The opinion of the court was delivered by: KNIGHT
March Gold, Ltd., was a Canadian corporation. March Gold, Inc., was a Delaware corporation, which held all of the stock of March Gold, Ltd., save twenty qualifying shares held by its directors and Goniagas Mines, Ltd., a Canadian corporation. For convenience March Gold, Ltd., will hereinafter be referred to as 'Limited' and March Gold, Inc., will hereinafter be referred to as 'Gold, Inc.' 'Ltd.' operated a gold mine in the Dominion of Canada.
Plaintiff, Edward G. Kinkel, was employed as an attorney for 'Gold, Inc.' and 'Ltd.' in the years 1930, 1931 and 1932, and during these years received on account of such services three promissory notes in the aggregate amount of $ 10,150, secured by bonds of 'Gold, Inc.'
In 1931, 'Limited' delivered a trust deed to the Trust & Guarantee Co., Ltd., on the mining property of that corporation, and it was executed to secure the payment of an issue of $ 150,000 of 7% Sinking Fund Gold Bonds. The bonds given as collateral for the notes given Kinkel were from this issue. Other bonds went to other creditors of both 'Limited' and 'Gold, Inc.' The total issue was $ 148,500. These bonds, together with those held by Kinkel as collateral, were turned over to the Royal Bank of Canada as security for an overdue obligation of 'Ltd.' to the Bank in the sum of $ 25,000.
In July, 1932, 'Ltd.' suspended all mining and milling operations. In April, 1933,the Workmen's Compensation Commission filed a lien against certain claims and improvements of 'Limited' to satisfy an assessment of upwards of $ 12,000. The property of 'Limited' was advertised for sale to satisfy this assessment. 'Limited' defaulted on its bond issue and sinking fund requirements, and on May 20, 1933, the Royal Bank of Canada instituted proceedings to foreclose. On foreclosure of the mortgage held by the Trust & Guarantee Co., Ltd., on the mining property of 'Limited', a judgment of foreclosure was entered July 13, 1933. Plaintiff, Edward G. Kinkel, was appointed by the bondholders of 'Limited' as the attorney with the authority to pledge the bonds with the Royal Bank of Canada and he was authorized to collect any surplus realized on the sale, provided there was a foreclosure, and thereafter divide it among the bondholders pro rata. As trustee for bondholders, plaintiff, Edward G. Kinkel, made a bid for the property of $ 100,000, payable $ 1,000 in cash and $ 99,000 by tendering $ 148,500 par value of bonds of 'Ltd.' Title was taken through one Thompson, Solicitor and Barrister, representing the Royal Bank of Canada, in a corporation named Marbuan Gold Mines, Ltd., which was organized on August 30, 1933. The last named corporation had an authorized capital stock of 1,000,000 shares. The shareholders of March, Inc., were given the right to subscribe to shares in the Marbuan Gold Mines, Ltd., in proportion to their holdings in March, Inc. 371,250 shares of Marbuan Gold Mines, Ltd., were delivered to the shareholders of 'March Gold'. On July 26, 1933, plaintiff, Edward G. Kinkel, received 25,375 shares in Marbuan Gold Mines, Ltd., stock by exchange for bonds of March Gold, Ltd. These shares, 25, 375, of the par value of $ 1 per shares, were received by plaintiff Kinkel on account of the indebtedness to him of $ 10,150, as aforesaid. On October 2, 1934, he purchased 8,750 shares at .40 per share. He also received by assignment for services from other bondholders in Marbuan shares aggregating 73,647. Certificates in evidence Nos. 9, 10, 11, 68, and 74 show the shares held by Kinkel in Marbuan.
During the years 1930-1933, inclusive, the plaintiff Kinkel did not report as taxable income the amount he received from 'March Gold' and 'Ltd.' on the bonds received as security for indebtedness and the stock he received by assignment for services.
In 1930-1932 Kinkel was attorney for, and one of the syndicate managers of, a mining venture called Ankerite Gold Mines Syndicate. During that time he received 13,000 shares for his services and bought 4,200 shares.
On October 20, 1932, the Buffalo Ankerite Gold Mines, Ltd., was organized in the Dominion of Canada, and the property of the Ankerite Gold Mines Syndicate was conveyed to this corporation. The stock was issued to the syndicate members and in that exchange Kinkel received 110,080 shares of the corporate stock in exchange for 17,200 units acquired in Ankerite Gold Mines Syndicate at dates commencing from December 8, 1930, to October 20, 1932. In 1932, he sold 5,620 shares and in 1933, 9,650.
In 1934, he purchased at least 15,746 shares of Buffalo Ankerite Gold Mines, Ltd., for his own account.
On March 15, 1935, the plaintiffs herein filed an individual income tax return for the calendar year 1934. They reported a capital gain of $ 28,927.45. This was made up, save an item of $ 1,836.52 designated Jacob Betz, of sales of 14,016 shares of Buffalo Ankerite for $ 27,083.52 received without cost to the taxpayer; 7,332 shares of Buffalo Ankerite for $ 19,646.34 received without cost to the taxpayer, and 26,437 shares of Marbuan Gold Mines, Ltd., at a cost of .565 per share for .592 and including a loss of $ 1,218.16 from the sale of 17,050 shares of Buffalo Ankerite Gold Mines, Ltd., and a loss from the sale of other stocks of $ 421.46. The plaintiffs paid $ 5,685.46 as the amount of the tax disclosed in their return. Anticipating the action of the Commissioner of Internal Revenue, the plaintiff on September 28, 1937, paid the Collector under protest the sum of $ 10,188.30, and the Collector credited $ 8,843.01, the deficiency tax assessed by him on October 25, 1937, of which $ 425.25 was interest. On September 26, 1939, the plaintiffs filed a claim for refund. On February 25, 1941, this was disallowed. This action was commenced in 1943. The taxpayers reported in their return a surtax net income of $ 36,222.29 and a surtax of $ 4,266.68; a balance of $ 35,469.75 subject to normal tax and a normal tax at 4% of $ 1,418.78, making a total of $ 5,685.46. The Commissioner found a surtax net income of $ 63,496.44, with a surtax of $ 12,018.72 and a balance of $ 62,743.86 subject to normal tax, at 4%, of $ 2,509.75, making a total of $ 14,528.47. Deducting the $ 5,685.46 paid, the Commissioner found an additional tax of $ 8,843.01. The Commissioner increased the item of capital gain from reported of $ 28,927.45 to $ 54,871.88.
As hereinbefore noted, Kinkel received from bonds of the operating company as security for the notes given him for services in 1930 to 1932 in the amount of $ 10,150. It is the contention of the government that the 25,375 shares of Marbuan stock received by Kinkel as a bondholder of March Gold were acquired by him on the date the mortgaged property of 'Ltd.' was sold in the foreclosure proceedings on July 26, 1933.
One contention as made by plaintiffs in the refund claim is that the date of the acquisition of this Marbuan stock was the date plaintiffs received the promissory notes for Kinkel's services- October, 1931, and November, 1932. This would only be so provided it was agreed that the notes should constitute payment for the service. Evidently there was no such agreement, because the plaintiffs had bonds as security. See: Anthony P. Miller, Inc. v. Commissioner, 3 Cir., 164 F.2d 268, 4 A.L.R.2d 1219.
Another position taken by the taxpayers has been that the stock was acquired on the dates Kinkel received the bonds. Since he had these bonds as security, he acquired no title or control over the bonds, and hence there could have been no acquisition.
The claim has also been made that the Marbuan stock bonds were acquired on the dates when sold, on the theory that payment was then received for services performed. It is pointed out by the defendant that, if that is the correct date of acquisition, the gain from the stock would be taxable as current income and not as capital gain, and hence the taxpayer could not complain.
The determination of the Commissioner as to the date of the acquisition of this stock is correct, because it was then that Kinkel first obtained full control over these bonds. This date was July 26, 1933. As the Court said in Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179, 62 S. Ct. 540, 543, 86 L. Ed. 775: 'We conclude, however, that it is immaterial that the transfer shifted the ownership of the equity in the property from the stockholders to the creditors of the old corporation. Plainly the old continuity of interest was broken. Technically that did not occur in this proceeding until the judicial sale took place. For practical purposes, however, it took place not later than the time when the creditors took steps to enforce their demands ...