O'Meara v. Commissioner (34 F.2d 390, 1929)

PHILLIPS, Circuit Judge.

These are appeals from decisions of the Board of Tax Appeals. The facts, as disclosed by the findings of the Board of Tax Appeals, the stipulation of facts filed in the proceeding before the board, and' the oral testimony of three witnesses given at the hearing before the board, are as follows:

The board found: That on and prior to March 31, 1919, certain oil and gas leases in Marion county, Kansas, were owned by the following persons as tenants in common in the following proportions: S. W. Forrester, 29/96; C. W. Horn, 12/96; N. B.. Burge, 5/96; C. B. Burge, 1/96; C. A. O’Meara, 1/96; Elmhurst Investment Company, a corporation, 48/96. That such persons, on September 1, 1919, completed a test well on one of these leases which resulted in a dry hole. That such persons, on February 4, 1919, completed a second well on another of these leases, which came in with a flush production of about 1,200 barrels per day. That such persons, on March 31, 1919, entered into a written contract to organize a corporation to take over and operate such oil leases and to market and sell the oil therefrom.

The findings of the board set out such contract in full. This contract described the oil and gas leases; it recited that the above mentioned persons were the owners thereof in the proportions above set out; that such persons had found it inconvenient to make contracts and to transact business with reference to the development and operation of such oil properties, under such diverse ownership thereof.

The contract provided that it was “agreed by and between said owners that for the purpose of placing the title to said leases under a single ownership, and for greater convenience in making contracts and doing business, that a corporation be created for the purpose of talcmg the title to said properties, holding and developing the same, and disposing buy, but insist that, since the leases had a market value, the stock also must have had a market value at least equal to that of the leases, and that, where there is no actual market value for corporate stock, intrinsic value may be resorted to for the purpose of estimating market value. They further contend that the burden of proving the absence of a market value was upon appellants, citing Wickwire v. Reinecke, 275 U. S. 101, 48 S. Ct. 43, 72 L. Ed. 184, and Avery v. Commissioner (C. C. A.) 22 F.(2d) 6, 55 A. L. R. 1277, and that appellants did not meet this burdep. of proof.

It seems clear to us that stoek for which there is no market — which could not be sold or could not he sold for an amount reasonably approximate to its real or intrinsic value— has no market value within the meaning of section 202(b) of the Revenue Act of 1918. It seems equally clear to us that sueh stoek, which would have to he sacrificed by the holder in order to convert it into cash, does not have an exchangeable value within the meanr ing nf the definition laid down in Eisner v. Macomber, supra. Sueh was the holding in Bourn v. McLaughlin (D. C. Cal.) 19 F.(2d) 148; Tsivoglou v. United States (C. C. A. 1) 27 F.(2d) 564; Id. (C. C. A.) 31 F.(2d) 706. See, also, Holmes, Federal Taxes, § 332, p. 597; Id. § 337, p. 620.

Section 202(b) provides that “the property received in exchange shall for the purpose of determining gain or loss he treated as the equivalent of cash to the amount of its fair market value, if any.” Under this section, where property is exchanged for other property, there is no taxable gain unless the property received in exchange has a value realizable in money’s worth. If the property received in exchange does not have sueh a value, the exchange leaves the taxpayer where he was before the exchange. Sueh must be the construction of section 202(b) if it is to he brought within the definition of “income” as laid down in Eisner v. Maeomber, supra, because, if the value of the property received in exchange cannot be realized in money, then the profit in the transaction is not susceptible of being severed from the capital.

No doubt eases may arise where intrinsic value may be resorted to for the purpose of establishing market value. For example, where stoek is closely held and there are no sales thereof on the open market but where, from proven facts and circumstances, there could be no doubt of the existence of a market for the stock at a fair price if the same were offered for sale. In sueh ease, however, it would be necessary to show -not only that there were no sales which reasonably reflected the market value but that there would be a market value if the stoek 'were offered for sale. Holmes, Federal Taxes (6th Ed.) p. 620, § 337.

The deficiencies made by the Commissioner were prima facie correct and the burden of showing lack of market value rested upon appellants. The question remains: Did they meet this burden? The proof showed that the Commissioner determined the market value of the shares solely from the market value of the leases and took no other elements into consideration; that there were no sales of the stock and no offers to buy it; that it was assessable under the provisions of the contract of March 31; that it was highly speculative; that prejudice existed against stock of such character; that oil leases could be sold but that stoek could not be sold.

A negative is always difficult to- establish, but we think appellants sustained the burden of proof and established that the stoek in question could not have been sold at a price approximating what the Commissioner determined to be its intrinsic value.

It is our conclusion that the deficiencies should be set aside in so far as they were based upon the transfer of the oil and gas leases to the Orlando; Company.

The Elmhurst Case presents one other question: Whether income derived from the sale of six leases made by that company should have been computed under the provision of section 337 of the Revenue Act of 1918 (40 Stat. 1096). This claim was not presented in the Elmhurst petition for appeal, but was first urged on the hearing under rule 50. We agree with the ruling of the board that this issue could not be presented for the first time at the hearing provided for under rule 50. Metropolitan Business College v. Blair (C. C. A.) 24 F.(2d) 176.

The causes are reversed and remanded for further proceedings in accordance with this opinion.