OPPER

Stock in the corporation employing petitioner and issued to him under an agreement restricting its use and sale held to have had no fair market value when acquired capable of being ascertained with reasonable certainty so as to justify charging petitioner with income at the time of issuance. Harry J. Rudick, Esq., Mason G. Kassel, Esq., and Joyce Stanley, Esq., for the petitioners. Scott A. Dahlquist, Esq., for the respondent.

Respondent determined a deficiency in income tax of $5,300.49 against petitioners for the year 1945. The question is whether respondent erred in determining that the differential, if any, between the price paid and the fair market value of stock purchased by petitioner Harold H. Kuchman in 1945 was income to him. Some of the facts were stipulated.

FINDINGS OF FACT.

The facts as stipulated are hereby found.

Petitioners are husband and wife, residing in Manhasset, Long Island, New York. They filed a joint return for the year 1945 with the collector for the second district of New York.

On or about December 4, 1945, Harold H. Kuchman, hereinafter referred to as petitioner, acquired 500 shares of new common stock of Bates Manufacturing Company, hereinafter sometimes referred to as Bates, from the First Boston Corporation and Coffin & Burr, Incorporated, hereinafter sometimes referred to as the underwriters, for $5 a share.

On December 4, 1945, and for many years prior to that date, Bates was engaged in the manufacture and sale of textiles. A majority of its stock was owned prior to October 30, 1945, by New England Industries, Inc., hereinafter sometimes referred to as Industries, which also owned a majority of the stock of four other corporations engaged in the manufacture and sale of textiles, namely Androscoggin Mills, the Edwards Manufacturing Company, Hill Manufacturing Company, and York Manufacturing Company, hereinafter sometimes referred to as the textile companies, and sometimes Androscoggin, Edwards, Hill, and York, respectively.

Because of the common control by Industries of Bates and the textile companies, the products of all five were sold through the same two agencies. The unfinished goods were sold through an unincorporated organization called the Maine Mills, which was created on February 1, 1940. Its expenses were shared and it was controlled by the five companies. The finished goods were sold through Bates Fabrics, Inc., a subsidiary of Bates which was organized in 1937 to take over the selling of the finished goods of Bates. In March 1944 it also took over the selling of the finished goods of the textile companies.

At the time of the acquisition of the Bates stock petitioner was employed by the Maine Mills. On December 17, 1945, petitioner commenced employment with Bates Fabrics, Inc. His services thereafter rendered to Bates Fabrics, Inc., were substantially the same as those previously rendered by him to the Maine Mills. Petitioner was employed on a month-to-month basis, without a written contract, in 1945 and thereafter.

On or about December 3, 1945, twenty-three other individuals connected with the management of Bates, its affiliates, and the four other textile companies controlled by Industries, purchased varying numbers of shares of Bates Manufacturing Company new common stock from the underwriters for $5 a share. These sales and that to petitioner were made by the underwriters as part of a plan by which the underwriters proposed sale of a new issue of Bates stock to the public. These 23 individuals, together with petitioner, are hereinafter sometimes referred to as the management group. The total number of shares of Bates new common stock acquired by the management group from the underwriters was 30,000.

The underwriters, prior to December 3, 1945, and prior to the sale of stock to the management group, owned 19,481 shares of Bates common stock ($100 par), the old stock, out of a total of 27,000 shares then outstanding. On December 3, 1945, the par value of the Bates common stock was reduced from $100 to $10 and the new stock was exchanged for the old stock in a ratio of five to one. The underwriters exchanged the 19,481 shares of old stock held by them for 97,405 shares of the new stock.

The 30,000 shares of Bates new common stock sold by the underwriters to petitioner and the other 23 individuals of the management group were a part of the 97,405 shares of Bates new common stock, owned by the underwriters after the stock split.

The 19,481 shares of Bates old common stock owned by the underwriters prior to December 3, 1945, were acquired by them as a part of a plan, called the Maine Mills Plan, for the reorganization of Bates and the four other textile companies which were formerly owned by Industries. This reorganization was, in turn, a part of the reorganization of the New England Public Service Company, hereinafter referred to as NEPSCO.

Prior to October 30, 1945, Industries was controlled by NEPSCO. By an order dated May 2, 1941, the Securities and Exchange Commission found the corporate structure and the distribution of voting power of NEPSCO to be in violation of section 11(b)(2) of the Public Utility Holding Company Act of 1935 and directed NEPSCO either to recapitalize on a common stock basis or, at its election, to liquidate its affairs and distribute its assets. NEPSCO chose the second alternative, and filed with the S.E.C. a plan or reorganization, later several times amended, a part of which provided for the sale of certain non-utility holdings, Industries included.

In April of 1945 Herman D. Ruhm, Jr., who was in charge of sales for Bates and the textile companies, conferred with Albert T. Armitage, president of the investment banking firm of Coffin & Burr, Incorporated, and Adolph H. Wenzell, vice president of the First Boston Corporation, and related his plan to them. They were cognizant of NEPSCO's willingness to sell its interest in Industries as early as March 1945 and expressed interest at that conference in acquiring those properties.

The underwriters evolved the Maine Mills Plan for the reorganization of the five textile companies controlled by Industries in the event they were successful in acquiring NEPSCO's interest in the latter company. The plan involved the liquidation of Industries with the underwriters acquiring the stock of the five textile companies on such liquidation. They then planned to have Bates or its subsidiary (Bates Company) buy the fixed assets and inventories of the four other textile companies which were thereafter to be liquidated and dissolved. Bates was to continue under its own name the operational activities which it and the four other textile companies had previously carried on. The underwriters planned to finance the acquisition by Bates of the assets of the other companies by having Bates issue additional stock to the public for which it would receive about $6,000,000 and by having Bates borrow about $4,600,000 from a bank or other institution. The funds requisite to enable Bates' subsidiary to effect its part of the purchase plan were to be loaned to the subsidiary by Bates. The plan also contemplated a sale by the underwriters to Ruhm and the other members of the management group of a part of the shares of Bates' stock.

Prior to June 19, 1945, NEPSCO invited competitive bids for the purchase of its holdings in Industries. Pursuant to such invitation the underwriters on June 19, 1945, jointly made a written offer to NEPSCO to purchase NEPSCO's entire investment in Industries and in the two other non-utility companies controlled by Industries, Keyes Fibre Company, and Bucksport Water Company, for the total sum of $15,839,000. This offer was accepted by NEPSCO as of July 13, 1945. The agreement was later amended by an agreement, dated September 27, 1945. The amended agreement, subsequently approved by the S.E.C. on October 11, 1945, covered the sale of the same assets but increased the total purchase price from $15,839,000 to $16,500,000.

On October 25, 1945, the District Court of the United States for the District of Maine, Southern Division, entered an order adopting the findings and conclusions of the S.E.C. and directing NEPSCO to carry out the sale. The purchase by the underwriters of the above-described assets from NEPSCO was completed on October 30, 1945.

On October 30, 1945, Industries owned the amount of debt and the amount of capital stock of its subsidiaries as set out below:

+-----------------------------------------------------------------------------+ ¦ ¦Debt (including unpaid accrued interest) ¦ ¦ ¦ ¦ ¦Number of shares of common stock and percentage¦ ¦ ¦ ¦ ¦of amount outstanding ¦ ¦ ¦ +----------------+-----------------------------------------------+------+-----¦ ¦ ¦ ¦Stock ¦Per ¦ ¦ ¦ ¦ ¦cent ¦ +----------------+-----------------------------------------------+------+-----¦ ¦Bates ¦$2,218,316 ¦18,714¦69.31¦ ¦Manufacturing Co¦ ¦ ¦ ¦ +----------------+-----------------------------------------------+------+-----¦ ¦Androscoggin ¦678,604 ¦17,424¦91 ¦ ¦Mills ¦ ¦ ¦ ¦ +----------------+-----------------------------------------------+------+-----¦ ¦Edwards ¦None ¦8,583 ¦80.21¦ ¦Manufacturing Co¦ ¦ ¦ ¦ +----------------+-----------------------------------------------+------+-----¦ ¦Hill ¦3,443,909 ¦13,426¦67.13¦ ¦Manufacturing Co¦ ¦ ¦ ¦ +----------------+-----------------------------------------------+------+-----¦ ¦York ¦2,957,663 ¦34,343¦95.39¦ ¦Manufacturing Co¦ ¦ ¦ ¦ +----------------+-----------------------------------------------+------+-----¦ ¦Maine Seaboard ¦3,642,301 ¦50,000¦100 ¦ ¦Paper Co ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+

Prior to October 30, 1945, the underwriters had acquired 767 shares of old stock of Bates Manufacturing Company from outside holders.

On November 13, 1945, Armitage, Wenzell, and Ruhm met in conference for the purpose of determining the number of shares of Bates stock which would be sold to Ruhm and the management group, and the price at which such shares would be sold. At that conference it was agreed that the underwriters would sell to the management group from the 19,481 shares of Bates Manufacturing Company old stock held by them, 6,000 shares at $25 per share. Because they contemplated at that time a stock split on the basis of five new shares for each old share, during the conference the participants also considered an offer to management of 30,000 new shares at $5 a share.

On November 17, 1945, the preliminary step to reorganization of the five textile companies in accordance with The Maine Mills Plan was begun with the liquidation of Industries. The underwriters then acquired the 18,714 shares of old Bates stock held by Industries and all the latter company's stockholdings in the other four textile companies. Together with 767 shares of old Bates stock acquired prior to October 30, 1945, the underwriters then held 19,481 of the 27,000 shares outstanding of old Bates stock.

The underwriters sent the following letter to petitioner:

THE FIRST BOSTON CORPORATION

100 Broadway

New York 5, N.Y.

COFFIN & BURR, INCORPORATED 60 State Street Boston 9, Mass. December 1, 1945

Harold Kuchman, Esq.

Bates Fabrics, Inc.

80 Worth Street

New York, N.Y.

Dear Sir:

As owners together of a majority of the capital stock of Bates Manufacturing Company, a Maine corporation, herein called ‘the Company,‘ we desire in the interest of the future business of the Company that you and other officers or personnel connected with the management of the Company shall have a financial interest therein as a stimulus to vigorous attention by you and the others to the Company's affairs, and as an inducement to you to acquire such an interest we offer to sell to you 500 shares, or any part thereof, of Common Stock of the Company ($10 par value) issued in exchange for Common Stock ($100 par value) pursuant to a change in capitalization effective December 3, 1945, at the price of $5 per share. The sale shall be completed by delivery of the shares against full payment in cash therefor on such day not later than December 7, 1945, as we designate, herein called the ‘Closing Date,‘ at the office of The First National Bank of Boston.

In order to accomplish our purpose in offering these shares to you at the price agreed herein as an investment to you to acquire a financial interest in the Company, you agree with us jointly and severally as follows:

(a) For a period of one year from the Closing Date you will not without our written consent sell or dispose of any of the shares purchased by you hereunder, but your agreement shall not be deemed to prevent you from pledging all or any part of such shares as collateral security for a loan or prevent the lender in the usual manner from realizing on such collateral in the event of default and for this purpose an appropriate reference to this agreement shall be stamped on the certificate for the shares delivered to you hereunder prior to the delivery to you thereof.

(b) If your employment by the Company shall terminate within one year from the Closing Date, for the reason that you desire to accept a business position with another organization or engage in business on your own account, you will offer to sell to us (in such proportions between us as we determine) all the shares purchased by you hereunder, free and clear of any pledge, at the price of $5 per share. Your offer to us shall be in writing and unless sooner rejected by us remain open for acceptance during two full business days. If your said offer is not accepted by us or either of us with reference to all of the shares so offered to us, you shall be free otherwise to dispose of the shares not taken by us.

(c) If and whenever on or before December 31, 1947 you propose to sell or dispose of all or any part of the shares purchased by you hereunder, you will first offer to sell such shares to us (in such proportions between us as we determine) at the then current bid price in the market. Your offer to us shall be in writing and unless sooner rejected by us remain open for acceptance during two full business days. If your said offer is not accepted by us or either of us with reference to all of the shares so offered to us, you shall be free otherwise to dispose of the shares not taken by us.

(d) Prior to the expiration of one year from the Closing Date, you will not exercise any preemptive right which you may have by reason of the ownership of any shares purchased by you hereunder to demand the sale to you of additional shares of capital stock of the Company.

The agreements contained herein shall bind and benefit our successors and assigns and your executors, administrators and assigns as herein provided.

This offer will remain open for acceptance by you until the close of business on December 5, 1945, and if you desire to accept it, please indicate your acceptance in the space provided below on the duplicate hereof.

Sincerely yours,

THE FIRST BOSTON CORPORATION COFFIN & BURR, INCORPORATED BY COFFIN & BURR, INCORPORATED

ACCEPTED, December 3d, 1945: by A. F. Armitage, President.

Harold H. Kuchman

Petitioner's answering letter, dated December 4, 1945, is, in part, as follows:

Gentlemen:

Enclosed is my check made out to your order, in the amount of $2500. to cover payment of 500 shares of Bates stock as offered to me in your letter of December 1st, my acceptance of which was mailed to you on December 3rd.

I wish to thank you for the offer.

Sincerely yours,

Harold H. Kuchman.

The underwriters acknowledged receipt of petitioner's letter by their letter dated December 5, 1945.

On December 3, 1945, new stock was exchanged for old in a ratio of five to one. The 19,481 shares held by the underwriters were exchanged for 97,405 shares of the new stock out of a total of 135,000 new shares then outstanding. 0n December 3, 1945, the stockholders authorized the issuance of an additional 256,500 shares of new common stock, and the directors were authorized to sell the new issue for cash and to determine the price thereof, with the proviso that the new stock was not to be sold at less than par and was first to be offered for subscription to all the stockholders, excluding, however, the management group who had waived their preemptive rights.

After the sale by the underwriters of the 30,000 shares to the management group, they held 67,405 shares of new stock out of a total of 135,000 shares then outstanding. These 67,405 shares were not offered for public sale at that time. In March 1946 the underwriters sold 12,500 of those shares at $37 per share and in April 1947 sold the balance of 54,905 shares at $26.60 per share to an underwriting group headed by E. H. Rollins & Sons who immediately thereafter sold the shares to the public at $29.25 per share.

On December 10, 1945, two substantially identical petitions were filed with the United States Court of Appeals for the First Circuit under section 24(a) of the Public Utility Holding Company Act of 1935 seeking to review the order of the S.E.C. dated October 11, 1945, which order approved the plan whereby NEPSCO sold to the underwriters its investment in Industries. These two petitions were the Petition of Blatchley and the Petition of Goldfine. The two petitions prayed, for various reasons including alleged concealment of certain facts from the S.E.C., that the court review the order of the S.E.C. and set aside the finding that the plan was fair and equitable. The two petitioners were dismissed in Blatchley v. S.E.C., 157 F.2d 898, and Goldfine v. S.E.C., 157 F.2d 899, on October 29, 1946.

On December 12, 1945, by a prospectus included in the Registration Statement, Bates offered to its stockholders (exclusive of the management group who had been required to waive their preemptive rights) the 256,500 shares of the new issue of common stock at $22.75 a share. Excluding the 97,405 shares held by the underwriters and the management group, there were 37,595 shares of Bates common stock then outstanding. That stock carried a preemptive right to purchase 1.9 shares of the newly issued stock for each share of old stock held. The preemptive rights to purchase additional stock attaching to the 37,595 shares in the hands of persons other than the bankers and the management group were exercised by 78.556 per cent of the holders who subscribed to 56,113 shares of the newly issued stock at $22.75 a share.

Under an agreement between Bates and the underwriters, the underwriters agreed to purchase from Bates at $22.75 a share all of the stock not purchased by the stockholders under their preemptive rights. Pursuant to this agreement, on December 22, 1945, the underwriters took up the unsubscribed 200,387 shares of the newly issued stock and made payment to the company. Those 200.387 shares (except for 12,253.4 shares offered to the minority stockholders of Androscoggin, Edwards, Hill, and York) were offered to the public by the underwriters on December 22, 1945, at $25 a share.

With the proceeds received from sale of the 256,500 shares of Bates new issue of common stock the Maine Mills Plan was carried out. Pursuant to the plan Androscoggin and Hill each sold to Bates Manufacturing Company, and Edwards and York each sold to Bates Company (the wholly owned subsidiary of Bates) on December 22, 1945 (1) its lands, buildings, machinery, equipment, and other fixed assets; and (2) all its other assets with certain exceptions not here material. After the consummation of the plan, Bates Manufacturing Company owned (directly or indirectly through its wholly owned subsidiary Bates Company) the five textile mill plants, and Bates Manufacturing Company and Bates Company carried on the businesses so acquired as well as the business formerly carried on by Bates Manufacturing Company.

On April 16, 1947, the Bates Company and Bates Manufacturing Company were merged and thereafter all the properties were owned by and all the business carried on by Bates Manufacturing Company.

On December 18, 1945, prior to the public offering of the newly issued stock, one Samuel Martin filed a petition in the Supreme Judicial Court of the State of Maine to enjoin Bates Manufacturing Company from selling the new issue of 256,500 shares of common stock. The court on December 18, 1945, issued a temporary restraining order pending a hearing. The company thereupon filed a motion to dissolve the restraining order and the company's motion was granted and the restraining order dissolved on December 21, 1945. On February 19, 1946, the court entered a further order vacating the restraining order and dismissing the plaintiff's petition.

On January 21, 1946, Blatchley and Goldfine filed separate notices of appeal from the District Court's order of October 25, 1945, which order approved the order of the S.E.C. dated October 11, 1945. These appeals were dismissed in Blatchley v. S.E.C., 157 F.2d 900, and Goldfine v. S.E.C., 157 F.2d 900, on October 29, 1946.

On June 13, 1946, Blatchley filed in the District Court of the United States for the District of Maine a petition in the nature of a bill of review accompanied by a petition for leave to file the same. The petition alleged, among other things, that facts were concealed from the S.E.C. in the course of the proceedings leading up to its order of October 11, 1945, and the order of the District Court dated October 25, 1945, and prayed that the latter order be reviewed, vacated, and reversed. At a preliminary hearing on the petition held on July 10, 1946, the S.E.C. filed with the District Court a motion to have the matter remanded to the S.E.C. for further hearing and report, and petitioner therein made a similar motion. These motions were orally denied by the Court, but the District Judge stated that the denial of the motion would not prevent the S.E.C. from conducting an investigation for its own purposes. The S.E.C. thereafter, under date of July 23, 1946, issued an order for a public hearing for the purpose of determining what position it should take with respect to the petition, and these hearings were held between July 29, 1946, and August 1, 1946.

The petition in the nature of a bill of review filed by Blatchley in the District Court of Maine was dismissed on April 18, 1947.

On August 8, 1946, Blatchley filed in the Court of Appeals for the First Circuit a notice of appeal from the United States District Court's order of July 10, 1946, denying the motion to remand the bill of review to the S.E.C. This appeal was dismissed in Blatchley v. S.E.C., 157 F.2d 901, on October 29, 1946.

On September 11, 1946, Blatchley filed with the Court of Appeals for the First Circuit an application for leave to file a petition for a writ of mandamus directing the District Court to remand the matter to the S.E.C. This petition was denied in Petition of Blatchley, 157 F.2d 894, on October 29, 1946.

Respondent made a single adjustment to petitioner's reported net income for 1945, adding $10,000 termed ‘other compensation.‘ The adjustment was explained as follows:

It has been determined that 500 shares of stock acquired by you in 1945 for $2,500.00 had a fair market value of $25.00 a share and that the value in excess of the price paid, or $10,000, constitutes taxable income in 1945 under the provisions of Section 22(a) of the Internal Revenue Code.

Neither the underwriters nor Bates and its affiliates claimed a deduction in income tax because of the stock sold to petitioner.

During the period 1943 to 1946, inclusive, petitioner was paid in cash as salary and as bonus the amounts set out as follows:

+--------------------------------------+ ¦Year¦Salary ¦Bonus ¦Total salary¦ +----+----------+---------+------------¦ ¦ ¦ ¦ ¦and bonus ¦ +----+----------+---------+------------¦ ¦1943¦$11,480.77¦$1,148.00¦$12,628.77 ¦ +----+----------+---------+------------¦ ¦1944¦13,500.00 ¦1,350.00 ¦14,850.00 ¦ +----+----------+---------+------------¦ ¦1945¦13,499.98 ¦1,350.00 ¦14,849.98 ¦ +----+----------+---------+------------¦ ¦1946¦16,000.14 ¦5,000.00 ¦21,000.14 ¦ +--------------------------------------+

Petitioner could not have found on November 13, or on December 3 or 4, 1945, a buyer for the Bates stock, as restricted, purchased on exercise of the option, for any price in excess of $5 per share and no holder of the stock would have sold at $5 per share in the absence of compulsion. The Bates Manufacturing Company stock as restricted, which petitioner acquired in November or December 1945 did not have at that time a fair market value capable of being ascertained with reasonable certainty.

OPINION.

OPPER, Judge:

Respondent's opinion witness and petitioner on brief agree that a purchaser could not be found for the stock in question with its contractual restrictions. Although respondent now seeks to rely on the testimony of one of petitioner's opinion witnesses, this evidence on analysis is obviously a valuation of the stock, not from the standpoint of a purchaser from petitioner, but as of the time and under the circumstances that the underwriters distributed it. Since fair market value is defined as the price at which the property to be valued with all its attributes would change hands between a willing buyer and a willing seller generally, Andrew B. C. Dohrmann, 19 B.T.A. 507, 513, and not as the sale might be limited to one specific purchaser, see Estate of Millie Langley Wright, 43 B.T.A. 551; Heiner v. Crosby (C.A. 3), 24 F.2d 191, we have concluded that the ascertainment of fair market value cannot be founded on this testimony.

The finding has accordingly been made that the property had no ascertainable fair market value in the hands of petitioner. Under these circumstances acquisition of the stock does not justify charging petitioner in the year of its receipt with income in any amount. Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 577; Propper v. Commissioner (C.A. 2), 89 F.2d 617; Schuh Trading Co. v. Commissioner (C.A. 7), 95 F.2d 404; Morris D. Kopple, 35 B.T.A. 1056. Cf. Robert Lehman, 17 T.C. 652.

This disposition of the matter as an issue of fact, see Gould Securities Co. v. United States (C.A. 2), 96 F.2d 780; Blanchard v. Commissioner (C.A. 3), 184 F.2d 438, makes unnecessary consideration of the legal questions involved in the issuance of stock to an employee at a price below its fair market value. See Delbert G. Geeseman, 38 B.T.A. 258; Norman G. Nicolson, 13 T.C. 690; Wanda V. Van Dusen, 8 T.C. 388, affd. (C.A. 9) 166 F.2d 647; cf. Commissioner v. Smith, 324 U.S. 177.

Reviewed by the Court.

Decision will be entered for the petitioners.

KERN, VAN FOSSAN, HARRON, and RAUM, JJ., dissent.