Ott v. Commissioner

WILL M. OTT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ott v. Commissioner Docket No. 13713. United States Board of Tax Appeals 15 B.T.A. 867; 1929 BTA LEXIS 2779; March 14, 1929, Promulgated *2779 GAIN - EXCHANGE OF ASSETS FOR STOCK. - Upon the facts, held that stock received by petitioner in 1920 in exchange for assets had no market value as of that date and accordingly no loss or gain was realized in the transaction. Norman Quale, Esq., for the petitioner. J. F. Greaney, Esq., for the respondent. TRUSSELL *867 Petitioner appeals from a deficiency in income tax for the calendar year 1920 determined and advised of by respondent on January 14, 1926. The deficiency arises from the computing of a profit as realized from a transfer of the assets of a personal business of petitioner to a corporation in return for all of the latter's capital stock, a portion of this stock being later sold within the same year by petitioner. Petitioner admits a gain upon this sale of stock and appeals only as to $1,288.65 of the total deficiency of $1,463.86. FINDINGS OF FACT. Petitioner is a resident of Baraboo, Sauk County, Wis, and prior to January 20, 1920, was the sole owner of a retail hardware business in that city. On that date petitioner caused to be organized under the laws of Wisconsin a corporation under the name of the Ott Hardware*2780 Co., with a capital stock of 500 shares of $50,000 par value, and to this corporation he transferred all of the assets used in the hardware business referred to, and which as of that date represented a cost to petitioner of $33,736.43, and received in exchange the 500 shares of stock. Prior to the incorporation of the Ott Hardware Co. petitioner had entered into contracts with Mark Case, Walter Seyler, and E. A. Isenberg, three individuals whose association and active assistance in the business he desired and who were desirous of securing employment in the business, providing for the incorporation of the business *868 and the issuance of $50,000 of stock for the assets in question, and obligating the said parties to purchase certain amounts of the issued stock from petitioner at its book value and providing for their employment in the business at certain stated salaries. Upon issuance of the $50,000 par value stock to petitioner the latter in accordance with the contract referred to transferred 80 shares to Isenberg, 30 shares to Case and 2 shares to Seyler (for which these parties paid petitioner at the rate of $94 per share, this being the book value of the stock. These*2781 three parties thereupon became salaried employees of the corporation, devoting all of their time to its business in accordance with the agreements made. Isenberg, Case, and Seyler purchased their respective shares of stock of the Ott Hardware Co. from petitioner because of the fact that they were thereupon to become salaried employees of the corporation, it being part of the agreement for employment that they were to make the purchases at the price paid and the price of $94 per share would not have been paid by them except for the fact that they were to receive employment. Isenberg and Case have been in the employ of the corporation on full time at all times since their purchase of the stock. Seyler remained with the corporation only a short time and, upon leaving, his two shares of stock were turned back to petitioner at the purchase price. No shares of stock of the corporation, other than those enumerated above, were ever offered for sale to the public or to any other parties at any time, no other sales were ever made and the stock was never listed or offered for listing on any stock exchange or any other place where stock is offered for sale or trade. No bids were ever*2782 received from any person seeking to acquire any of the stock. The corporation paid no dividends in 1921, 1922, and 1923. It paid a dividend of 1 per cent in 1924, and 6 per cent in 1925. Respondent in determining the deficiency here appealed from computed a profit as accruing upon the transfer of assets of the individual business of petitioner to the corporation in the sum of the difference between $33,736.43, the cost of such assets to petitioner, and the 500 shares of stock received therefor on a basis of market value of $94 per share. The 500 shares of stock in question had no market value when acquired by petitioner. OPINION. TRUSSELL: The only question presented is whether or not the 500 shares of stock received by petitioner in 1920 in exchange for the assets of his individual hardware business had a market value upon which a taxable gain in the transaction could be determined under section 202(b) of the Revenue Act of 1918, providing that: *869 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 extent of its fair market value, if*2783 any; * * * Respondent contends that the three sales of stock by petitioner at $94 per share immediately after its issuance to him fixes this as its fair market value. Petitioner contends that these sales were not on the market and did not indicate its value as they were made to individuals under peculiar circumstances and the payment of this price was induced by consideration other than the acquisition of the stock. It is, we think, a well-recognized rule that in determining whether a stock has a fair market value at a certain date, sales of stock at or near that date may be looked to but the circumstances of such sales must be considered, and such of them as are shown to have been due to conditions other than a market created by buyers and sellers with only the purpose of disposing of or acquiring the stock can not be considered as proving a market or a fair market price. . In , the court said: The stock sales made from time to time are to be considered together with the nature and extent of the sales and the circumstances under which they are made; hence forced*2784 sales or sales of small lots, may often be no real indication of value. In , in holding that sales of stock at par to certain organizers of a corporation who were to receive salaried positions with the corporation did not prove a market or a value for the stock, we said: The mere fact of one or more sales of stock at a given figure does not in itself prove that to be its fair market value. The circumstances in connection with such sales must be considered and if they be shown to have been made under peculiar conditions indicating some inducing cause other than the mutual desire of seller and buyer to make on the one hand an advantageous disposal, and on the other a wise purchase, they can not be considered as determining a fair market value for the stock. * * * In the present case it is admitted that no sales of stock were made other than the three to Isenberg, Case, and Seyler; that aside from these sales no offer either to sell or buy has ever been made, and that the purchases of stock by the three parties named at the price of $94 per share would not have been made had it not been agreed that they would in consequence be*2785 given salaried positions with the corporation. Upon these facts we hold that the sales of stock to these three parties do not prove a market as existing for the stock or a fair market value of $94 per share, and that it is satisfactorily shown that the stock had no market value when acquired by petitioner and there was accordingly no loss or gain as a result of the exchange of assets therefor. *870 Petitioner admits a profit on the sales of stock to Isenberg, Case, and Seyler and appeals only from that portion of the deficiency as represents a profit determined in respect to the balance of the 500 shares of stock. The cost of the 500 shares of stock to petitioner was $33,736.43 or $67.47 per share, and the difference between this figure and $94 represents his profit on each of these 112 shares sold. Judgment will be entered pursuant to Rule 50.