Nichols v. Commissioner , 15 B.T.A. 1155 ( 1929 )

A. M. NICHOLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Nichols v. Commissioner

Docket No. 12623.

United States Board of Tax Appeals

15 B.T.A. 1155; 1929 BTA LEXIS 2716;

March 29, 1929, Promulgated

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">*2716 As compensation for his services in effecting a sale of certain coal properties the petitioner received from the purchaser certain interest-bearing notes and bonds payable seven years from the date of receipt, the bonds being secured by a deed to the property purchased and the notes being unsecured. The Commissioner included the face value of the notes and bonds in the petitioner's income for the year in which they were received. Held, that the notes had no market value at the time received and that, therefore, the Commissioner's determination in respect to the notes was erroneous, but that the evidence offered was insufficient to show error in the Commissioner's determination in respect to the bonds.

W. W. Booth, Esq., and W. A. Seifert, Esq., for the petitioner.

L. A. Luce, Esq., for the respondent.

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MURDOCK

">*1156 This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $4,221.87. It is alleged that the Commissioner erred in including in the petitioner's gross income the amount of $25,000, the face value of certain promissory notes and bonds received as commissions by the petitioner">*2717 during the taxable year.

FINDINGS OF FACT.

The petitioner is an attorney-at-law residing at Waynesburg, Greene County, Pa. About October 1, 1920, he arranged a sale to the General Investment Co. of approximately 6,347 acres of undeveloped coal land situated in Marshall County, W. Va. In payment of the purchase price and the commissions on the sale of the property the General Investment Co. gave $29,140 of its notes, $525,000 of its bonds, and $71,804 in cash. The bonds were dated August 15, 1920, bore interest at 6 per cent, and matured over a period of 7 years, $70,000 maturing each year for 6 years and the balance or $105,000 maturing the seventh year. They were secured by a deed to the property purchased.

Of the acreage sold, 46.5 acres were owned by the petitioner. In exchange therefor he received from the General Investment Co. $4,625 in cash, which amount he returned as income for 1920. He also received from the company as commissions on the sale, three of the primissory notes of a total face value of $14,000, all dated August 15, 1920, and payable August 15, 1927, bearing interest at 6 per cent, and $11,000 face value of the company's bonds maturing August 15, 1927. ">*2718 He was paid the full amount of interest on both the notes and bonds in the years 1921, 1922, and 1923, but has received no interest since the latter year.

The General Investment Co. was a West Virginia corporation formed in 1915 by J. C. McKinley and Nelson T. Hubbard of Wheeling, W. Va., as a holding company to take title to coal properties, none of which it operated. During the taxable year it owned about 10,000 acres of such property. The balance sheet of the company as of December 31, 1920, was as follows:

Assets
Cash	$655.25
Bills receivable	130,000.00
Accounts receivable	29,761.85
Supplies	32.04
Stock in other corporations	277,935.00
Bonds	800.00
Real estate	1,053,110.63
Oil investigation	600.00
Treasury stock	62,000.00
	1,554,894.77
Liabilities
Bills payable	$464,181.19
Accounts payable	458,753.61
Bonds	525,000.00
Capital stock	84,000.00
Accrued interest	11,812.50
Surplus	11,147.47
	1,554,894.77

">*1157 The bills receivable in the above balance sheet represented two notes of $65,000 each, made by McKinley and Hubbard. Of the stock in other corporations, about $270,000 represented stock from which the company never">*2719 received any income. The greater part of the item designated bills payable represented notes given for the purchase of coal lands. The accounts payable represented money owed to various allied corporations and to McKinley and Hubbard. After July 1, 1920, and through the balance of the year the company owned no income-producing assets.

The amount of $71,804 used as part payment in the purchase of the Marshall County properties was borrowed on open account from the Richland Coal Co. All of this company's common stock was owned by the Richland Coal Mining Co. and all of the latter company's common stock was owned by McKinley and Hubbard.

Before the sale was made, the petitioner agreed to accept the notes and bonds as payment for his commissions. He took these of necessity since he was unable to obtain anything else. A short time after receiving the notes he offered them in payment of a debt, but the creditors refused to accept them at any value due to the fact that after making numerous inquiries they were unable to receive any cash offers therefor. At some undisclosed time or times the petitioner offered the notes as collateral to the First National Bank and to the Marshall">*2720 County Bank, both of Moundsville, W. Va., both of which banks refused to accept them. When some of the General Investment Co.'s notes were presented for discount at the Marshall County Bank of Moundsville, W. Va., in 1920, the bank refused to discount them or to accept the bonds as collateral security with the notes. The company did not pay any of the bonds at their maturity dates. About the end of the year 1920 the petitioner placed three bonds with a bank as collateral security on a loan.

The notes had no market value at the time they were received by the petitioner. The market value of the bonds at the time they were received by the petitioner was $11,000.

OPINION.

MURDOCK: The petitioner has alleged that the Commissioner erred in adding to his income for the taxable year 1920 the amounts of $11,000 and $14,000 representing the face value of the notes and bonds received as compensation during that year by the petitioner under the circumstances set forth in the findings of fact. It is the petitioner's contention that none of this amount represented income to him during the year, for the reason that the notes and bonds so received in 1920, and payable in 1927, had no">*2721 market value at the time received.

">*1158 Section 213 of the Act of 1918 provides as follows:

SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -

(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid * * *.

Regulations 45, promulgated by the Commissioner with the approval of the Secretary, relating to the 1918 Act, contains the following:

ART. 33. Compensation paid other than in cash. - Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. * * *

ART. 34. Compensation paid in notes. - Promissory notes received in payment for services, and not merely as security for such payment, constitute income to the amount of their fair market value. * * *

In the case of , the Board considered and approved a somewhat similar regulation promulgated under the Revenue Act of 1916 (art. 4, par. 22 of Regulations 33) and held that stock paid as compensation">*2722 for personal services was taxable as income to the extent of its fair market value. See also , holding that bonds received as compensation for personal services are income in the year received to the extent of their fair market value.

Presumably, then, the Commissioner in conformance with his regulations has determined that the fair market value of the notes and bonds received by the petitioner equaled their face value. This determination must be sustained unless the petitioner can show that in 1920 their market value was less than the amount determined, or that at that time they had no market value whatsoever, which latter condition is the one the petitioner contends was a fact. To meet the burden of proof he has offered the opinion testimony of two witnesses - one, a banker who was familiar with the values of coal properties and securities issued by coal companies of the vicinity during the year 1920; and the other, the former secretary-treasurer of the General Investment Co., who had held this position during the taxable year. In answer to a hypothetical question as to whether the notes and bonds had a market value in 1920, the">*2723 banker testified that in his opinion neither would be readily marketable. When examined further concerning this opinion he stated that he did not know where a market could have been found for the bonds and that he or his bank would not have paid anything for them in 1920. The former officer of the company testified that in his opinion neither the notes nor the bonds had any market value in 1920.

It may be observed that where the issue before the Board concerns the existence of market value, a question of fact, expert opinion ">*1159 testimony as to such value may be only one of several methods of proof and is merely evidence to be followed or not, to the extent that it may be considered reliable. See ; ; ; ; ; . Also, its efficacy as proof may depend to a great degree upon the qualifications of the witnesses and their familiarity with the market for the property concerning which">*2724 they are testifying. The fact that one of the witnesses was during the taxable year an officer of the company which issued the notes and bonds, does not show that he was familiar with the market values of its securities. In this particular case both the notes and the bonds were issued in payment for the property and it does not appear that the witness was ever concerned with the sale of the securities or with any attempt to sell them.

The petitioner was attempting to prove that the fair market value of the securities was nihil.He did not necessarily accomplish this by merely having the witnesses state that in their opinions the securities had no market value. It is our duty to decide whether or not these securities had any fair market value at the controlling date, and we must be given sufficient facts on which to base our decision in order that it may not be a mere echo of the unsupported opinions of others. Fair market value means the amount which would be mutually agreed upon in a sale between a willing seller not forced to sell and a willing purchaser not forced to buy. See ">*2725 ; ; . In this particular case it does not appear that the witnesses understood this to be the meaning of the term fair market value, so that our decision should not depend solely upon their opinions. Cf. .

The General Investment Co. was only a holding company of undeveloped coal lands, having no income at any time from operations. It did not receive income from any source from July 1, 1920, throughout the balance of the year. Its bills and accounts payable were in excess of its receivables and its only real assets consisted of undeveloped coal lands, the value of which was not given. The comparatively small amount of cash given in purchase of the acreage which was bought in 1920 was borrowed from another corporation. The remainder of the payment consisted of the General Investment Co.'s notes and bonds. The notes were unsecured. Two of the petitioner's creditors refused to accept them at any value in payment of their debt. These facts are sufficient to convince us">*2726 that at the time received by the petitioner the notes had no market value and represented no taxable income to him at such time. We therefore conclude ">*1160 that the Commissioner was in error in including the amount of $14,000, representing the face value of the notes, in the petitioner's income for the year 1920.

However, as to the bonds, the petitioner's evidence is not sufficient to show that they had no market value at the time received. Although they were not payable for seven years, they were secured by a deed to the property purchased. It is true that the value of this property does not appear on the record, but, even if it were worth little more than the amount of cash paid in its purchase, it is quite probable that this security would give some value to the bonds for which a purchaser would be willing to pay. The determination of the Commissioner in respect to the bonds is sustained.

Judgment will be entered under Rule 50.