Opinion
Docket Nos. 107242 107243.
1942-11-24
FRED G. GRUEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.GEORGE J. GRUEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Irving G. Bieser, Esq., and Zivel B. Niden, C.P.A., for the petitioners. Owen W. Swecker, Esq., for the respondent.
1. In 1935 petitioners agreed to use their best efforts as active officials of the Gruen Watch Co. to make the operations of that company successful; to carry out faithfully the work assigned to them by the board of directors of the company; and to effect at the earliest possible time payment of the outstanding debentures and the retirement of the class A preferred stock of the company. In turn banks which, as creditors, had received securities in the Gruen Watch Co. pursuant to a plan of reorganization agreed to deliver certain quantities of class B nonvoting preferred stock to the children of petitioners as each 10 percent face amount of debentures was retired at or before maturity. This obligation was to terminate if the net earnings of the company did not reach certain figures. Pursuant to this agreement, stock was received by the children in 1937. Held, the gift of the stock from the petitioners to their children was effected in 1937, not 1935.
2. A $40,000 payment to donees in January 1937 for a percentage of stock which might be received by them under the above-mentioned contract held, not to constitute a part of the gifts. As to an additional $40,000 paid to donees in June 1937 when they delivered stock to the payor, held, the stock and not the cash constituted part of the gifts.
3. Respondent's determination of value per share of stock received by donees approved.
4. Value of gifts held reduced by amounts paid by donees in satisfaction of petitioners' liability for income taxes due as result of receipt of stock by donees. Irving G. Bieser, Esq., and Zivel B. Niden, C.P.A., for the petitioners. Owen W. Swecker, Esq., for the respondent.
Respondent determined deficiencies in gift taxes for the year 1937 against the petitioners, Fred G. Gruen and George J. Gruen, in the respective amounts of $1,230 and $930. The first issue is whether respondent erred in determining that there were gifts in 1937. If we decide there were gifts in that year, we are then presented with the question as to the value of the property which was the subject of the gifts.
FINDINGS OF FACT.
In 1937 petitioners filed gift tax returns with the collector of internal revenue for the first district of Ohio.
In 1935 the petitioners, George J. Gruen and Fred G. Gruen, were vice president and president, respectively, of the Gruen Watch Co., hereinafter referred to as the company. The company was organized in 1922 under the laws of Ohio.
In 1935 the company was indebted to eight banks in the amount of $1,818,750 and was unable to meet its obligations to these banks as they matured.
In August 1935 a plan of reorganization which passed voting control of the company from petitioners to the eight banks became effective.
The plan of reorganization provided for a recapitalization of the company as follows:
+---------------------------------------------------------------------------+ ¦(1)¦Debentures, 1 to 5% ¦$727,500¦ +---+--------------------------------------------------------------+--------¦ ¦(2)¦Class A cumulative preferred, $100.00 par, with limited voting¦Shares ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦rights ¦7,275 ¦ +---+--------------------------------------------------------------+--------¦ ¦(3)¦Class B nonvoting 6% preferred, $1 par, subject to prior ¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦rights and cumulative after retirement of the debentures and ¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦class A cumulative preferred, convertible into class B voting ¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦6% preferred, $1 par (similar to class B nonvoting), or common¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦stock on a share for share basis ¦363,750 ¦ +---+--------------------------------------------------------------+--------¦ ¦(4)¦Class B voting 6% preferred, convertible into common, share ¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦for share ¦363,750 ¦ +---+--------------------------------------------------------------+--------¦ ¦(5)¦Class C voting 6% preferred, $25 par, subject to prior rights ¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦and cumulative after retirement of all above issues ¦20,000 ¦ +---+--------------------------------------------------------------+--------¦ ¦(6)¦Common stock $1 par (363,750 reserved subject to conversion ¦ ¦ +---+--------------------------------------------------------------+--------¦ ¦ ¦privilege of class B preferred) ¦500,000 ¦ +---------------------------------------------------------------------------+
All preferred stocks, except class C, were callable under certain conditions at their par value. For each $1,000 claim, the banks received:
+---------------------------------------+ ¦Debentures, face amount ¦$400¦ +----------------------------------+----¦ ¦Class A preferred shares ¦4 ¦ +----------------------------------+----¦ ¦Class B nonvoting preferred shares¦200 ¦ +---------------------------------------+
As a part of the plan of reorganization the eight banks entered into a contract with B. S. Katz and George J. and Fred G. Gruen, known as the ‘Katz and Gruen contract‘ whereby petitioners agreed to use their best efforts as active officials of the company to make the operations of the company successful, to carry out faithfully the work assigned to them by the board of directors of the company, and to effect at the earliest possible time the payment of the outstanding debentures and the retirement of the class A preferred stock of the company. The banks agreed that as each 10 percent face amount of debentures was retired at or before maturity they would deliver 3,750 shares of their class B nonvoting preferred stock to the daughter of petitioner Fred G. Gruen, and 3,750 shares of the same stock to the two children of petitioner George J. Gruen. This obligation was to terminate if the net earnings of the company as defined in the plan of reorganization did not aggregate $100,000 on April 1, 1937; $175,000 on April 1, 1938; and $250,000 on April 1, 1939.
On the same conditions additional similar stock was to be delivered to the same persons on retirement of the class A preferred stock. The total amount to be delivered on the full retirement of both debentures and class A preferred was as follows:
+----------------------------------------------------------------------+ ¦Margaret G. Gruen, daughter of Fred G. Gruen ¦50,625 shares¦ +--------------------------------------------------------+-------------¦ ¦R. D. Gruen and George T. Gruen, sons of George J. Gruen¦50,625 shares¦ +----------------------------------------------------------------------+
Under the Katz and Gruen contract the banks had the option of making delivery in equivalent numbers of shares of class B voting preferred or common stock in lieu of class B nonvoting preferred.
At the time of the reorganization the company offered to deliver in the future the stock as provided in the Katz and Gruen contract to petitioners. Petitioners refused because they were personally heavily indebted to the banks and did not wish to have such stock appropriated by the banks in payment of their other claims.
Petitioners continued as officers and directors of the company after the reorganization and received substantial salaries for their services.
On January 30, 1937, petitioners and their children entered into a contract with Alfred L. Strelsin, whereby the latter agreed to pay the children of petitioners an aggregate of $80,000 as follows:
+-----------------------------------------------------------------------------+ ¦At the time of the signing of the agreement ¦$40,000¦ +---------------------------------------------------------------------+-------¦ ¦On or about April 1, 1937, simultaneously with the delivery by the ¦ ¦ ¦Gruens to Strelsin of the 40% interest of 39,000 shares of Class B ¦40,000 ¦ ¦convertible nonvoting preferred stock, more or less ¦ ¦ +-----------------------------------------------------------------------------+
This contract also provided that the $80,000 payment constituted, among other things, complete payment for a 40 percent interest in the total number of 101,250 shares receivable by the children of petitioners under the Katz and Gruen contract. It was further agreed that none of the remaining 60 percent of the shares retained would be sold for a period of one year from the date of their receipt and that Alfred L. Strelsin would have a proxy over the remaining 60 percent of the shares, to be held in escrow for that period.
At the time of the agreement it was known by the parties that sufficient debentures would be retired by June 1, 1937, to require delivery of approximately 39,000 shares to the children of petitioners by the banks.
On June 1, 1937, Margaret S. Gruen became entitled to receive and on June 7, 1937, she did receive from the eight banks 22,500 shares of class B nonvoting preferred stock of company, of which she delivered 9,000 shares to Alfred L. Strelsin, pursuant to the agreement. The sons of George J. Gruen received the same number of like shares from the eight banks and also delivered 9,000 shares thereof to Alfred L. Strelsin, pursuant to the agreement.
The entire amount of $80,000 was paid to the children and was divided among them in proportion to their stock interests under the contract.
The fiscal year of the company has always terminated on March 31, and as of that date all financial reports were prepared for the benefit of the company and its stockholders.
As of March 31, 1937, the book value of the class B nonvoting preferred stock was $1 per share. The liquidating and redemption value of this stock was $1 per share.
No dividends were paid by the company during any of the fiscal years ending March 31, 1933, to March 31, 1937, inclusive, except that in 1937 dividends, approximating $22,000, were paid on the class A preferred stock held by the banks.
Figures reflected by annual reports for the fiscal years ending March 31, 1933, to March 31, 1940, inclusive, are as follows:
+----------------------------------------------------------------------+ ¦Book value¦ ¦ ¦ ¦ ¦ ¦ ¦ +----------+-------+-----------+----------+-------------+--------------¦ ¦ ¦Date of¦ ¦ ¦Surplus ¦ ¦ +----------+-------+-----------+----------+-------------+--------------¦ ¦Year ¦report ¦Loss ¦Profit ¦charges ¦ ¦ ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦ ¦ ¦ ¦ ¦ ¦Class B¦Common¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1933 ¦5-25-33¦$480,835.98¦ ¦$2,547,988.77¦ ¦ ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1934 ¦5-15-34¦334,840.61 ¦ ¦59,668.86 ¦ ¦ ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1935 ¦ ¦799,299.39 ¦ ¦484,240.24 ¦ ¦ ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1936 ¦5- 7-36¦ ¦$4,745.95 ¦14,678.42 ¦ ¦ ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1937 ¦4-30-37¦ ¦606,685.95¦20,405.50 ¦$1.00 ¦$1.10 ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1938 ¦5- 7-38¦ ¦726,141.87¦92,661.34 ¦1.00 ¦3.76 ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1939 ¦5-23-39¦ ¦540,669.23¦79,028.73 ¦1.00 ¦4.00 ¦ +----------+-------+-----------+----------+-------------+-------+------¦ ¦1940 ¦5-31-40¦ ¦745,267.87¦119,908.70 ¦1.00 ¦5.11 ¦ +----------------------------------------------------------------------+
The outstanding stock of the company as of March 31, 1937, was as follows:
+-------------------------------------------------------------------------+ ¦ ¦ ¦ ¦Shares ¦Amount ¦ +--------------------------------------------------------+-------+--------¦ ¦Class A preferred stock, $100 par, authorized and issued¦7,275 ¦$727,500¦ +--------------------------------------------------------+-------+--------¦ ¦Class B convertible non-voting preferred stock, $1 par, ¦ ¦ ¦ +--------------------------------------------------------+-------+--------¦ ¦outstanding ¦357,794¦357,794 ¦ +--------------------------------------------------------+-------+--------¦ ¦Class B convertible voting preferred stock, $1 par— ¦ ¦ ¦ +--------------------------------------------------------+-------+--------¦ ¦Shares authorized ¦ ¦363,750 ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Less shares unissued ¦ ¦363,650 ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Outstanding ¦ ¦ ¦100 ¦100 ¦ +--------------------------------------------------------+-------+--------¦ ¦Class C preferred stock, $25 par— ¦ ¦ ¦ +--------------------------------------------------------+-------+--------¦ ¦Shares authorized ¦ ¦20,000 ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Less shares in treasury ¦ ¦425 ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Outstanding ¦ ¦ ¦19,575 ¦489,375 ¦ +--------------------------------------------------------+-------+--------¦ ¦Common stock, $1 par— ¦ ¦ ¦ +--------------------------------------------------------+-------+--------¦ ¦Shares authorized ¦ ¦500,000 ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Less shares unissued ¦376,357 1/2 ¦ ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Shares in treasury ¦2,691 1/2 ¦379,049 ¦ ¦ ¦ +-------------------------------+--------------+---------+-------+--------¦ ¦Outstanding ¦ ¦ ¦120,951¦120,951 ¦ +-------------------------------------------------------------------------+
Earnings per share for each class of stock for the years 1936 to 1940, inclusive, were as follows:
+---------------------------------------------------+ ¦ ¦Net earnings ¦Net earnings¦Net earnings ¦ +----------+-------------+------------+-------------¦ ¦Year ended¦after surplus¦applied for ¦available for¦ +----------+-------------+------------+-------------¦ ¦ ¦charges ¦redemption ¦dividends ¦ +----------+-------------+------------+-------------¦ ¦3-31-36 ¦$19,424.37 ¦ ¦$19,424.37 ¦ +----------+-------------+------------+-------------¦ ¦3-31-37 ¦586,280.45 ¦$441,435.68 ¦144,844.77 ¦ +----------+-------------+------------+-------------¦ ¦3-31-38 ¦633,480.53 ¦431,564.32 ¦201,916.21 ¦ +----------+-------------+------------+-------------¦ ¦3-31-39 ¦461,640.50 ¦174,600.00 ¦287,040.50 ¦ +----------+-------------+------------+-------------¦ ¦3-31-40 ¦625,359.17 ¦407,400.00 ¦217,959.17 ¦ +---------------------------------------------------+
+-----------------------------------------------------------+ ¦ ¦Class A ¦Class B ¦Class C ¦Common ¦ +----------+------------+-----------+-----------+-----------¦ ¦ ¦preferred ¦preferred ¦preferred ¦ ¦ ¦ +----------+------------------------------------------------¦ ¦Year ended¦ ¦ +----------+------------------------------------------------¦ ¦ ¦Earned¦Paid ¦Earned¦Paid¦Earned¦Paid¦Earned¦Paid¦ +----------+------+-----+------+----+------+----+------+----¦ ¦3-31-36 ¦$2.67 ¦None ¦None ¦None¦None ¦None¦None ¦None¦ +----------+------+-----+------+----+------+----+------+----¦ ¦3-31-37 ¦3.00 ¦$3.00¦$.06 ¦None¦$1.50 ¦None¦$.60 ¦None¦ +----------+------+-----+------+----+------+----+------+----¦ ¦3-31-38 ¦3.00 ¦3.00 ¦.06 ¦None¦1.50 ¦None¦.64 ¦None¦ +----------+------+-----+------+----+------+----+------+----¦ ¦3-31-39 ¦4.00 ¦4.00 ¦.06 ¦None¦1.50 ¦None¦.66 ¦None¦ +----------+------+-----+------+----+------+----+------+----¦ ¦3-31-40 ¦5.00 ¦5.00 ¦.06 ¦$.01¦1.50 ¦$.01¦.43 ¦None¦ +-----------------------------------------------------------+
Under the aforementioned agreement, before the class B convertible nonvoting preferred stock or the common shares could be redeemed, all outstanding debentures had to be retired; no dividends were payable on any stock except the class A preferred stock; and no stock of the company could be purchased or retired so long as the debentures were outstanding. Seventy-five percent of the annual net earnings, less any amounts paid out during the year as dividends on class A preferred stock, was required to be paid toward the redemption of the debentures and was, accordingly, not available for dividends.
The common stock of the company was held by approximately 1,400 individuals. Approximately 16,000 shares of this stock, out of a total of 120,951 shares, were held by members of the Gruen family.
None of the issues of stock of the company was listed on any exchange. The class C preferred and common stock were traded in the over-the-counter market in Cincinnati. The shares of common stock of the company bought and sold through June 1937 over the counter in Cincinnati and the prices obtained therefore were as follows:
+--------------------------------------------------------------+ ¦ ¦ ¦Shares¦Shares ¦ ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦Date ¦bought¦sold ¦Price ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 1-18-37 ¦ ¦100 ¦7 1/4 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 1- 6-37 ¦ ¦100 ¦7 1/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦W.E. Fox & Co ¦( 1- 7-37 ¦ ¦9 ¦7 1/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 1-14-37 ¦ ¦62 1/2 ¦6 7/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 5- 3-37 ¦ ¦13 ¦7 5/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 1- 4-37 ¦ ¦75 ¦7 1/4 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 3-10-37 ¦200 ¦ ¦7 3/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 3-19-37 ¦ ¦15 ¦7 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 7-14-37 ¦ ¦28 ¦8 5/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 7-23-37 ¦ ¦100 ¦8 1/2 ¦ +-------------------+----------+------+---------+--------------¦ ¦W.E. Hutton & Co ¦( 7-29-37 ¦ ¦100 ¦8 3/4 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 8- 2-37 ¦ ¦200 ¦8 1/2 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 8-12-37 ¦100 ¦ ¦8 7/8 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 9-14-37 ¦100 ¦ ¦8 1/2 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦( 9-22-37 ¦ ¦100 ¦8 1/2 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦(10- 2-37 ¦ ¦100 ¦7 3/4 ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦ ¦ ¦(Approx. ¦7, 7 1/8, ¦ +-------------------+----------+------+---------+--------------¦ ¦Edw. Brockhaus & Co¦(April ¦ ¦( 1,000 ¦7 5/8, and ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦ ¦ ¦( shares.¦7 3/4. ¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦(September¦ ¦700-800 ¦(7 3/4, 8 3/8,¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦ ¦ ¦ ¦(8 1/2, 8 3/4,¦ +-------------------+----------+------+---------+--------------¦ ¦ ¦ ¦ ¦ ¦(and 9. ¦ +--------------------------------------------------------------+
High and low quotations for common stock of the company in lots usually of 100 shares or less, but in a few instances of 200 and 500 share lots, were as follows:
+-------------------------------------------------------------------+ ¦ ¦High ¦Latest¦Low ¦Latest¦High ¦ ¦Low ¦Date ¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦ ¦bid ¦date ¦bid ¦date ¦asked¦Date ¦asked¦ ¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦Jan. to June 1937¦8 ¦2-15 ¦6 3/4¦4- 9 ¦8 3/4¦2-15 ¦7 1/4¦4- 9 ¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦July to Dec. 1937¦8 3/4¦9-15 ¦5 ¦11- 9 ¦9 1/4¦9- 3 ¦5 7/8¦11-23¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦Jan. to June 1938¦5 5/8¦1-20 ¦2 1/2¦4- 9 ¦6 1/4¦2-25 ¦3 1/2¦4- 2 ¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦July to Dec. 1938¦8 1/4¦12- 9 ¦4 ¦10- 7 ¦8 3/4¦12- 9¦5 ¦10- 8¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦Jan. to June 1939¦7 ¦1- 5 ¦4 ¦4- 6 ¦10 ¦1- 5 ¦4 7/8¦4- 8 ¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦July to Dec. 1939¦4 1/2¦7- 8 ¦3 1/8¦12-30 ¦5 3/4¦7- 8 ¦3 3/4¦9-29 ¦ +-----------------+-----+------+-----+------+-----+-----+-----+-----¦ ¦Jan. to June 1940¦7 1/8¦4- 8 ¦3 3/4¦6-26 ¦7 5/8¦4- 8 ¦4 1/2¦6- 7 ¦ +-------------------------------------------------------------------+
In or about April 1937 the Lincoln National Bank sold its entire stock holdings in the company to Alfred L. Strelsin for 80 cents on the dollar for each group of holdings. These holdings consisted of $45,000 debentures, 450 shares of class A stock with a par value of $100, and 20,953 1/2 shares of class B nonvoting preferred with a par value of $1. At the same time two other Cincinnati banks were also willing to sell their entire holdings in the company, but on advice of counsel that they might be subject to liability under the Katz and Gruen contract they refused to conclude the sale.
Deficiencies of income tax asserted against petitioners for the year 1937 in the amount of $25,290.67 in the case of George J. Gruen and in the amount of $14,815.78 in the case of Fred G. Gruen were settled by stipulation, resulting in the finding of deficiencies by the Board of Tax Appeals in the respective amounts of $11,389.70 and $5,060.70. Payments were made on account of the deficiencies and interest in the amount of $13,317.68 in the case of George J. Gruen by his sons, R. D. and George T. Gruen, and in the amount of $5,917.34 in the case of Fred G. Gruen by his daughter, Margaret G. Gruen.
At all times from 1935 to the present petitioners have been insolvent.
OPINION.
VAN FOSSAN, Judge:
The first issue for our consideration is whether the gifts in question were made in 1935 or 1937. Petitioners contend that the gifts were effected in 1935 because it was then that the rights of the donees as third party beneficiaries of the Katz and Gruen contract became vested. Respondent argues that the gifts were not completed until 1937, since it was not until that year that the donees received delivery of the property which was the subject of the gifts.
The elements essential for a valid gift are to be found in the following statement from Edson v. Lucas, 40 Fed.(2d) 398:
* * * ‘To constitute a valid gift inter vivos, there must be a gratuitous and absolute transfer of the property from the donor to the donee, taking effect immediately and fully executed by a delivery of the property by the donor, and an acceptance thereof by the donee.‘
An examination of the facts in these proceedings shows that the Katz and Gruen contract in 1935 did not, of itself, contain the requirements indicated in the above quotation as necessary for a completed gift in that year. Consummation of the gifts was conditioned on the occurrence of certain events. A certain amount of debentures of the company had to be retired at or before their maturity and the net earnings of the company had to reach certain amounts before the donees would become entitled to the stock. Such conditions precedent are themselves sufficient to prevent the contract from constituting a gift in 1935. See Lorraine Manville Gould Dresselhuys, 40 B.T.A. 30.
Moreover, in 1935 the donors retained control over the right to receive the stock in that they had to be actively associated with the company and had to be using their best efforts to make the company's operations successful at the time the obligation to deliver the stock accrued. Thus the donors could have prevented the stock from ever being delivered to their children simply by disassociating themselves from the company. See Sanford's Estate v. Commissioner, 308 U.S. 39; Doris Bond Sherman, 41 B.T.A. 898.
We conclude that the gift was consummated in 1937, when the donees actually received the property.
The second issue concerns the proper value to be placed on the gift in 1937. Respondent, in determining the value of the gift, considered the $80,000 payment received by the donees from Strelsin as part of the gift. Petitioners contend that the stock, not the $80,000 payment, was the subject of the gift and, therefore, only the value of the former should be considered in computing the value of the gift.
As to the $80,000 ($40,000 as to each petitioner) received by the children of petitioners from Strelsin, ue are unable to agree with the respondent. The gifts by petitioner to the children consisted of stock. They were consummated in June 1937 and the gifts became effective and taxable at that time. Though the petitioners were, for a reason which does not appear, made parties to the Strelsin contract, the contract was one for the sale of stock when received, and the payment was a payment on account of such contract for the purchase of stock. The $80,000 never belonged to petitioners and never passed through their hands. Strelsin was not making a gift to anybody— he was paying for stock bought— nor did petitioners, who had no rights in the $80,000 and who were never entitled to receive the same, make a gift thereof to their children. As we have observed, the gifts consisted solely of stock. We are not in these cases concerned with the income tax results of the Strelsin contract under which the $80,000 was paid. Respondent's determination is reversed to the extent that it depends on the inclusion of the $80,000 in the gifts of the petitioners.
There remains the question of the proper value to be placed on the class B nonvoting preferred stock. The respondent determined the value to be $3 per share and assessed a gift tax on that basis. Petitioners contend that the stock did not have a fair market value greater than $1.10 a share.
The evidence presented does not demonstrate that the respondent's determination was incorrect. We have not overlooked the fact that there was one sale of class B nonvoting preferred stock made by a bank at a nominal figure of 80 cents on the dollar. However, that sale was made as a part of the bank's disposition of its entire holding of securities in the company and, hence, does not afford an accurate criterion of an independent value placed on such stock by the bank. On the other hand, occasional sales of common stock, into which the class B nonvoting preferred stock was convertible, were made at prices ranging from approximately $6.50 to $7.50 a share during a period of five months preceding the delivery of the stock to the children, thus indicating an even greater value than that determined by the Commissioner. Taking the entire record into consideration, the evidence does not warrant our disturbing the finding of the Commissioner in this respect.
Petitioners further contend that the value of the gifts should be reduced by amounts paid by the donees in satisfaction of their transferee liability for income taxes due from petitioners. Respondent has not attempted to refute this contention, either at the hearing or on brief.
The liability for the income tax resulting from the receipt of the stock in question arose at the time of such receipt. See Otto C. Botz, 45 B.T.A. 970, wherein stockholders of a corporation to whom corporate assets had been distributed were held liable as transferees for income taxes of the corporation arising on a gain from a sale or exchange of assets for cash. The corporation was on a calendar year basis and the sale or exchange occurred on August 1, 1933. We stated therein as follows:
* * * The debt for the tax, basing the present proceedings, arose on August 1, 1933, when the sale or exchange by the Botz Co. occurred, giving rise to the tax.
Furthermore, the insolvency of the donors at the time of the transfer and their consequent inability to pay the income tax resulting from the transfer were sufficient to shift the tax liability to the donees. In Lehigh Valley Trust Co., Executor, 34 B.T.A. 528, we said:
Under the decisions of the Board and the courts the distribution of assets does not of itself mean the incurring of transferee liability. It is only when such distribution makes the taxpayer insolvent or leaves him with insufficient assets to pay the tax due that the liability comes into existence. Helen Dean Wright, 28 B.T.A. 543, and cases there cited. Here the parties have stipulated that the distributions by the administrator rendered the estate of Jonas George insolvent and without funds or assets with which to pay the tax. We must assume that the stipulation was carefully drawn and couched in language chosen with full realization of the meaning of the words used. Thus we have no alternative to holding that petitioners are liable as transferees.
It is our opinion, therefore, that the value of the gifts should be decreased by the amount of income taxes paid by the donees as transferees of the donors. See United States v. Klausner, 25 Fed.(2d) 608.
Decisions will be entered under Rule 50.