Henritze v. Commissioner

T. W. HENRITZE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. NELL HENRITZE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. T. R. HENRITZE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. B. HENRITZE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Henritze v. Commissioner Docket Nos. 60606-60609. United States Board of Tax Appeals 28 B.T.A. 1173; 1933 BTA LEXIS 1046; August 18, 1933, Promulgated *1046 1. Shares of stock, received in a reorganization under an agreement, stamped on the certificates, not to sell them for a year without the banker's consent, held not to be without fair market value. 2. Evidence of the price of such shares, similar but unrestricted, in active trading on the New York Curb Market at the time when the restricted shares were received by the taxpayer, held more probative of fair market value of such restricted shares than evidence of book value or the past earnings of either of the corporations involved in the reorganization. J. R. Sherrod, Esq., for the petitioners. J. M. Johnston, Esq., for the respondent. STERNHAGEN *1173 Respondent determined the following deficiencies in petitioners income taxes for 1929: Docket No. 60606, T. W. Henritze $9,047.48 Docket No. 60607, Nell Henritze 400.00 Docket No. 60608, T. R. Henritze 406.24 Docket No. 60609, J. B. Henritze 385.62 Pursuant to a plan of reorganization, petitioners surrendered certain shares of stock and received in exchange therefor cash and shares of a new corporation. In computing taxable profit on the exchange, respondent*1047 determined that the new shares received had a fair market value equal to the market quotation of similar shares at the date of the exchange. Petitioners contend that an agreement stamped on their certificates, binding them not to sell, pledge, or otherwise dispose of their shares for one year without a banking company's permission, deprived the shares of any market value. They also contend that the cash received should be taxed as a dividend in so far as it represents surplus of the company whose shares they surrendered. FINDINGS OF FACT. Petitioners are individuals, residing in Denver, Colorado. Prior to September 17, 1929, they were shareholders of the Snodgrass Food *1174 Co., a Colorado corporation, engaged in operating 45 grocery stores, 44 meat markets and one bakery in Denver and vicinity. T. W. Henritze held 575 such shares, of which 175 were acquired by him in 1929 for $26,250 and 400 more than two years prior to September 17, 1929, for $45,250. Nell Henritze, his wife, held 100 shares; T. W. Henritze, 105 shares; and J. B. Henritze, 105 shares; all of which they had acquired within two years prior to September 17, 1929, at costs of $10,000, $10,500 and $10,500, *1048 respectively. Under date of September 17, 1929, the Snodgrass Co. entered into an agreement with Merrill, Lynch & Co., a New York banking house, whereby it transferred all its assets and liabilities to the MacMarr Food Corporation, Ltd., of Delaware, receiving in exchange $781,744.10 in cash and 700 shares of the common capital stock of the said MacMarr Corporation. Among the assets exchanged were all the outstanding stock of the J. F. Sherman Mercantile Co., a Colorado corporation operating four grocery stores and four warehouses, and all the outstanding stock of the T. R. Coulson Fruit & Produce Co., a Colorado corporation operating one warehouse, the shares of these corporations being the property of the Snodgrass Co. The cash portion of the consideration received by the Snodgrass Co. was determined as the company's net worth on December 31, 1928 ($731,796.42), plus interest thereon from January 1, 1929 ($31,345.68) plus cash received from the issuance in 1929 of 446 shares of its stock ($66,870), less a dividend of $48,268 paid February 12, 1929. As part of the above agreement the Snodgrass Co. exchanged the 700 common shares of the MacMarr Food Corporation, Ltd., of Delaware*1049 for 50,000 shares of the no par common capital stock of MacMarr Stores, Inc., a Maryland corporation, which was organized January 15, 1929, for consolidating the businesses of many independent chain grocery stores and which owned the stock of the MacMarr Food Corporation, Ltd. On the same date all the shareholders of the Snodgrass Co. surrendered their stock, aggregating 5,000 shares, and received in liquidation thereof the 50,000 shares of MacMarr Stores, Inc., and $750,000 in cash, both being distributed in proportion to shareholdings. The remaining cash, less expenses, was distributed in 1930. Petitioners' shares of the liquidation distribution were as follows: Shares of MacMarr Cash Stores T. W. Henritze 5,750 $86,250 Nell Henritze 1,000 15,000 T. R. Henritze 1,050 15,750 J. B. Henritze 1,050 15,750 *1175 On each stock certificate of MacMarr Stores, Inc., distributed to petitioners was the following restriction, to which they agreed: This certificate and the shares represented hereby shall not be sold, pledged, loaned or otherwise assigned or transferred prior to September 17, 1930, without the written consent of Merrill, *1050 Lynch & Company and the holder of this certificate by acceptance hereof agrees that the above restrictions shall be binding on such holder and the legal representatives and successors in interest of such holder. This restriction was required by Merrill, Lynch & Co. in order that it might more easily manipulate the market price of unrestricted shares. Waiver of such a restriction was contrary to its policy. Similar shares without the restriction were sold on the New York Curb Market, September 17, 1929, at an average price of $40.25 each. Respondent treated the several transactions as parts of a reorganization, and computed petitioners' profit from the liquidation of the Snodgrass Co.'s shares by subtracting the cost basis of each from the sum of the cash and value of the new shares received, which value he determined to be $40.25 a share. The fair market value of shares of MacMarr Stores, Inc., when received by petitioners was $40.25 each. On September 17, 1929, the Snodgrass Co. had a surplus of $391,073.51. OPINION. STERNHAGEN: The petitioners, having owned all of the shares of the Snodgrass Co., carried out an agreement whereby they first exchanged such shares*1051 for cash and shares of the Delaware corporation and then immediately exchanged the shares of the Delaware corporation for shares of the Maryland corporation, thus leaving the parties in the same situation as if there had been a technical merger or consolidation of the Snodgrass corporation and the Maryland corporation. There was, therefore, a statutory reorganization, sec. 112(i)(1), Revenue Act of 1928. ; cf. . Upon this the parties agreed. The issue arises from the respondent's determination that in such reorganization the petitioners realized gain and that such gain must be recognized in accordance with sec. 112(c)(1) and taxed to the extent of the cash received. The petitioners contend not that 112(c)(1) is inapplicable, but that the fair market value of the shares received, with cash, for their Snodgrass shares is to be taken as zero, because, since the petitioners were bound, during the year of acquisition, not to sell their shares without the bankers' consent, there was no market therefor and hence no fair market value. A secondary *1176 *1052 contention is that if any fair market value is to be recognized for the shares, it is in fact less than that determined by respondent. 1. A contractual obligation assumed by the recipient of shares not to exercise an owner's right of sale does not as a matter of law establish the absence of fair market value. ; rehearing denied, ; certiorari denied, ; ; ; . The restrictive provisions, although stamped upon the share certificates are not inherent attributes of the shares. Between the corporation and the shareholder exist all of the normal legal incidents of such a relation. The restriction deprives the shareholder of none of his rights qua shareholder and adds nothing to either the rights or duties of the corporation. Held, for example, by a trustee prohibited by the trust to sell, they would nevertheless have full market value. Like any other property, such as land, buildings or chattels, they may have substantial*1053 fair market value despite a local or temporary obstacle to their cash realization by the one who happens to own them at a given time. The very purpose of the restriction in this instance is shown by the evidence to be for the protection and enhancement of value rather than its destruction. The hypothesis of fair market value is the existence of willing seller and willing buyer, and it is a manifest anomaly to attempt an ascertainment of what a willing seller would take in respect of property which by reason of a voluntary contractual inhibition he has made himself unwilling to sell. Could it be said, for example, that one who receives as compensation for services a marketable railroad bond, with the agreement with his employer that he will not sell it for a year, has received nothing of fair market value? Cf. ; . Instances of wide diversity come to mind which would make the statute incredibly vulnerable. It has been held in other connections that taxpayers may not, by private contracts or definitions, determine their income tax liability. *1054 ; ; certiorari denied, ; ; certiorari denied, . And the doctrine is, we think, applicable to a contractual restriction upon the sale or disposition of income received. The petitioners' point, therefore, that because of the restrictive clause upon the shares they were without fair market value, is rejected. 2. Since the shares have been held by the respondent to have a fair market value when received and the petitioners have not shown that they are without fair market value, it is necessary to consider *1177 the petitioners' secondary contention that the fair market value determined by the respondent is too high. They claim that the value was not more than $2.81 a share. At the time, in September 1929, when the MacMarr shares were received by petitioners, such shares bearing no restrictive clause were the subject of active daily trading on the New York Curb. Prices, it is agreed, were from 40 to 40 1/2. We have found as a fact an average price of $40.25 per share, *1055 which is the figure used by the respondent in determining statutory gain. While the evidence indicates that this trading price was affected in some way by the "manipulation" of the bankers, there is nothing to indicate that there was other than a free market or, if the market were other than free, how else a free market would have operated upon the price. Cf. . Quite clearly, book value of either or both the Snodgrass and MacMarr properties and business did not reflect the value of the shares, for the public seems to have felt that the future was more important than either past experience or book value. The MacMarr shares, it must be remembered, were not merely the substitute for the Snodgrass shares so as to reflect the history of the Snodgrass Co. alone, but represented an amalgamated and constantly expanding business which was absorbing others more or less like Snodgrass. From the evidence it is impossible to appraise the MacMarr shares with reference only to the history of the businesses which those shares represented when received by these petitioners. While there is evidence to show that earnings actually dropped from 1929*1056 to 1930, it can not be assumed, contrary to the optimism of the market which the record otherwise discloses, that this drop was reasonably in prospect at the valuation date of September 17, 1929; and if it was reasonably in prospect, it must have been a factor of the market appraisal at $40.25 a share. There seems to be no escape, therefore, in this record from the treatment of the curb market price for actual sales as the fair market value of the shares. It is not necessary in this case to go so far as to say that the measure of value to be applied to such restricted shares is always or as a matter of law the stock exchange price of unrestricted shares. Whether in fact this is generally true may remain to be seen. In this case, however, the evidence fails to demonstrate that the fair market value of the shares received by these petitioners was less than the price fixed by traders on the curb. The respondent's determination as to value is therefore sustained. 3. In computing the deficiency the respondent determined that all of the income received by the petitioners in the reorganization was ordinary income or capital gain. The petitioners contend, apparently under section*1057 112(c)(2), that a portion of the cash received was in distribution of surplus of the Snodgrass Co. and therefore *1178 taxable as dividends subject to surtax only. The respondent makes no mention of this, either in the notices of deficiency or in his argument. The evidence shows that on September 17, 1929, the Snodgrass Co. had a surplus of $391,073.51, and it is therefore apparent that to this extent the cash distributed must be treated as dividends to the petitioners and the deficiencies modified accordingly. Judgment will be entered under Rule 50.