Opinion
Docket No. 11836.
1947-07-14
ALEDA N. HALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Douglas D. Felix, Esq., for the petitioner. Bernard D. Hathcock, Esq., for the respondent.
Pursuant to a separation agreement, petitioner released her rights in her husband's estate. The husband agreed in consideration therefor to pay petitioner $750,000. Later the manner and medium of payment were agreed upon. By this later agreement petitioner, inter alia agreed to accept 6,000 shares of X stock in satisfaction of $360,000 of the $750,000 her husband had agreed to pay her. Held, petitioner's cost basis in X stock is $60 a share and not its fair market value at the time of petitioner's acquisition. Douglas D. Felix, Esq., for the petitioner. Bernard D. Hathcock, Esq., for the respondent.
Respondent determined a deficiency in petitioner's income tax for the year 1941 in the amount of $1,702.18. Respondent, on brief, conceded an issue relating to the deductibility of charitable contributions. The remaining question involves the determination of the proper cost basis of certain stock sold by petitioner for the purpose of measuring the taxable gain thereon. The return was filed with the collector of internal revenue for the district of Florida.
FINDINGS OF FACT.
Petitioner is an individual, residing in Miami Beach, Florida. Prior to her marriage to her present husband, she was married to Don A. Davis. Her marriage to Davis was terminated by divorce. Prior to the divorce petitioner and Davis entered into an agreement dated December 3, 1928. This agreement, as here pertinent, provided:
* * * WHEREAS, the parties hereto were married September 1st, 1909, and are now husband and wife, but have mutually agreed to separate and live apart, and in consideration of said agreement to separate and to finally and henceforth to live separate and apart, each from the other, it is stated and agreed that the said Don A. Davis sets over and delivers unto the said Aleda N. Davis money and securities of the agreed value of Seven Hundred and Fifty Thousand Dollars ($750,000). * * *
In consideration of the money and property so turned over, paid and delivered to the said Aleda N. Davis, she agrees to and does hereby relinquish and releases and does hereby satisfy and quit claim all rights and interest, including dower and homestead, and all other rights arising out of and belonging to the plaintiff on account of the laws of the State of Missouri effecting (sic) the rights or interest of a wife in a husband's property, taking and accepting the property so set over and delivered to her in full satisfaction of all rights whatsoever due and coming to her, or that might be hereafter due and coming to her as the wife of the said Don A. Davis.
Attached to this agreement is a ‘Memorandum of Stock, Bonds and Cash Turned Over to Mrs. Aleda N. Davis (petitioner) by Don A. Davis, December 4th, 1928.‘ This memorandum shows the following:
+--------------------------------------------+ ¦BONDS ¦ +--------------------------------------------¦ ¦Chicago & Great Western Railroad ¦$5,000¦ +-------------------------------------+------¦ ¦Australia ¦10,000¦ +-------------------------------------+------¦ ¦Johnson County, Kansas (road) ¦10,000¦ +-------------------------------------+------¦ ¦Johnson County, Kansas (school) ¦10,000¦ +-------------------------------------+------¦ ¦New York City ¦5,000 ¦ +-------------------------------------+------¦ ¦City of Chicago ¦5,000 ¦ +-------------------------------------+------¦ ¦Topeka (school) ¦5,000 ¦ +-------------------------------------+------¦ ¦Oklahoma City (school) ¦5,000 ¦ +-------------------------------------+------¦ ¦Imperial Valley Co. California (road)¦5,000 ¦ +-------------------------------------+------¦ ¦50 shares Kendall (preferred) ¦5,000 ¦ +-------------------------------------+------¦ ¦ ¦65,000¦ +--------------------------------------------+
STOCK 380 shares Western Auto Supply Co. (preferred) 39,900 2,333 shares Western Auto (B) 139,980 6,000 shares Western Auto (A) 360,000 Liberty bonds 130,000 Premiums and accrued dividends (estimated) 6,000 Cash (automobile) 2,600 Cash 6,520 Total 750,000
The amount of $750,000 was agreed upon between petitioner and Davis before the manner and medium of its payment were settled upon between the parties. The schedule set out above represents the parties' agreement as to the manner and medium of paying the $750,000. The value attributed to the shares of Western Auto Class A stock by the parties was arrived at on the basis of its fluctuating market value over a period of several months preceding the agreement.
During 1941 petitioner sold 1,700 shares of the Western Auto class A stock which she had received from Davis under the agreement. In reporting her gain on this sale petitioner used $60 a share as her cost basis for the 6,000 shares acquired from Davis, being the value attributed to such stock by petitioner and Davis for the purpose of the agreement. Respondent, in his deficiency notice, determined that these 6,000 shares had a fair market value of $56 a share when received by petitioner from Davis and that this value constitutes their cost basis to petitioner.
OPINION.
HILL, Judge:
The cost to petitioner of the 6,000 shares of stock received by her from Davis is the question.
Petitioner claims the cost amounts to the value attributed to the stock for the purpose of the agreement. Respondent contends that the cost amounts to the stock's fair market value when received by petitioner. We agree with petitioner.
Due to a 3 to 1 split-up of this stock and the issuance of stock rights certain adjustments in the cost basis are involved but are not here in controversy. A determination of the question stated above will afford the necessary answer for determining the proper cost basis of the 1,700 shares sold by petitioner in 1941.
We interpret the transaction as follows: In connection with separation and divorce petitioner agreed to relinquish certain rights she had in Davis' property. Davis, in consideration therefor, agreed to pay petitioner $750,000. The manner of Davis' payment was later agreed upon. In this latter connection petitioner agreed to accept 6,000 shares of Western Auto class A stock in satisfaction of $360,000 of the $750,000 Davis had agreed to pay her. In other words, petitioner used $360,000 of her $750,000 credit in acquiring the stock. In our opinion, the stock therefore cost her $360,000.
Respondent in effect contends that petitioner paid for the stock by relinquishing certain rights. Respondent argues that these relinquished rights are virtually incapable of being evaluated and that therefore the fair market value of the property she accepted as consideration for relinquishing the rights must be taken as the measure of the rights' value and that this value represents her cost basis. This view, in our opinion, misconceives the transaction in question. Petitioner did not relinquish her rights in consideration of certain designated property. She relinquished her rights in consideration of $750,000. There is no inference made that the transaction was not an arm's length one and we consider that it was. It therefore would seem that if we are to measure the value of the rights by what petitioner was willing to accept for their relinquishment, $750,000 becomes the measure, being what petitioner agreed to accept and not the fair market value of the property constituting the medium of payment.
Respondent, on brief, states that no case directly in point has been discovered, but respondent cites two cases involving the tax consequences to the husband in such situations as the present. Commissioner v. Halliwell, 131 Fed.(2d) 642; certiorari denied, 319 U.S. 741, and Commissioner v. Mesta, 123 Fed.(2d) 986; certiorari denied, 316 U.S. 695. The problem in these cases was in part to determine what amount the husband received for property transferred to his wife under circumstances like the present. In other words, what was the husband's sale price? Respondent argues that these cases hold that the fair market value of the property when transferred constitutes the husband's sale price and, therefore, in the instant situation should constitute the wife's cost. Neither case is in point. In the Halliwell case, supra, the sale price of the securities transferred by the husband was held by the Circuit Court to be $461,887.62 and this amount represented the aggregate value of the separate values attributed to the various securities by the parties in the form of a schedule similar to the one here involved. See Walter S. Halliwell, 44 B.T.A. 740, at 743, for the schedule. No point was made by this Court or the Circuit Court in the Halliwell case distinguishing between the value attributed to the securities by the husband and wife, on the one hand, and the fair market value on the other. The Halliwell case, therefore, does not stand for the proposition that fair market value as distinguished from the value agreed upon by the parties must be considered as the sale price received by the husband in transfers like the instant one.
In the Mesta case, supra, no value was attributed to the property transferred by the husband to the wife. The wife did not agree to accept a certain amount of money, but agreed to accept 5,200 shares of stock of the Mesta Machine Co., and no value was attributed to these shares by the parties. Under these circumstances, in the absence of any agreed value, it was held that the fair market value represented the husband's sale price. The Circuit Court said:
* * * The fair market value of the property or benefit received by Mesta for the stock may be difficult to ascertain, but in the absence of any other value being shown we think that it is proper to take fair market value. In the case at bar the amount of the taxpayer's obligation to his wife was fixed in part in terms of stock by the parties themselves who really dealt at arm's length with one another. * * * We think that we may make the practical assumption that a man who spends money or gives property of a fixed value for an unliquidated claim is getting his money's worth. (Emphasis supplied.)
In the instant case Davis' obligation was liquidated, i.e., $750,000, and was not fixed in terms of stock to which no value was attributed by the parties. It is clear, therefore, that the Mesta case is distinguishable and does not stand for the proposition that fair market value must be taken instead of the values agreed upon by the parties in satisfaction of a fixed claim or amount.
The determining consideration in the Halliwell and Mesta cases is the extent to which the husband realized economic benefit. In the instant case Davis benefited to the extent of $360,000 by transferring the 6,000 shares. Conversely, we consider that petitioner paid $360,000 worth of her credit of $750,000 for the 6,000 shares of Western Auto class A stock, and we hold, therefore, that their cost basis to her is $60 a share.
Reviewed by the Court.
Decision will be entered under Rule 50.