Coffey
v.
Comm'r of Internal Revenue

Tax Court of the United States.Jun 30, 1950
14 T.C. 1410 (U.S.T.C. 1950)
14 T.C. 1410T.C.

Docket Nos. 9042 19978-19989.

1950-06-30

T. J. COFFEY, JR., PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

E. Byron Singleton, Esq., and Wilbur E. Swenson, C.P.A., for the petitioners. John W. Alexander, Esq., for the respondent.


Petitioners, the owners of all of the stock of a corporation, entered into agreement with two purchasers, wherein they sold their stock for $190,000, and reserved to themselves certain assets in which purchasers were not interested, one of which was a contract which entitled them to the receipt of $200,000 over a five-year period in the event the price of casinghead gas exceeded 2 1/2 cents per gallon. Stock was not delivered to purchasers until corporation's directors authorized and directed distribution of pro rata interests in contract to petitioners. Held,

1. Interests in contract received by petitioners constituted a dividend and was taxable as such.

2. Value of contract at time of distribution determined. E. Byron Singleton, Esq., and Wilbur E. Swenson, C.P.A., for the petitioners. John W. Alexander, Esq., for the respondent.

In these proceedings, which were consolidated for hearing, the respondent determined the following deficiencies in income tax for the fiscal years of the petitioners which ended on March 31:

+----------------------------------------------------+ ¦ ¦Fiscal year ¦Fiscal year ¦Fiscal year ¦ +----------+-------------+-------------+-------------¦ ¦Docket No.¦ended 3-31-41¦ended 3-31-42¦ended 3-31-44¦ +----------+-------------+-------------+-------------¦ ¦ ¦ ¦ ¦ ¦ +----------+-------------+-------------+-------------¦ ¦9042 ¦ ¦$2,292.62 ¦ ¦ +----------+-------------+-------------+-------------¦ ¦19978 ¦$73.15 ¦518.64 ¦$179.52 ¦ +----------+-------------+-------------+-------------¦ ¦19979 ¦73.15 ¦518.64 ¦179.52 ¦ +----------+-------------+-------------+-------------¦ ¦19980 ¦655.68 ¦21,876.80 ¦ ¦ +----------+-------------+-------------+-------------¦ ¦19981 ¦ ¦119.78 ¦22.46 ¦ +----------+-------------+-------------+-------------¦ ¦19982 ¦ ¦119.78 ¦36.75 ¦ +----------+-------------+-------------+-------------¦ ¦19983 ¦151.48 ¦6,708.13 ¦ ¦ +----------+-------------+-------------+-------------¦ ¦19984 ¦151.48 ¦6,708.13 ¦ ¦ +----------+-------------+-------------+-------------¦ ¦19985 ¦ ¦ ¦103.16 ¦ +----------+-------------+-------------+-------------¦ ¦19986 ¦ ¦276.99 ¦ ¦ +----------+-------------+-------------+-------------¦ ¦19987 ¦ ¦276.99 ¦ ¦ +----------+-------------+-------------+-------------¦ ¦19988 ¦105.60 ¦8,306.40 ¦360.88 ¦ +----------+-------------+-------------+-------------¦ ¦19989 ¦ ¦4,585.35 ¦ ¦ +----------------------------------------------------+

The issue for determination was whether a contingent payment in the amount of $200,000 (hereinafter sometimes referred to as the Cabot payment) constituted a dividend received by petitioners from the Smith Brothers Refinery Co., Inc., as determined by the respondent. If it did, it will be necessary to determine the value of the payment on the date it was received by the petitioners.

All other issues raised by petitioners, not relating to the Cabot payment, were conceded by them at the hearing.

FINDINGS OF FACT.

The petitioners, residents of the State of Texas, were all former stockholders of Smith Brothers Refinery Co., Inc. They filed their returns with the collector of internal revenue for the second district of Texas, and all filed their returns on the basis of a fiscal year ended March 31.

On October 23, 1940, Smith Brothers Refinery Co., Inc., sold its Kermit, Texas, plant to the Cabot Carbon Co., for $700,000 cash and the reservation of a so-called ‘overriding royalty‘ in the amount of $200,000. The contract between Smith Brothers Refinery Co., Inc., and Cabot Carbon Co. provides, in part, as follows, with respect to the manner of calculating payment of the so-called ‘overriding royalty‘:

8(b). In executing the assignment of the casinghead gas contracts listed in Exhibit A Smith shall reserve an overriding royalty to be determined and calculated as follows:

(4) On or before the 25th day of each month, beginning with the 25th day of the first month after Cabot takes possession, Cabot shall furnish Smith a statement setting forth the plant production as defined in Section 8(b)(2), supra, during the prior calendar month and the value thereof calculated as set forth in Section 8(b)(3), supra. If the values average more than 2 1/2¢ per gallon, then the product of the gallons times the average value minus 2 1/2¢ shall be the overriding royalty payable to Smith for such previous calendar month. If the values for such prior month average less than 2 1/2¢ per gallon then the product of the gallons times the average value minus 2 1/2¢ shall be the overriding royalty payable to Smith for such previous calendar month. If the values for such prior month average less than 2 1/2¢ per gallon then the product of the gallons times 2 1/2¢ minus the average value shall constitute a deficit in the overriding royalty account which shall be carried forward to statements for the following month or months until such time as the overriding royalties payable to Smith exceed the accumulated deficit for one or more months. Smith shall not be required to pay Cabot the amount of any deficit or deficits. The use of deficits hereunder is limited to deductions from overriding royalties accruing subsequent to the accruals of deficits. Whenever the overriding royalties payable exceed accumulated deficits Cabot shall, when transmitting the statement showing such excess, send a cheque for the amount of such excess to Smith.

(7) In no event shall total overriding royalty payments under this section, during the five-year term specified herein, exceed a $200,000.00. Whenever the royalties paid hereunder total $200,000.00 Cabot shall have no further obligation or liability whatsoever with respect to said royalty payments. At the end of the said five-year period, or at the end of any extension of that period, as hereinafter specified, no further obligation or liability shall rest upon Cabot, whether or not Cabot has theretofore paid total overriding royalties in the sum of $200,000.00.

On January 27, 1941, J. H. Boyle, acting on behalf of Hanlon-Buchanan, Inc., wrote Ruel Smith, president of Smith Brothers Refinery Co., Inc., inquiring whether it was the desire of the latter corporation to sell its remaining properties and stating that Hanlon-buchanan, Inc., was interested in buying the properties if they were for sale.

Conferences between representatives of Smith Brothers Refinery Co., Inc., and Hanlon-Buchanan, Inc., were held between the dates of January 27, 1941, and April 10, 1941, which resulted in J. H. Boyle, acting for the purchasing corporation and in part for himself, making the following offer:

April 10, 1941

To the Stockholders of Smith Brothers Refinery Company, Inc.:

Gentlemen:

We hereby make you the following offer for the purchase of all of the issued and outstanding common stock of Smith Brothers Refinery Company, Inc.:

1. We offer you the sum of $190,000.00 for all of the issued and outstanding common stock of Smith Brothers Refinery Company, Inc., subject to the following terms and conditions:

(a) You are to receive from Smith Brothers Refinery Company, Inc. the contingent gasoline payment, in the amount of $200,000.00, due and owing to Smith Brothers Refinery Company, Inc. from Cabot Carbon Company, payable out of gasoline processed in Winkler County, Texas.

(b) You are to receive from said Smith Brothers Refinery Company, Inc. all accounts and notes receivable due and owing to it by Smith Brothers Gin Company, Concho Oil & Gas Company, and by the officers, directors and stockholders of said Smith Brothers Refinery Company, Inc.

(c) You are also to receive all life insurance policies in which said Smith Brothers Refinery Company, Inc. is named as beneficiary, all royalty owned by said Corporation in and under lands in Lamb County, Texas, all oil and gas leases covering lands in the State of Oklahoma, and a farm consisting of 317.36 acres, more or less, out of the West one-Half (W. 1/2) of Section 22, Block A-5, H. & G. N. Railway Company Survey, Wheeler County, Texas.

(d) No expenditures of the funds of Smith Brothers Refinery Company, Inc. shall be made pending the consummation of this purchase, except for the payment of the usual, ordinary, and necessary operating expenditures and record liabilities as they mature, unless approved in writing by the undersigned.

(e) Proceedings shall be immediately instituted in the proper Courts to authorize the sale of any of said stock owned by minors.

(f) The undersigned agrees to hold you harmless against claims of preferred stockholders which may arise on account of your receipt of any or all of the assets of said Corporation, above specified.

The above items set out are to be received by you from the Corporation in addition to the $190,000.00 to be paid you for the stock.

If you accept this offer, all parties are to proceed immediately and diligently to the consummation of this transaction, and upon its consummation you will cooperate immediately to the substitution of directors and officers named by the undersigned for said Corporation.

If the above proposal meets with your approval, please indicate by signing in the space provided below, and thereupon this letter will constitute our contract of sale and purchase of said stock.

Yours very truly,

(Signed) J. H. Boyle Trustee

Accepted for all owners of common stock of Smith Brothers Refinery Company, Inc., by:

(Signed) Ruel Smith (Signed) T. J. Coffey (Signed) H. C. Rippy

The offer of April 10, 1941, was modified slightly in a supplemental offer of April 11, 1941, which was as follows:

April 11, 1941.

To the Stockholders of Smith Brothers Refinery Company, Inc.:

Gentlemen:

Supplementing letter of yesterday from the undersigned to you regarding the purchase of the common stock of Smith Brothers Refinery Company, Inc., you have stated that J. D. Garnett is the owner of 10,000 shares of such common stock and that the proposed sale of all the stock has not been discussed with him. You agree that you will immediately exercise every effort to induce the said Garnett to join in the sale.

In the event he does not join in such sale, then the sum of $4,000.00 is to be deducted from the purchase price of $190,000.00 provided for all of the stock, and the sale and purchase of the remaining stock is to be consummated for the consideration of $186,000.00 and the additional considerations provided in the original letter. However, if at any time within four months from the date of consummation of the sale, either you or the undersigned is able to secure the stock of the said J. D. Garnett for less than $4,000.00, the remaining portion of such $4,000.00, after payment for said stock, is to be paid to you, but if such sale of the Garnett stock is not consummated within said four months, then the agreement to refund any portion of the $4,000.00 shall be of no effect.

If this correctly sets forth our understanding regarding this matter, please sign in the space provided below, whereupon this letter will constitute our supplemental agreement covering the subject matter.

Very truly yours,

(Signed) J. H. Boyle Trustee

Prior to making the offer of April 10, 1941, the representatives of the purchasers and the representatives of the sellers examined and discussed the various assets owned by Smith Brothers Refinery Co., Inc., and the liabilities of the company, with a view to reaching an agreement upon the fair market value of the stock. During these negotiations the representatives of the purchasers and of the sellers could not agree upon the value of the $200,000 payment and other assets mentioned in sub-paragraphs (a) to (c) of paragraph 1 of the letter of April 10, 1941. The representatives of the purchasers informed the representatives of the Smith Brothers Refinery Co., Inc., that they could withdraw these assets from the assets of the company and that they would buy the stock without these assets being a part of the sale, thus eliminating the necessity for arriving at their valuation in determining the value of the stock on a net worth basis. Their agreement with reference to these assets was incorporated in the offer of April 10, 1941, hereinbefore mentioned.

In carrying out the agreement of April 10, 1941, the board of directors of Smith Brothers Refinery Co., Inc., held a special meeting on May 15, 1941, and the minutes of that meeting read in part as follows:

MINUTES OF SPECIAL MEETING OF THE BOARD OF DIRECTORS OF SMITH BROTHERS REFINERY COMPANY, INC., MAY 15, 1941

A special meeting of the Board of Directors of the Smith Brothers Refinery Company, Inc., was held at the office of Cornell & Company, 609 Oliver-Eakle Building, Amarillo, Texas, on the 15th day of May, 1941, at the hour of 4:00 o'clock P.M.

Mr. Ruel Smith, president, acted as chairman of the meeting, and Mr. T. J. Coffey, secretary, recorded the proceedings. * * *

All of the directors were present at the meeting in person.

The president stated that the common stockholders of the corporation had made a proposal to sell the common stock owned by them to Hanlon Buchanan, Inc., a Delaware corporation, and J. H. Boyle providing that as part of the consideration for said sale of such stock the corporation would convey free and clear of all liens and encumbrances to the common stockholders pro rata according to stock ownership as of March 28, 1941, the $200,000.00 overriding royalty interest reserved by this corporation in its Conveyance to Cabot Carbon Company, dated November 16, 1940, of record in Winkler County, Texas; and providing that certain other assets of the corporation would be conveyed to certain officers of this corporation as bonus for extra services rendered to this corporation and that Hanlon Buchanan, Inc. would agree to indemnify the sellers as individuals and as directors against any claims of the preferred stockholders by reason of such conveyances. The president further stated that such sales proposal had been accepted and that Hanlon Buchanan, Inc. was purchasing 638,511 shares of said common stock, and J. H. Boyle was purchasing 60,000 shares of said common stock. Mr. Ruel Smith further stated that the purpose of the meeting was to authorize and direct the conveyance of the corporate assets mentioned.

The matter was fully discussed and upon motion duly made, seconded and unanimously adopted:

BE IT RESOLVED THAT Ruel Smith, president, and T. J. Coffey, secretary, of the corporation, be and they are hereby authorized and directed to forthwith in the name of and as the act of this corporation to do and perform the following:

(1) To convey and deliver to the common stockholders of the corporation pro rata according to common stock ownership as of March 28, 1941, free and clear of all liens and encumbrances the $200,000.00 overriding royalty interest reserved by this corporation in its conveyance to Cabot Carbon Company, dated November 16, 1940, and of record in Winkler County, Texas.

BE IT FURTHER RESOLVED that Ruel Smith, president, and T. J. Coffey, secretary, are hereby authorized and directed to execute all conveyances, deeds, assignments, and instruments of whatsoever nature, and to perform all acts whatsoever, necessary and required to fully carry and fully complete the transfers and conveyances of the assets hereinabove designated to the respective parties named above.

The meeting next proceeded to a discussion of the fact that in the near future the purchasers of the common stock would probably elect a new Board of Directors and new officers and that the purchasers have designated parties whom they desired to have authority to withdraw funds of the corporation from the existing depositories of the corporation. Upon motion duly made and seconded, the following resolution was unanimously adopted:

BE IT RESOLVED that all resolutions heretofore adopted by this corporation authorizing any bank or banks to pay out cash or give credit on checks, drafts, or other orders when signed by certain designated individuals, are such hereby cancelled and annulled as to all checks, drafts, or other orders dated on and after June 1, 1941.

Upon motion the meeting was adjourned.

(Signed) Ruel Smith President

ATTEST:

(Signed) T. J. Coffey

Secretary

On the same day that this directors' meeting was held the individual stockholder's stock certificates were endorsed and delivered to Hanlon-Buchanan, Inc., and that corporation in turn delivered to the stockholders the checks for the cash consideration. As soon as possible thereafter, pursuant to the authorization contained in the resolution adopted at the May 15th meeting of the board of directors, instruments were executed by Ruel Smith, as president, and attested by T. J. Coffey, as secretary, conveying to each of the common stockholders pro rata according to stock ownership as of March 28, 1941, an undivided interest in the Cabot payment. These instruments were executed on May 17, 1941, and delivered to petitioners on that day.

At the time representatives of petitioners and purchasers met to close the transaction set forth in the agreement of April 10, 1941, representatives of petitioners asked J. H. Boyle, who acted for Hanlon-Buchanan, Inc., for an agreement indemnifying petitioners against loss arising from any claims of the preferred stockholders of the Smith Brothers Refinery Co., Inc., and of the Republic National Bank. The preferred stock certificates contained certain restrictions upon the payment of dividends to common stockholders and a deed of trust held by the Republic National Bank prohibited the declaration and payment of dividends as long as the corporation's indebtedness to it remained unpaid. In an instrument (undated), signed by J. H. Boyle, secretary of Hanlon-Buchanan, Inc., Hanlon-Buchanan, Inc., agreed to hold petitioners harmless against any any and all claims by the preferred stockholders or by the bank, and, in addition, Hanlon-Buchanan, Inc., agreed to endeavor forthwith to obtain from the bank (for the petitioners) a release of all liens ‘in so far only as the same cover and include all of the contingent overriding royalty reserved by Smith Brothers Refinery Co., Inc., in a certain conveyance to Cabot Carbon Co. dated November 16, 1940.‘ Such a release was executed by the Republic National Bank under date of May 29, 1941.

In filing their income tax returns for the fiscal year ended March 31, 1942, the petitioners included as part of the selling price of their stock the $200,000 Cabot payment at face value.

At the time Smith Brothers Refinery Co., Inc., sold its Kermit plant in October 1940 for $700,000 in cash and the $200,000 contingent payment, it did not attribute any value to the contingent payments in computing gain or loss, and this payment was carried on the books and records of Smith Brothers Refinery Co., Inc., at no cost and without any basis. On February 28, 1941, Smith Brothers Refinery Co., Inc., had earnings and Profits

+-----------------------------------------------------------------------------+ ¦ ¦ ¦April 1, ¦April 1, ¦April 1, ¦ ¦ ¦ ¦ ¦1941 ¦1942 ¦1943 ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Distribution: ¦Per cent¦to March ¦to March ¦to March ¦Total ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦ ¦ ¦31, 1942 ¦31, 1943 ¦31, 1944 ¦ ¦ +--------------------------+------------+------------+------------+-----------¦ ¦Verna Smith, Guradian of ¦ ¦ ¦ ¦ ¦ +--------------------------+------------+------------+------------+-----------¦ ¦Vester Lee Smith ¦0.0039 ¦$383.64 ¦$104.58 ¦$291.78 ¦780.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Verna Smith, Ind.¦ ¦ ¦ ¦ ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Executrix of the ¦ ¦ ¦ ¦ ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Estate of ¦ ¦ ¦ ¦ ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Vester Smith ¦.3002 ¦29,530.68 ¦8,050.16 ¦22,459.16 ¦60,040.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦H. C. Rippy ¦.0200 ¦1,967.40 ¦536.32 ¦1,496.28 ¦4,000.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Nerene Hicks ¦.0039 ¦383.64 ¦104.58 ¦291.78 ¦780.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦T. J. Coffey ¦.2581 ¦25,389.30 ¦6,921.21 ¦19,309.49 ¦51,620.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦T. J. Coffey, Jr ¦.0433 ¦4,259.42 ¦1,161.13 ¦3,239.45 ¦8,660.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Myrtle Smith, ¦ ¦ ¦ ¦ ¦ ¦ ¦Com. ¦ ¦ ¦ ¦ ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Survivor ¦.1507 ¦14,824.36 ¦4,041.17 ¦11,274.47 ¦30,140.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Myrtle Smith, ¦ ¦ ¦ ¦ ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Guardian of ¦ ¦ ¦ ¦ ¦ ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Robt. Wm. Smith ¦.1507 ¦14,824.36 ¦4,041.17 ¦11,274.47 ¦30,140.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Ruel Smith ¦.0267 ¦2,626.48 ¦715.99 ¦1,997.53 ¦5,340.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Bert Smith ¦.0267 ¦2,626.48 ¦715.99 ¦1,997.53 ¦5,340.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦J. D. Garnett ¦.0079 ¦777.12 ¦211.85 ¦591.03 ¦1,580.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Binford Arney ¦.0079 ¦777.12 ¦211.85 ¦591.03 ¦1,580.00 ¦ +-----------------+--------+------------+------------+------------+-----------¦ ¦Total ¦100.0000¦$98,370.00 ¦$26,816.00 ¦$74,814.00 ¦$200,000.00¦ +-----------------------------------------------------------------------------+

OPINION.

JOHNSON, Judge:

The petitioners contend that they received the Cabot contingent payment of $200,000 as part of the consideration for stock sold and that any profit resulting from its receipt by them is taxable as a capital gain. In the alternative they urge that, if the distribution of the Cabot payment constituted a dividend, it is taxable to the purchasers of the stock and not to them. If we should hold that it was a dividend distribution taxable to them, they urged that its value was between $5,000 and $50,000.

The respondent contends that he correctly treated the distribution of the Cabot payment as a distribution by the corporation to petitioners of a dividend having a value of not less than $714,643.30.

Two witnesses for the respondent, one of whom was the vice president and treasurer of Hanlon-Buchanan, Inc., and the other the attorney for that corporation, both of whom were familiar with the negotiations leading up to the agreement of April 10, 1941, testified that the cash consideration the purchasers agreed to pay for the stock was based upon a computation of the net worth of the corporation; that in arriving at net worth the value of each asset and the amount of liabilities were taken into consideration; that the representatives of the purchasers and sellers could not agree upon the value of some of the assets; that the Cabot payment was one of these assets; that the representatives of the purchasers told petitioners' representatives that they had no interest in this asset because they considered it as having only prospective and at the time little if any value; and that they did not want it and petitioners could take it out of the company and they would buy the stock without it being a part of the sale.

We do not agree with petitioners that they received the Cabot payment as part of the consideration for the sale of their stock. The purchasers did not agree to buy their stock and then turn over to them $190,000 and the Cabot payment in consideration therefor. From the testimony above set forth it is apparent that they were not interested in the Cabot payment, did not want it included in the assets of the corporation at the time they acquired its stock, and negotiated with petitioners to acquire stock of a corporation whose assets did not include the unwanted Cabot payment. The offer of April 10, 1941, accepted by petitioners, was to pay $190,000 for the stock, subject, however, to the condition precedent that petitioners were to receive the Cabot payment from the corporation, and we think it quite significant that petitioners did not transfer their stock to the purchasers until a resolution was passed by the board of directors assuring petitioners of the receipt of the Cabot payment. This action, taken by the board of directors on May 15, 1941, distinguishes the facts of the instant proceedings from those in Philip D. C. Ball, 27 B.T.A. 388, 400 (affd., on another issue 69 Fed.(2d) 439; certiorari denied, 292 U.S. 655), cited and relied upon by the petitioners, where no distribution of part of the assets of a corporation was authorized by its directors prior to the transfer by the seller of his stock to the purchaser. The fact that the stock was delivered to the purchasers on May 15, 1941, and that the president and secretary of the corporation did not execute the conveyances of interests in the Cabot payment to petitioners until May 17, 1941, does not establish that the Cabot payment came to petitioners from the purchasers. Under the provisions of the directors' resolution the right to the Cabot payment accrued to petitioners on May 15, 1941, and they acquired this right as stockholders on March 28, 1941, and not in part payment for their stock. They received $190,000 for their stock. Under the contract of sale, they did not sell or part with their interest in the Cabot contract. It was expressly reserved by them and was a distribution they received as stockholders by virtue of the reservation.

The parties have stipulated that on February 28, 1941, the Smith Brothers Refinery Co., Inc., had earnings and profits of $191,547.60 in addition to the Cabot payment of $200,000 to which the corporation attributed no value at the time of its receipt and carried on its books at no cost. There is no evidence that this surplus decreased between February 28 and May 17, 1941, when distribution of the Cabot payment was made. On the latter date, therefore, the corporation had earnings and profits in excess of the amount of $174,643.30, which the respondent determined to be the value of the contingent payment on the date of its distribution. Inasmuch as it appears that the distribution was not in cancellation or redemption of all or a part of the corporation's stock, and therefore not a distribution in partial liquidation, it was a dividend distribution and taxable as such to the extent of its value.

The petitioners' contention that the Cabot payment had a value not in excess of $50,000 is based upon views and opinions expressed during the negotiations leading up to the sale. As heretofore noted, the representatives of the purchasers testified that they told the representatives of petitioners at that time that they were not interested in the Cabot payment because they considered it as having only prospective and little if any value. The attorney who represented the petitioners in these negotiations, when asked by respondent's counsel on cross examination what they thought with respect to the value of the Cabot payment at the time they were negotiating, testified:

I think we were about in concurrence on our opinion. I think we all thought it had a good potentiality of getting something, I don't think you could have found a one of us that would have said, ‘It will pay out a hundred percent.‘ I think you would have found a lot of us that thought it might pay out fifty percent and then if you discounted that for present value, I believe the general feeling was that it was worth twenty-five cents on the dollar.

The negotiations leading up to the sale took place prior to April 10, 1941. At that time casinghead gas was selling at 2 1/2 cents per gallon. Under the provisions of the contract of October 23, 1940, between Smith Brothers Refinery Co., Inc., and Cabot Carbon Co., nothing was to be paid unless the price of casinghead gas exceeded 2 1/2 cents per gallon, and, in the event the price dropped lower than 2 1/2 cents per gallon, a deficit would occur and such deficit would have to be made up before Smith Brothers Refinery Co., Inc., would be entitled to any payment. Between October 1940 and April 1941, a deficit in the amount of $11,000 had accrued under the contract which had to be absorbed. It is not surprising, therefore, that during the negotiations the purchasers of petitioners' stock had a rather poor opinion as to the value of the Cabot payment and that the petitioners did not believe it was worth more than 25 cents on the dollar. After April 10, when the contract was entered into, the price of casinghead gas increased from 2 1/2 cents per gallon to 3 3/4 cents on April 21, 1941, 3 cents on April 24, and 3 1/8 cents on May 24. Obviously, therefore, the prospects of petitioners receiving substantial payments under the Cabot contract were enhanced between April 10 and May 17, and, as disclosed by our findings, the entire $200,000 due under this contract was paid to petitioners on or prior to March 31, 1944, and $98,370 of this amount was received by them during the year ended March 31, 1942.

In Doric Apartment Co. v. Commissioner, 94 Fed.(2d) 895, where it was urged that the subsequent history of certain second mortgage notes had no bearing whatsoever upon their value when received, the Court of Appeals for the Sixth Circuit made the following pertinent comment:

* * * Where * * * property has no ready or an exceedingly limited market, as is the case made here by the evidence, fair market value may be ascertained upon considerations bearing upon its intrinsic worth. H. H. Miller Industries Co. v. Commissioner, 6 Cir., 61 F.2d 412, 414. There we held that in determining value the Board is not obliged at a later date to close its mind to subsequent facts and circumstances demonstrating it. It has also been held that where the search is for value all evidence is admissible bearing upon the matter. Whitlow v. Commissioner, 8 Cir., 82 F. 2d 569. As was said by the Supreme Court in Sinclair Refining Co. v. Jenkins Petroleum Process Co., 289 U.S. 689, 697, 53 S.Ct. 736, 739, 77 L.Ed. 1449, 88 A.L.R. 496, upon a question of value, ‘but a different situation is presented if years have gone by before the evidence is offered. Experience is then available to correct uncertain prophecy. Here is a book of wisdom that courts may not neglect. We find no rule of law that sets a clasp upon its pages, and forbids us to look within. ‘ See Nachod & United States Signal Co. v. Helvering, 6 Cir., 74 F. 2d 164; American Chemical Paint Co. v. Commissioner of Internal Revenue, 3 Cir., 66 F.2d 381.

The burden was on the petitioners to establish that the value of the Cabot payment was less than the amount of $174,643.30 determined by the respondent to be its value on the date of its distribution to them. Petitioners have not sustained this burden. The pessimistic views which their representatives and representatives of the purchasers entertained prior to April 10, 1941, are not in our opinion indicative of the value of the Cabot payment on May 17, the date of its distribution. No opinion was expressed by the witnesses as to its value on the latter date when prospects for the receipt of the $200,000 were enhanced by the increase in the price of casinghead gas. We now know that the petitioners did receive the entire $200,000 prior to March 31, 1944, and whatever uncertainty existed as to the value of the Cabot payment on the basic date has been removed. After a careful consideration of all of the evidence, we have reached the conclusion and found as a fact that the Cabot payment had a fair market value of $174,643.30 when distributed to the petitioners in May 1941. We are not impressed by petitioners' contention that this distribution was taxable to the purchasers rather than to them. As heretofore noted, the directors authorized the distribution to the stockholders as of March 28, 1941. The stockholders on that date and on the date of the authorization were the petitioners. Having received this dividend distribution, they are liable for tax to the extent of the interest therein received by each.

Before concluding, some reference should perhaps be made to the bases at the time of sale of stock held by petitioners Verna Smith Nichols, Myrtle Smith Ayers, and Robert William Smith. These three petitioners acquired this stock by inheritance as the result of the deaths in 1940 of Vester Smith and Porter Smith, president and vice president of the Smith Brothers Refinery Co., Inc., respectively, from the time of its incorporation. The parties have stipulated that the respondent placed a value of 41 cents per share on this stock for estate tax purposes at the time of settling the estate of Porter Smith and that in arriving at that valuation it was concluded that the corporation had assets over and above liabilities of $513,711.52. They also stipulated that in arriving at this latter figure, consideration was given to the fact that between the date of Porter Smith's death and the date of the sale of the stock to Hanlon-Buchanan, Inc., and J. H. Boyle, the corporation paid off liabilities of $140,371.52 and in selling the stock the stockholders received a cash consideration of $190,000, and also received the Cabot payment. While the respondent expressly did not stipulate that the Cabot payment so received was a part of the sales price, the petitioners apparently are of the opinion that he treated it as part of the sales price for estate tax purposes. Even if it be assumed that he did do this, and did not, as we think, merely use the value of the Cabot payment in arriving at the estimated value of the corporate assets, his action in the estate tax proceeding would not be binding on this Court in the instant proceedings in determining the nature of the distributions received by petitioners. For reasons hereinbefore set forth, the evidence in the instant proceedings convinces us that petitioners did not receive the Cabot payment as a part of the consideration for the sale of their stock and that it constituted a dividend distribution. As such, the pro rata portion received by each petitioner is taxable in its entirety as ordinary income, and is not affected by their respective bases for gain or loss.

Decisions will be entered under Rule 50.