Burley Tobacco Co. v. Commissioner ( 1928 )

BURLEY TOBACCO CO. OF FRANKFORT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Burley Tobacco Co. v. Commissioner

Docket No. 21311.

United States Board of Tax Appeals

13 B.T.A. 892; 1928 BTA LEXIS 3155;

October 10, 1928, Promulgated

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Held, certain bonds and stock had no readily realizable market value when received by petitioner.

Elwood Hamilton, Esq., for the petitioner.

Harold Allen, Esq., for the respondent.

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VAN FOSSAN

This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended June 30, 1923, amounting to $3,149.91, to which was added a penalty of $787.48 for failure to file a return.

The petitioner alleges that the Commissioner erred in two respects:

(1) In valuing at par, for the purpose of determining gain or loss, certain stock and bonds received by the petitioner in part exchange for its tangible assets;

(2) In assessing a penalty upon the petitioner for failure to file a return.

FINDINGS OF FACT.

The petitioner is a corporation organized in 1919 under the laws of the State of Kentucky, for the purpose of owning and operating tobacco warehouses. Its principal place of business is at Frankfort, Ky. Prior to December 23, 1921, it had acquired warehouse buildings and equipment at a cost of $52,469.46. After deducting depreciation of $4,848.02, the net depreciated cost in 1922 was $47,621.44. On the last mentioned date it entered into an agreement with one R. M. Barker, Director of Warehouses for the Burley Tobacco Growers Cooperative Association, a corporation then in the process of organization, whereby it agreed to lease its property to the said Association with an option to purchase it under specified terms and conditions. On February 15, 1922, the petitioner entered into another contract with the Association and the Central District Warehousing Corporation, a subsidiary of the Association, whereby it agreed to lease to the Central District Warehousing Corporation all its physical assets for ten and one-half months from the date of the contract "or unless and until the property is conveyed to the corporation prior to that date" and to sell all such property to the corporation at the fair market value to be determined according to the methods set forth in the Standard Warehouseman's Agreement theretofore made the basis of the agreement of December 23, 1921. The corporation exercised its option to purchase and paid the petitioner $18,750 in cash, $37,500 in bonds, and $18,750 in the capital stock of the Burley Tobacco Growers Cooperative Association. The par value of the stock and bonds paid to petitioner for its tangible assets was $10 and $100, respectively. The bonds bore interest at the rate of 6 per cent per annum, while the stock was 8 per cent preferred. Subsequent to this exchange the petitioner desired to distribute its assets among its 247 shareholders. After holding the securities for some time without being able to convert them into cash, the petitioner returned them to the Cooperative Association for the purpose of having them reissued in smaller units, with the view to making a distribution in kind. Later they were returned to the petitioner and were, with some exceptions, distributed on January 31, 1923, to its shareholders. Both stock and bonds had been issued serially, with maturity dates extending over a period of 5 years. Due to their early date of maturity 63 bonds and 41 shares of stock were retired at par by the Cooperative Association before the distribution to the petitioner's stockholders took place. Both prior and subsequent to the distribution, efforts were made by the petitioner and its stockholders to find a market for the stock and bonds, without success. None of the 5 banks located in Frankfort would handle them. No attempt was made to sell the securities outside of Frankfort, as all other tobacco growing centers had similar securities on hand. The sale of the petitioner's assets to the Cooperative Association had met with practically the unanimous approval of the stockholders and directors, although the petitioner reserved no lien upon the tangible property transferred.

The Cooperative Association, which was organized under an Act of the legislature of Kentucky passed January 10, 1922, was an association of 109,000 farmers in the States of Kentucky, Ohio, Indiana, West Virginia and Tennessee, formed for cooperative marketing and selling of tobacco. Tobacco growers, upon becoming members, agreed to deliver tobacco, six crops or for five years, to the Association at any designated point, and at the end of that time could withdraw from the Association.

As the stock and bonds of the Association matured they were retired by the Association and no stockholder of the petitioner ever sustained a loss on account of securities of the Association distributed to him.

On September 18, 1926, the petitioner filed a return for the fiscal year ended June 30, 1923, showing a profit of $8,986.50 on the sale of its real estate and equipment. The return and the 60-day letter based on the revenue agent's report contain no item of rentals received by the petitioner under its contract of February 15, 1922.

OPINION.

VAN FOSSAN: The sole question in this case is whether or not the stock and bonds of the Burley Tobacco Growers Cooperative Association had a readily realizable market value at the time they were received by the petitioner in exchange for its property. It is our conclusion that they did not.

This case has as its background the attempt of the tobacco growers to overcome by cooperation the disastrous consequences of individual competition and unfavorable economic conditions. The petitioner was a local organization of 247 small stockholders, which sold its property to the larger cooperative association comprising many farmers and local associations in 5 tobacco-growing States. In payment it received some cash, but chiefly stock and bonds of the Association. The respondent found these securities to be worth par while the petitioner contends they had no readily realizable market value at that time.

To understand the situation a picture of the whole project is essential. The Cooperative Association had bought out, under somewhat similar terms, a large number of local organizations. Each tobacco center had been called on to absorb its quota of the Association securities. Thus, the field for disposal of the securities was limited by practical conditions to the City of Frankfort, and to those persons already interested. With the above facts should also be considered, as bearing on the marketability of the securities, the uncertainty of success of any cooperative association. It may be stated as a fact demonstrated by many instances that the success of such a project depends chiefly on the loyalty and fidelity of the members to the association. The failure of a cooperative scheme is at once indicated when defections from its ranks become numerous. The ultimate success of a particular association does not demonstrate conclusively that its securities had a readily realizable market value from the start. So here the fact that the bonds and stocks were retired at maturity is not inconsistent with the petitioner's contention. .

Viewing the entire situation as we understand it, we are of the opinion that at the time the petitioner exchanged its property for cash and securities of the Cooperative Association, such securities did not have a readily realizable market value.

The available market being local, the marketability of the securities should be measured by a local yardstick. When so measured it is found that the market was overstocked, inquiries and attempts to sell the securities elicited no response, and efforts to interest the banks either by way of the sale or loan of the stock or bonds as collateral were fruitless.

The deficiency and penalty are disallowed.

Judgment will be entered for the petitioner.