own efforts and at the same time since we would both be satisfied prevent any depreciation of those efforts through any fights which might*2742 result between us. The fact remains that the business in the St. Louis territory and a good portion of the Iowa business has been due to my own efforts and those associated here while the business in Kansas City territory has been due to your efforts and your associates. Since I can see that a concentration of territory is going to be necessary eventually on account of our Principals who do not want to see us grow too big and I am quite sure all principals would be willing to split up the territory. The arrangements I would suggest would be as follows: To liquidate assets of T-M-R at book value after same is appraised by public accountants as of January 31, 1921 and for me to buy back to merchandise and equipment in St. Louis and you the merchandise and equipment in Kansas City at book value. Cash assets to be liquidated according to holdings in T-M-R. The Company name to be dissolved and for each or us to operate under our own name. Principals to be notified of the change with a form letter announcing a splitting up for the purpose of concentration of territory and better personal development of the principals' accounts and to abide by the decision of each principal*2743 separately without any further comments from either one of us to any principal as to their pleasure in placing the accounts with each of us as individuals in the respective territory. My territory to embrace the City of St. Louis and all points in Missouri East of Jefferson City and a line drawn North and South and as far North at Ottumwa, Iowa, and South as far as Pine Bluff, Ark. The reason I make this division is because this is logical St. Louis territory. You will note that this includes Memphis which is logical St. Louis territory and in exchange for Memphis I would pass over Des Moines and Cedar Rapids which points I have worked and developed to considerable extent. We to make an agreement between ourselves to stay out of each of these territories on merchandise business for a period of three years and to go into such territory only as the accounts of principals might designate. St. Louis and Kansas City organizations to remain intact as they are now and the whole operation to proceed without any fight - simply a separation of the business. I would be willing to purchase for you in St. Louis on a fixed commission basis and have the same arrangement on purchases that*2744 you would make for us in Kansas City market. This arrangement as you can see is based on the results of our own efforts of what we have each actually done and would leave no room for dissatisfaction. So far as Leeds Chemical Co. is concerned, I would be glad to still be connected with it as a stock holder and do everything possible to act as their selling agent in this territory. My suggestion would be to make the arrangements effective as of January 31st or as of February 15th as soon as we could get the details straightened out. I would also state that my policy would be to make my commission business paramount and my merchandise business secondary quite the opposite I know of your policy, but nevertheless, one on which I thoroughly believe. The question then of personal qualifications is the essential feature and I am sure you agree with me that it is something concerning which there would be room for debate for ever and aye if we were together and which can only be justified by each being separate on our own feet. Very respectifully, (Signed) G. S. ROBINS. *1071 Thompson, on January 20, 1923, notified petitioner that his position as sales manager for*2745 the company was vacant. In the year 1923 petitioner sold his entire stockholdings in the company to Thompson for $44,000. Thompson stated if petitioner attempted to organize a company to compete with his company that he would do all within his power to prevent the petitioner's success. Petitioner organized on February 1, 1923, a corporation under the laws of the State of Missouri and known as G. S. Robins & Co. The clerical, warehouse, and sales force of the Thompson-Munro-Robins Chemical Co. accepted employment with G. S. Robins & Co. The two corporations did business in the same trade territory and G. S. Robins & Co. was able to secure most of the clients and to represent most of the manufacturers that the Thompson-Munro-Robins Chemical Co. had represented prior to the organization of G. S. Robins & Co. OPINION. MILLIKEN: The respondent determined that the petitioner realized a taxable gain of $30,966 by reason of the sale of his stock in the Thompson-Munro-Robins Chemical Co. to Thompson in the year 1923. There is no dispute between the parties concerning the computation of gain determined by the respondent if the sale by petitioner is not governed by section 214(a)(12) *2746 of the Revenue Act of 1921 or was not a mere reorganization giving rise to no gain or loss. Congress in the Revenue Act of 1921 added subdivision 214(a)(12) which provides as follows: Sec. 214. (a) That in computing net income there shall be allowed as deductions: * * * (12) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (C) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing*2747 the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax acts. *1072 It is clear from the facts obtained in this proceeding that the property, i.e., stock of petitioner, was not destroyed or that it was not stolen or seized, and we are unable to find that the stock was sold by reason of the exercise of the power of requisition or condemnation or threat or imminence thereof. Petitioner contends that his investment was faced with ruin unless he sold his stock to Thompson and that such state of facts may bring his case within the intendment of the section in question. We think the statute did not have an intent of application such as claimed for it by petitioner. No doubt as a business expediency petitioner acted with foresight in selling his stock, bearing in mind the conditions that obtained. Viewed in the light of his legal rights, he was under no compulsion to sell. He could*2748 have stood on his rights and demanded such a disposition of his stock ownership as justice might have required. There is also no showing in this case, even if we agree that the sale was an involuntary conversion, that petitioner complied with the requirement of the statute that he expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted. No doubt petitioner did, from the proceeds which he derived from the sale of his stock, invest some or all of the money so derived in the organization of G. S. Robins & Co., but we have no evidence as to the amounts, if any, so invested. See also ; ; ; and . Petitioner next contends that if relief can not be afforded him under section 214(a)(12) of the Revenue Act of 1921, he is entitled to relief because the sale of his stock to Thompson amounted to a reorganization which should give rise to no gain or loss. It seems sufficient to observe that*2749 there was no reorganization of the Thompson-Munro-Robins Chemical Co. into G. S. Robins & Co. When petitioner sold his stock to Thompson the corporation in which he had been a stockholder continued in business and petitioner merely formed another corporation which had no relation to or connection with the Thompson-Munro-Robins Chemical Co. Except that the corporation which petitioner formed competed with the corporation in which he had been a stockholder and did, as the evidence shows, succeed to most of the clients of the Thompson-Munro-Robins Chemical Co. and became sales representative for most of the manufacturing chemists that the former had represented. Judgment will be entered for the respondent.