Appeal of Aldrich

3 B.T.A. 911

• Court: United States Board of Tax Appeals
• Decided: February 19, 1926
• Docket: Docket No. 3301
• Status: Published

Opinion

OPINION.

MaRquette:

We have two questions for decision herein: (1) Whether the amoufit of $6,000 in dividends on the stock held in escrow, received by the taxpayer in 1918, constituted a dividend to him under the circumstances above set forth, and (2) whether the 600 shares of stock of the Aldrich Pump Co., received by him m 1919, had a fair market value at that time and were taxable as income in that year. We will consider these questions in their order.

By the terms of the agreement the Allentown Eolling Mills agreed to compensate Aldrich for entering into a contract with the Aldrich Pump Co. to act as general manager for a period of five years by delivering in escrow 600 shares of the capital stock of the Pump Co., upon the conditions that all dividends declared upon those shares from time to time should be paid to him, and at the end of five years, if the conditions therein named had been performed, the 600 shares should be transferred and delivered to him as his absolute property. It appears that Aldrich entered into an agreement with the Aldrich Pump Co. in conformity with the above-named agreement, acting as its general manager during the five-year period and otherwise performing the conditions of the agreement. He acted as a director of the company and voted the escrow stock at stockholders’ meetings without objection and held no other shares of stock to qualify him as a director.

It is a general rule of law that where stock is deposited in escrow, to be delivered upon the performance of certain conditions, dividends declared before such performance belong to the vendor. 6 Fletcher Enc. Corps., section 2701. There can be no doubt but that parties can by agreement provide to- whom dividends shall be paid, and the effect of this contract was to assign the future dividends to the taxpayer. The right to receive dividends, however, is an incident of stock ownership, and the transfer of such a right does not operate to constitute the person to whom the right is assigned a stockholder.

The contract with the Boiling Mills did not provide that Aldrich should have the right to vote the stock held in escrow. It appears that the stock was voted by him at stockholders’ meetings without objection, but this fact would not constitute him a stockholder, for here again the right to vote stock is an incident of ownership which may by contract be given to another; nor do we think the fact that he acted as director of the Pump Co. could make him a stockholder therein if he was not such in fact. Looking to the agreement, or what was done under it by the parties thereto, we are unable to conclude that the taxpayer was a stockholder of the Pump Co. prior to the transfer and delivery to him of the escrow stock in 1919. Appeal of James R. Lister, 3 B. T. A. 475.

The Bevenue Act of 1918 defines a dividend as follows:

Sec. 201. (a) That the term “dividend” when used in this title (except in paragraph (10) of subdivision (a) of section 234) means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property * * * out of its earnings or profits accumulated since February 28, 1913, * * ⅜.

The taxpayer not being a stockholder of the Pump Co., he does not come within the terms of this section, and we conclude that the amounts received in 1918 did not constitute dividends as to him. We are of opinion that, by the very terms of the contract, the payment of the dividends to him was intended to be and was compensation for his services to be rendered to the Pump Co. and that the Commissioner properly so held.

On the second question, the taxpayer does not contend that the transfer and delivery of the stock in 1919 would not constitute income to him in that year to the extent of its fair market value. His claim is that the stock had no fair market value at that time and that, therefore, the determination of any gain must be postponed until the stock had been disposed of by sale.

The evidence does not show the value of the assets of the Pump Co. It does disclose, however, that the company paid dividends of 10 per cent in the years from 1915 to 1918, and that in the year 1919 a dividend of 12 per cent was paid. No effort was made by the taxpayer during the year 1919 to sell the stock and there were no other sales. The stock of the Pump Co. was held in its entirety by the Boiling Mills and Aldrich, and it was not until 1923 that Aldrich offered to sell his stock to the managing director of the Bolling Mills. Again, in 1924, he sought to sell the stock to the same party, who declined to make any offer therefor. The evidence further discloses that during 1924 the taxpayer made efforts at two local banks to borrow money on this stock but that they declined to make any loans on the security thereof, for the reason that they would not be able to satisfy their boards of directors that the stock had a market value.

We do not think this evidence of efforts to sell the stock to the same person in 1923-and 1924 and the failure to secure loans in 1924 has1 any material bearing on the question of whether the stock had a fair market value in 1919. In the first place, it is too remote, and, further, the facts disclose that no dividends were paid by the company after 1920, which would necessarily have a material influence on the question of fair market value in 1923 and 1924. Assuming that the evidence establishes that the stoek had no fair market value in 1923 and 1924, it does not establish that the stock had no fair market value at the time of its receipt in 1919. The Commissioner determined that ihe stock had a fair market value in 1919 of $100 per share, and, in view of the fact that dividends of 10 per cent per annum were paid on this stock over a period of four years immediately preceding the year of receipt, and a dividend of 12 per cent was paid in that year, there is certainly some evidence to support his determination. We must therefore approve the action of the Commissioner.