
    AMERICAN RADIATOR & STANDARD SANITARY CORPORATION v. THE UNITED STATES
    [No. 505-58.
    Decided November 1, 1961]
    
      
      M. Bernard Aidinojf for the plaintiff. Norris Darrell, Eendyl K. Monroe and Sullivan <& Ororrmdl were on the brief.
    
      Eugene Emerson, with whom was Assistant Attorney General Louis F. Oherdorfer, for the defendant. James P. Garland and Philip B. Miller were on the brief.
   Jones, Chief Judge,

delivered the opinion of the court:

The plaintiff in this action, successor by statutory merger to Mullins Manufacturing Corporation (hereinafter called “taxpayer”), which was organized under the laws of New York, sues to recover alleged overpayments of excess profits taxes for the years 1951 and 1953 paid pursuant to the requirements of the Excess Profits Tax Act of 1950, 64 Stat. 1137.

The facts are stipulated. To encourage stock ownership by its supervisory employees, taxpayer gave the employees the opportunity to enter into stock purchase agreements. During July 1952, agreements, involving 70,060 shares of newly-issued common stock and 1,050 shares of treasury stock, were consummated with 290 employees for a total purchase price of $1,786,638.75.

The agreements provided substantially as follows:

(1) The employee paid to taxpayer $1 in cash (the par value of the stock) multiplied by the number of shares purchased and agreed to pay the balance of the purchase price of $25% per share in ten equal annual installments payable on January 15th of each year.

(2) Until the purchase price was paid, the employee was required to apply all cash dividends to the purchase price; the employee could authorize the taxpayer to make payroll deductions for application to the purchase price; the employee had the privilege at any time of paying taxpayer all, or any part, of any unpaid installment of the purchase price.

(8) As security for the unpaid balance of the purchase price, the employee pledged the purchased shares with taxpayer, but the purchaser retained all voting rights. No share could be released from the pledge until full payment of the purchase price for all of the shares purchased had been made.

(4) If any payment was not made within 30 days after due date, taxpayer could elect to declare the entire purchase price to be due and payable forthwith. Taxpayer had the further right to sell any of the shares pledged at public or private sale and apply the proceeds to the purchase price.

(5) The taxpayer had the unrestricted right to assign or pledge the agreement of sale. ■

(6) The employee had no right to assign or pledge the agreement, or to assign any right to receive stock thereunder, without the prior written consent of the taxpayer. No share of stock purchased could be transferred or otherwise disposed of by the employee until he had paid the total purchase price due under the agreement.

(7) On the retirement or death of any employee before completing payment of the full purchase price, the employee (or his estate) had the right, within a stipulated period, to pay the taxpayer the entire unpaid balance of the purchase price.

(8) On the termination of the employment, other than by reason of death or retirement, the taxpayer had the option to repurchase from the employee all of the shares purchased by him by paying all amounts theretofore paid, or credited, on the purchase price and cancelling the employee’s obligation to make further payments under the agreement.

(9) If such options were not exercised by the employee, his estate, or taxpayer, as the case may be, taxpayer would apply all amounts paid or credited on the purchase price to full payment of the purchase price of the largest number of shares which could be fully paid for by the application of such amounts, and would release such shares and pay over any remaining cash balance to the employee. Taxpayer would repurchase the remaining shares purchased by the employee under the agreement by cancelling his obligation to make further payments thereunder.

Taxpayer’s accounting treatment of these transactions was to credit capital stock $1 per share and its capital surplus account $24% per share. Cash was debited $1 per share (the amount paid in by the employee upon the execution of the agreement), and an account nominated “Miscellaneous Accounts Receivable — Employee Stock Purchase Plan #2” was debited $24% per share.

All stock was issued to and registered in the names of the purchasing employees upon execution of the agreements during July of 1952 and it was listed on the New York Stock Exchange. A Federal issue tax was paid on the newly-issued stock. In 1952 taxpayer paid a long-term capital gain tax on the difference between cost to taxpayer of acquiring the treasury stock and the sales price of such stock as provided in the stock purchase agreements.

From July 1952 until January 30, 1956, the date of taxpayer’s merger into plaintiff, taxpayer repurchased a total of 12,953 shares of stock because of death, retirement, or termination of employment.

Taxpayer in 1952 computed its excess profits credit on the “based on income” method as provided in section 435 of the Internal Revenue Code of 1939. Subsection 435(a) (1) (C)

provides that a factor in this computation shall be 12 per cent of the “net capital addition.” The determination of “net capital addition” requires an ascertaining of “daily capital addition” which is defined in'subsections 435(g) (3) (A) and (B). In computing taxpayer’s excess profits credit for 1952, the Commissioner of Internal Revenue refused to include the total amount due under the stock purchase agreements as “money and property paid in for stock, or as paid-in surplus” under subsection 435 (g) (3) (A) but rather included only the actual cash paid in. Similarly, for 1953, “equity capital” under subsection 435(g)(3)(B) was determined by the Commissioner to include only that amount corresponding to the figure used for “property paid in for stock” for 1952 (an average figure) and thus did not include the total amount due on the agreements.

To summarize, plaintiff contends that in determining “net capital addition” for 1952 and 1953 (and in turn the excess profits credit for those years), the total amount due and not just that actually received on the stock purchase agreements must be included. If plaintiff is correct, then taxpayer’s “net capital addition” will be increased, as will its excess profits credit in proportionate amount.

By increasing the excess profits credit in 1952, taxpayer’s unused excess profits credit carryback to 1951 would be increased, and this would decrease its excess profits tax liability for that year. The interest on the deficiency assessed against the taxpayer for 1951 would, in turn, be decreased. By including the total amounts due on the agreements in “equity capital” as of the beginning of the year 1953, taxpayer’s excess profits credit would be increased and its ultimate 1953 excess profits tax liability decreased. This reduction would cause a decrease in the interest on the deficiency assessed for 1953. We are of the opinion that the plaintiff’s contentions are essentially correct, and that plaintiff, as successor to the taxpayer, is entitled to a refund.

What constitutes “property paid in for stock, or as paid-in surplus” under § 485(g) (3) (A) and hence is to be included in the computation of “net capital addition” is not delineated in the Code. Nor has any case arising under the Excess Profits Tax Act of 1950 decided whether an agreement containing a promise to pay money on the sale of stock is includible in the computation of “net capital addition.” However, the model for section 435 was a substantially identical provision in the Excess Profits Tax Act of 1940. This latter provision was before the Tax Court in Difco Labs., Inc. v. Commissioner, 10 T.C. 660 (1948). There a stock purchase agreement in terms similar to the one in this action provided that a promissory note payable in 5 years with interest at 5 percent was to be given in exchange for the stock. Although issued to the employee-purchaser upon execution of the agreement and the note, the stock was retained by Difco as security for the payment of the note. If the employment were terminated, Difco had the option of repurchasing the stock; however, were this option not exercised the purchaser did have the opportunity to pay in the amount still due and thus receive the stock. It was held that the promissory note was “property paid in for stock” and, therefore, its value was to be used in determining Difco’s excess profits credit for the year in which the transaction took place.

Certainly, to be considered “property” for tax purposes, the rights received by a taxpayer must be of such vested character as to be properly considered working capital. In this respect the Government argues that there is a difference between a promissory note and an agreement containing a promise to pay. This would undoubtedly be so if the promissory notes in Difco Labs., supra, could have been negotiated to a holder in due course, in which case any defenses based on the agreement itself would be unavailable to the employee-purchaser. But, there are not sufficient facts given in Difco Labs, to determine whether the notes were negotiable. It is further argued that, in the case before this court, the taxpayer, in the event the employee terminated his employment by resignation, was limited to one of two courses set out in paragraph “8” of the stock purchase agreement (Appendix A). After such resignation the taxpayer could not sue for any balance due. Whereas in Difco Labs., if the repurchase option were not exercised by Difco, the latter could, seemingly, still sue to recover the amount remaining unpaid. We must decide if these are significant factual distinctions.

In answer to the Government’s argument that the rights received by the taxpayer were not sufficiently binding and unconditional to be considered “property paid in for stock,” plaintiff cities Haskett & Barker Car Co. v. Commissioner, 9 B.T.A. 1081 (1928), a case arising under an excess profits tax law of World War I. That act allowed, in computing what would be analogous to an excess profits credit, “stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds and other property” paid in for stock. Revenue Act of 1918, § 825(a), 40 Stat. 1091-92. The agreement in Haskett & Barker provided for full payment of the stock purchase price in 5 years; default caused the purchase right to lapse with the employer-seller returning the amounts previously paid in. If the employment terminated, or at any time the employee elected, the employer would repay that amount already paid in on the agreement and cancel the obligation. The employer’s rights in Haskett & Barker are no more vested than those involved in this cause of action, and the Board of Tax Appeals in that case regarded the contract as being within the provision quoted above. There is no indication that the Congress intended “property paid in for stock, or paid-in surplus” to be less broad than the provision involved in the Haskett & Barker case.

Cases involving stock subscription agreements which hold that only amounts actually paid in, and not the total amount due, are includible in computing excess profits credit are in-apposite. In a stock subscription agreement, the stock certificates are not issued to the purchaser until the full pur-

díase price is paid. Thus, such agreements cannot be paid in for stock. Fidelity Trust Co. v. Commissioner, 13 B.T.A. 109 (1928), clearly illustrates this. Again the question was presented of whether an agreement promising to pay money for the sale of stock was within the same provision quoted above in reference to the Haskell da Barker case. In allowing the inclusion of the total purchase price, although it had not been paid in full, the Board said at page 114:

As these agreements were executed, the sales they called for were completed by the petitioner by the issuance of the designated number of shares of capital stock. There was then something more than a mere subscription or promise to buy which might.perhaps be abrogated; there was .an executed contract, in so far as the [taxpayer] was concerned, by which the obligor became the owner of shares of stock which he hypothecated as collateral security for the balance of his obligation.

An examination of the provisions of taxpayer’s stock purchase agreement and the circumstances surrounding its execution can only but yield the conclusion that the agreement was a binding contract and intended to be such by the parties. Upon default the taxpayer clearly has the power to collect any amount still due from the-defaulting employee. The repurchase provisions, in the case of death or retirement, rather than detracting from the binding quality of the obligation are a sensible and worthwhile arrangement in an agreement of this type.

Only upon termination of employment by reason of resignation is it certain that the obligation would not be satisfied. The Government urges that this imputes an aura of contingency to the contract. It is true that if the taxpayer’s use of money or property received is tó a great extent contingent upon the occurrence of some event, it cannot be considered as “net capital addition.” Since only the rather drastic act of resignation would suffice to avoid one’s duty to perform the obligation, this contingency cannot be said to be of sufficient importance to change the otherwise binding character of the agreement. The Government offers no compelling reason for differentiating between the contract and promissory note in Difco Labs, and the binding contract involved here.

The Government does, however, further contend that New York corporation law precludes this stock from being lawfully issued prior to the full payment of the purchase price. However, this statute allows the issuance of stock if “property” is received in payment. We find no case under the New York statute which holds that a binding and secured obligation to pay, entered into in good faith, is not property which can be considered as payment for stock. Since the statute on its face is in terms broad enough to include a binding contract containing a promise to pay as property, and since there are no decisions which would limit such a construction, we must conclude that the agreement before us is not prevented by the New York statute from being considered “property paid in for stock” for purposes of computing excess profits credit. Cf. Graves, Inc. v. Commissioner, 202 F. 2d 286 (5th Cir. 1958), cert. denied, 346 U.S. 812 (1953).

We feel it necessary to emphasize that the issue has been to this point whether or not the contracts are “property paid in for stock, or as paid-in surplus.” In holding that the provisions in the agreement were not of such character to prevent the obligation from being sufficiently binding to be considered property for excess profits credit purposes, we have not intended to imply that they may not be relevant in determining the valuation of this property. Thus, there remains the problem of ascertaining the fair market value of these agreements in order to accurately determine the amount to be included in the computation of “net capital addition.” There is not sufficient evidence before this court to rule on this matter. Without intending to preclude the use of other factors, nor in any way to indicate the weight to be given such factors, we, nevertheless, note as an example that the fair market value of a non-interest-bearing promise to pay might well be less than its face value.

Judgment will be entered for the plaintiff with the amount of recovery to be determined pursuant to Rule 38(c).

It is so ordered.

Dureee, Judge; Laramore, Judge, and Whitaker, Judge, concur.

EINDINGS OE EACT

The court, having considered the evidence, the stipulation of the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff is a validly existing corporation organized under the laws of the State of Delaware. Its principal executive office is located at 40 W. 40th Street, New York, New York.

2. Mullins Manufacturing Corporation (“taxpayer”) was organized in 1919 under the laws of the State of New York. Its principal place of business was at Salem, Ohio. On January 30,1956, it was merged into plaintiff.

3. On or about March 14, 1952, taxpayer timely filed its Corporation Income Tax Return for the calendar year 1951 (“1951”) with the Collector of Internal Revenue, Cleveland, Ohio. Said return reported an income tax liability of $4,476,479.03 and an excess profits tax liability of $417,889.20.

4. The following amounts were paid by taxpayer to the Collector of Internal Revenue in respect of income and excess profits taxes shown due on taxpayer’s 1951 return: on or about March 13, 1952, $1,722,060.00; on or about June 11, 1952, $1,727,940.00; on or about September 11, 1952, $715,-820.00; on or about December 11,1952, $728,548.23.

5. On or about March 10, 1953, taxpayer timely filed its Corporation Income Tax Return for the calendar year 1952 (“1952”) with, the District Director of Internal Revenue, Cleveland, Ohio. Said return reported no excess profits tax liability, an excess profits tax credit of $7,677,504.61 and an unused excess profits credit of $923,890.47.

6. On or about March 10, 1953, taxpayer filed with the District Director of Internal Revenue, Cleveland, Ohio, an application for tentative carryback adjustment of its unused 1952 excess profits credit of $923,890.47 to the year 1951. As a result of said application, taxpayer, on or about May 18, 1953, received a refund of $277,167.14 of excess profits taxes paid in respect of the year 1951.

7. In calculating the excess profits credit shown on its 1952 return, taxpayer used the “Excess Profits Credit — Based on Income” method provided in Section 435 of the Internal Revenue Code of 1939.

8. In calculating the excess profits credit shown on its 1952 return, taxpayer did not include in “property paid in for stock”, under Section 435 (g) (3) (A) of the Internal Revenue Code of 1939, $1,747,585.73 due taxpayer from its employees under certain employees stock purchase agreements (hereinafter referred to as “the stock purchase agreements”) attached hereto as Appendix A, for 71,110 shares of taxpayer’s stock purchased by employees from taxpayer during 1952.

9. On September 14, 1955, after audit and examination of taxpayer’s returns for the years 1951 and 1952, the Commissioner of Internal Revenue determined that taxpayer’s excess profits credit for 1952 was $7,596,896.67 and its excess profits credit carryback to 1951 was $849,460.53, and that taxpayer’s income tax liability for the year 1951 was $4,474,562.72 and its excess profits tax liability for 1951 was $178,066.58, for a total income and excess profits tax liability for 1951 of $4,652,629.30. Since only $4,617,201.09 had been paid by taxpayer in respect of its income and excess profits tax liability for 1951, the Commissioner of Internal Revenue further determined that in respect of the year 1951 there was a deficiency of $35,428.21.

10. In determining the excess profits credit for 1952 and the excess profits credit carryback to 1951, the Commissioner of Internal Revenue did not include, in “property paid in for stock” during tbe year 1952, amounts due under the stock purchase agreements, but only included the actual cash paid in under those agreements, namely, $39,053.02.

11. Taxpayer paid the following amounts to the District Director of Internal Revenue, Cleveland, Ohio, in respect of the deficiency for 1951 and interest thereon: on or about September 28, 1955, $32,215.65; on or about September 5, 1956, $5,812.76; by credit for overassessment of income taxes for the year 1952, $3,212.56; by credit for interest on over-assessment of income taxes for the year 1952, $383.70. Of the foregoing amounts, $6,196.46 represented interest on the deficiency for 1951.

12. Taxpayer has paid to the Director of Internal Revenue, Cleveland, Ohio, in respect of income and excess profits taxes for the year 1951, a total of $4,652,629.30, no part of which has been refunded to taxpayer or to plaintiff. Of the foregoing amount, $4,474,562.72 is attributable to income taxes and $178,066.58 to excess profits taxes. Taxpayer also has paid to the District Director of Internal Revenue $6,196.46 in respect of interest on an asserted deficiency in respect of income and excess profits taxes for the year 1951, no part of which has been refunded to taxpayer or to plaintiff.

13. On March 13, 1956, plaintiff, as successor by statutory merger to taxpayer, timely filed with the District Director of Internal Revenue, Upper Manhattan, New York, a claim for refund for $40,000 of overpayments of excess profits taxes for the year 1951, due to the failure to take into account, in computing taxpayer’s excess profits credit for the year 1952 and its excess profits credit carryback to the year 1951, the entire amounts due or received from employees under the stock purchase agreements for stock purchased by employees during 1952.

14. More than 6 months elapsed between the filing of the aforementioned claim for refund for 1951 and the filing of the petition by plaintiff.

15. On or about June 10, 1954, taxpayer timely filed its Corporation Income Tax Return for the calendar year 1953 (“1953”) with the District Director of Internal Revenue, Cleveland, Ohio. Said return showed an income tax liability of $4,215,045.09, and an excess profits tax liability of $74,960.66. The following amounts were paid to the District Director of Internal Revenue, Cleveland, Ohio, in respect of income and excess profits taxes shown due on taxpayer’s 1953 return: on or about March 13, 1954, $1,941,750.00; on or about June 11, 1954, $1,919,255.18; on or about September 10, 1954, $214,500.28; on or about December 15, 1954, $214,500.29.

16. In its tax return for the year 1953, taxpayer showed an excess profits tax credit of $7,904,467.71. In calculating this credit, taxpayer included in “equity capital”, under Section 435(g) (3) (B) of the Internal Revenue Code of 1939, as of January 1, 1953, amounts due or received by taxpayer from its employees as of January 1,1953 under the stock purchase agreements in the amount of $1,759,001.25.

17. Upon audit and examination of taxpayer’s return for the year 1953, the District Director of Internal Revenue, Cleveland, Ohio, proposed to reduce taxpayer’s excess profits credit for the year 1953 to $7,713,494.79 and to increase taxpayer’s income tax liability to $4,300,296.83 and its excess profits tax liability to. $181,436.24, for a total income and excess profits tax liability for the year 1953 of $4,481,733.07. Since only $4,290,005.75 had been paid by taxpayer in respect of income and excess profits taxes for 1953, the District Director proposed to assess a deficiency hi respect of income and excess profits taxes for the year 1953 of $191,727.32.

18. Of the proposed deficiency of $191,727.32 for 1953, $57,291.87 reflected a proposed increase in excess profits tax liability attributable to the District Director’s refusal, in computing taxpayer’s excess profits credit for 1953, to include as part of “equity capital” the entire amount due or received by taxpayer as of January 1,1953, from employees under the stock purchase agreements.

19. The Commissioner of Internal Revenue included as “equity capital” as of January 1, 1953, only $39,053.02, corresponding to the figure used for “property paid in for stock” for the year 1952, whereas the actual cash paid in for stock during 1952, includible in “equity capital” as of January 1, 1953, was $126,165.00.

20. Plaintiff paid the following amounts to the District Director of Internal Revenue, Cleveland, Ohio, in respect of the proposed deficiency for 1953 and interest thereon: on or about November 13,1956, $170,000.00; on or about January 31, 1957, $34,444.10; by credit for overassessment of income taxes for the year 1954, $9,933.45; by credit for over-assessment of income taxes for the year 1955, $7,752.60; and by credit for interest on overassessments of income taxes for the years 1954 and 1955, $843.43. Of the foregoing amounts, $31,246.26 represented interest on the deficiency for 1953.

21. Taxpayer and plaintiff have paid to the District Director of Internal Revenue, Cleveland, Ohio, in respect of taxpayer’s income and excess profits taxes for the year 1953, a total of $4,481,733.07, no part of which has been refunded to the plaintiff. Of the foregoing amount, $4,300,296.83 is attributable to income taxes and $181,436.24 to excess profits taxes. In addition, plaintiff has paid to the District Director of Internal Revenue, Cleveland, Ohio, $31,246.26 in respect of interest on an asserted deficiency in respect of taxpayer’s income and excess profits taxes for the year 1953, no part of which has been refunded to plaintiff.

22. On February 27,1958, plaintiff, as successor by statutory merger to taxpayer, timely filed with the District Director of Internal Revenue, Upper Manhattan, New York, a claim for refund of $60,000 of overpayments of excess profits taxes for the year 1953 attributable to the District Director’s failure to include, in computing taxpayer’s excess profits credit for 1953, the entire amount due or received from employees as of January 1, 1953 under the stock purchase agreements.

23. More than 6 months elapsed between the filing of the aforementioned claim for refund for 1953 and the filing of the petition by plaintiff.

24. On July 2, 1952, taxpayer offered to certain of its employees the opportunity to enter mto individual stock purchase agreements, in the form attached hereto as Appendix A, at a price of $25% per share, the closing sales price for taxpayer’s common stock on the New York Stock Exchange at the time of the offering. A prospectus relating to the offered shares was given to said employees, and a registration statement relating ¡thereto was filed with the Securities and Exchange Commission.

25. During July 1952,: tlie taxpayer entered into individual stock purchase agreements, in the form attached hereto as Appendix A, with certain of its employees. Under the terms of these agreements, taxpayer sold and delivered to the employee, and the employee purchased and received from taxpayer, an agreed number of shares of common stock of taxpayer, having a par value of $1 per share, at the price of $25% per share.

26. The total number of shares so sold during July 1952 by taxpayer was 71,110, and the total purchase price was $1,786,638.75. The shares consisted of 70,060 shares of authorized but unissued stock, representing a total price of $1,760,257.50, and 1,050 shares of treasury stock, representing a total price of $26,381.25.

27. The dates and amounts of the individual stock purchase agreements were as follows:

28. No purchases were made by employees under the stock purchase agreements after July 31,1952.

29. Of the proceeds from the sale during July 1952 of the stock under the stock purchase agreements, $1 per share (the par value) was credited to the capital stock account on taxpayer’s books, and the balance of $24% per share was credited to the capital surplus account. An account denominated “Miscellaneous Accounts Eeceivable — Employees Stock Purchase Plan #2” was correspondingly debited.

30. Cash payments under the stock purchase agreements, whether by payroll deductions, dividend applications or otherwise, were debited to cash and credited to the aforesaid accounts receivable account.

31. In taxpayer’s annual reports for 1952, 1953, 1954, and 1955 the full amount of the receivables under the stock purchase agreements was entered in the balance sheets as “Other Assets”, while the stock covered by the agreements was entered as “Common Stock — Issued” in the amount of $1 per share and as “Capital Surplus” in the amount of the balance of $24% per share.

32. All the shares sold under the stock purchase agreements were issued to and registered in the names of the employees who purchased the shares in July 1952, and the shares were listed on the New York Stock Exchange.

33. The employees in whose names the shares were issued had the right to vote the stock; they also had the right to the full dividends thereon, and were subject to Federal income tax on such dividends.

34. Taxpayer paid a Federal issue tax (stamp tax) of $86.57 on the issue of the stock covered by the stock purchase agreements, excepting the treasury shares.

35. Of the 71,110 shares originally sold under the stock purchase agreements, 1,050 shares represented treasury stock. These shares of treasury stock were acquired in the following manner: 1,000 shares of treasury stock were purchased on the open market on June 22,1951, at a cost of $17,436.75; in December 1951, 50 shares were acquired as a result of a 5 percent stock dividend. These shares, together with the others, were sold at $25% per share. At this price there was a gain of $8,994.50 on the treasury stock, which the company treated as a long-term capital gain in its 1952 return and paid the tax thereon. The Commissioner of Internal Eevenue agreed in this treatment, thereby acquiescing in the fact that the profit on the treasury stock was a realized gain in 1952.

36. During 1952, 50 shares of stock covered by the stock purchase agreements were repurchased by taxpayer. All of these shares, attributable to the termination of employment of one employee, were cancelled on December 15, 1952.

37. During 1953, a total of 725 shares were repurchased by taxpayer, attributable to the death of three employees and the termination of employment of twelve employees.

38. During 1954, a total of 6,508 shares were repurchased by taxpayer, attributable to the death of one employee, the retirement of one employee, and the termination of employment of fifteen employees.

39. During 1955, 3,365 shares were repurchased by taxpayer, attributable to the death of one employee, the retirement of two employees, and the termination of employment of thirteen employees.

40. In January 1956, in anticipation of the impending merger of taxpayer into plaintiff, each employee of taxpayer holding stock purchase agreements was given the option of either (1) applying all amounts paid or credited on the purchase price of shares purchased by him to the full payment of the purchase price of the largest number of whole shares which could be fully paid for by the application of such amounts and reselling to taxpayer the remaining shares, in return for cancellation of the individual’s obligation to make any further payments under the agreement, any balance of the purchase price previously paid or credited and not applied to full payment for shares being paid over to the individual, or (2) entering into a new agreement, accompanied by a promissory note, providing for payment of the balance remaining payable for shares purchased under his stock purchase agreement, and cancelling the latter agreement. In either case, the shares of stock of plaintiff were to be substituted for the shares of taxpayer upon the occurrence of the contemplated merger. Fifteen employees selected the first alternative while the remaining 223 employees selected the second alternative.

41. During 1956, prior to the time of the merger of taxpayer into plaintiff on January 30, 1956, a total of 2,305 shares were repurchased by taxpayer, attributable to the retirement of four employees.

42. Upon the cancellation of stock because of death, retirement, or termination of employment, the treasury stock account was debited and the receivable account referred to in finding 29 above, was correspondingly credited.

43. If, in computing taxpayer’s excess profits credit for 1952, the entire amount due or received under the stock purchase agreements for the purchase of 71,110 shares of stock sold to employees during 1952 had been included in “property paid in for stock” within the meaning of Section 435(g) (3) (A) of the Internal Revenue Code for purposes of calculating “the daily capital addition” under Section 435 (g) (3) and therefore “the net capital addition” under Section' 435 (g)(1), taxpayer’s excess profits credit for the year 1952 would have been increased from $7,596,896.67 to $7,691,486.17 and taxpayer’s excess profits credit carryback from the year 1952 to 1951 would have been increased from $849,460.53 to $944,050.03, resulting in a decrease of taxpayer’s excess profits tax liability for the year 1951 of $28,376.85:-'"'This would further have resulted in a decrease in interest-on taxpayer’s deficiency for the year 1951 of $4,97i.91. ' 'r '

44. If, in determining taxpayer’s excess profits credit for 1953, the entire amount due or received as of January 1,1953,’ under the stock purchase agreements for stock sold to employees during 1952, less any stock repurchased by taxpayer during 1952, had been included in “equity capital” under Section 435(g) (3) (B) of the Internal Revenue Code, and as defined in Section 437 (c), for purposes of calculating “the daily capital addition” under Section 435(g) (3) -and therefore the “net capital addition” under Section 435 (g) (1), the taxpayer’s excess profits credit for 1953 would have been increased from $7,713,494.79 to $7,907,633.45, and taxpayer’s excess profits tax liability for 1953 would have been decreased ■ by $57,291.87. This would further have resulted in a decrease in interest ‘ on taxpayer’s deficiency for 1953 - of $9,336.69.

45. Plaintiff is the sole and absolute owner of this claim. No transfer or assignment of the claim or of any part thereof has been made except as hereinbefore alleged. Nó aetioh other than as aforesaid has been taken' thereon by5 the Con-. gress by any department of the Government of the United States, in the Tax Court of the United States, or in any other judicial proceeding.

APPENDIX A

MULLINS MANUFACTURING CORPORATION

Employees’ Stock Purchase Agreement

agreement made the day of July 1952, by and between mullins manufacturing corporation, a New York corporation (herein called the Company), and (herein called the Employee):

Whereas, the stockholders of the Company have duly consented to and approved a plan for the sale of shares of the Company’s Common Stock to supervisory employees of the Company as an incentive and to encourage stock ownership by such employees; and

Whereas, said plan contemplates that the particular terms upon which said shares are to be sold are to be specified by the Board of Directors of the Company and contained in written agreements entered into with the purchasing employees; and

Whereas, the Board of Directors has specified such terms and approved employees’ stock purchase agreements in the form hereof; and

Whereas, the Employee is an employee of the Company at the date hereof:

Now, therefore, this agreement WITNESSETH:

1. The Company hereby sells and delivers to the Employee, and the Employee hereby purchases and receives from the Company, shares of the Common Stock of the Company at the price of $ per share, payable as hereinafter provided.

2. The Employee has paid to the Company, on account of the purchase price hereunder, the sum of $ in cash ($1 multiplied by the number of shares purchased hereunder) and the Company hereby acknowledges receipt of such payment. The Employee agrees to pay the balance of the purchase price as follows: ...

(a) The Employee will pay to the Company on January 15,1953 the sum of $ (10% of the total purchase price hereunder minus the amount of the initial payment) less any credit then accrued under clauses (c) and (d) of this Section 2.
(b) The Employee will pay to the Company on January 15 in each of the years 1954 to 1962, inclusive, the sum of $ (10% of the total purchase price hereunder) less any credit then accrued under clauses (c) and (d) of this Section 2.
(c) Until the purchase price of all shares purchased hereunder is paid in full, the Employee will apply all cash dividends paid on said shares toward the payment of any unpaid balance of the purchase price hereunder and the Company will credit all amounts so applied and collected by it against any such unpaid balance. The Employee agrees to execute and deliver to the Company all dividend orders necessary to permit the Company to collect all such dividends for this purpose.
(d) If the Employee authorizes the Company to make payroll deductions for application to the purchase price hereunder by signing an appropriate payroll deduction authorization, all amounts deducted by the Company from the Employee’s salary pursuant to such authorization will be credited at the time of deduction against any unpaid balance of such purchase price.

3. The Employee shall have the privilege at any time of paying to the Company all or any part of any unpaid instalment of the purchase price of the shares purchased hereunder.

4. The Employee hereby pledges with the Company, as security for the unpaid balance of the purchase price, the shares purchased hereunder, and agrees to deliver to the Company for the purpose of such pledge certificates for said shares accompanied by a duly executed stock power in blank. The Employee shall be entitled to exercise all voting rights in respect of said shares. Subject to the provisions of Sections 7 and 8 hereof, no share of stock purchased hereunder shall be released from the pledge provided for in this agreement until payment in full of the purchase price for all of the shares purchased hereimder shall have been made. Upon fall payment for all of said shares, the Company will release said shares from the pledge herein provided for.

5. If any of the payments required to be made by the Employee shall not be made within 30 days after the date fixed for such payment, the Company may elect to declare the entire purchase price to be due and payable forthwith. Whether or not such election is made, and without prejudice tó the Company’s rights with respect to payments, if any, not yet due and payable, the Company may, without further demand and without notice to the Employee, sell all or any of the shares pledged hereunder at public or private sale and apply the proceeds of such sale to the purchase price of the shares sold and delivered hereunder and exercise any other right or remedy allowed to it by law.

6. For the purpose of securing the repayment of loans or for any other purpose, the Company shall have the right to assign or pledge this agreement and/or to deliver and repledge any or all of the shares pledged hereunder to and with any other person, firm or corporation, who shall thereupon become vested with all the powers and rights hereunder of the Company with respect to this agreement and/or the shares pledged hereunder. The Employee shall have no right to assign or pledge this agreement or to assign any right to receive shares of stock hereunder without the prior written consent of the Company. No share of stock purchased hereunder may be transferred, sold, pledged (except as collateral under this agreement for payment of all or part of the purchase price of the stock) or otherwise disposed of by the Employee until the Employee has fully paid for such share and has the unrestricted right to sell or otherwise dispose thereof, free from any pledge or hypothecation of the stock as collateral for the payment of its purchase price hereunder.

7. If the Employee should die before completing payment of the full purchase price of all shares purchased hereunder, the legal representatives of the Employee’s estate may within six months after the Employee’s death pay to the Company the entire unpaid balance of the purchase price hereunder. If the Employee should retire on account of old age or if he should retire with the approval of the Board of Directors of the Company on account of disability before completing payment of the full purchase price of all shares purchased hereunder, the Employee may within 60 days after he retires pay to tbe Company the entire unpaid balance of the purchase price hereunder. If in any such case of death or retirement full payment is not made within the time allowed therefor, the Company shall at the expiration of such period apply all amounts paid or credited on the purchase price of the shares purchased hereunder to full payment of the purchase price of the largest number of shares, if any, which can be fully paid for by the application of such amounts, and shall release the shares, if any, which thereby become fully paid for to the Employee or to the Employee’s legal representatives, as the case may be. At the same time the Company will repurchase the remaining shares purchased by the Employee hereunder by canceling the obligation of the Employee or the Employee’s legal representatives, as the case may be, to make any further payments hereunder. Any remaining balance of the purchase price paid or credited hereunder not applied to full payment for shares in accordance with this Section shall be paid over by the Company to the Employee or to the Employee’s legal representatives, as the case may be. For the purpose of determining the largest number of shares which may become fully paid for under this Section, the price per share shall be the price per share stated in Section 1 hereof after appropriate adjustment to give effect to the prior occurrence of one or more of the events mentioned in Section 9 (a), (b) or (c) hereof.

8. If prior to the payment in full of the purchase price of all shares purchased hereunder the Employee should cease to be employed by the Company or a subsidiary of the Company in any manner other than through the occurrence of one of the events mentioned in Section 7 hereof, the Company may at its option repurchase from the Employee all of the shares purchased by the Employee under this agreement by paying to the Employee all amounts heretofore paid or credited on the purchase price of the shares purchased hereunder and by canceling the Employee’s obligation to make any further payments hereunder. The Company shall exercise such option by written notice and such notice shall be mailed to the Employee at his address as listed upon the stock records of the Company, first class postage prepaid and registered, not later than 30 days after the Employee shall have ceased to be employed by the Company or any such subsidiary. If such option is not exercised by the Company, the Company shall at the time of expiration of such option or on such earlier date as it may declare its intention not to exercise such option, apply all amounts paid or credited on the purchase price of the shares purchased hereunder to full payment of the purchase price of the largest number of shares, if any, which can be fully paid for by the application of such amounts, and shall release the shares, if any, which thereby become fully paid for to the Employee. At the same time the Company will repurchase the remaining shares purchased by the Employee hereunder by canceling the obligation of the Employee to make any further payments hereunder. Amy remaining balance of the purchase price paid or credited hereunder not applied to full payment for shares in accordance with this Section shall be paid over by the Company to the Employee. For the purpose of determining the largest number of shares which may become fully paid for under this Section the price per share shall be the price per share stated in Section 1 hereof after appropriate adjustment to give effect to the prior occurrence of one or more of the events mentioned in Section 9 (a), (b) or (c) hereof.

For the purposes of this agreement, the term “subsidiary” means any corporation in which the Company owns stock possessing more than 50% of the total combined voting power of all classes of stock in such corporation.

9. (a) In the event of the payment by the Company of a stock dividend on its Common Stock before full payment of the purchase price hereunder, the pledge under Section 4 hereof shall extend to the shares issued in payment of such stock dividend on the shares purchased hereunder from the time of payment of such dividend shares. The Employee shall promptly after the payment of any such stock dividend deliver the certificates representing the dividend shares to the Company with a duly executed stock power in blank. After the payment of any such stock dividend, whenever shares are released from the pledge hereunder or are repurchased by the Company hereunder, the dividend shares paid on the shares so released shall also be released and the dividend shares paid on the shares repurchased shall also be repurchased.

(b) In the event that the shares purchased hereunder shall be changed or reclassified as a result of any charter amendment, recapitalization, reorganization, merger or consolidation before full payment of the purchase price hereunder, the changed or reclassified shares shall be substituted for the shares pledged hereunder with the same force and effect as if the changed or reclassified shares had originally been purchased and delivered under this agreement.

(c) In the event of the issue to holders of Common Stock of the Company of rights to subscribe for or purchase stock or other securities, whether such rights be evidenced by warrants or not, such rights in respect of all shares pledged hereunder shall be delivered to the Employee free from pledge.

No payment of a stock dividend, no change or reclassification of shares and no issuance of subscription rights shall affect the total purchase price payable hereunder, nor the amount or due date of any instalment of said purchase price.

10. This agreement shall be binding upon and inure to the benefit of the parties hereto, the successors and assigns of the Company and the personal representatives of the Employee.

11. The Employee hereby acknowledges receipt of a copy of the Company’s Prospectus dated July 2,1952.

In witness wbereoe, the Company has caused this agreement to be executed by its President or one of its Vice Presidents and the Employee has hereunto set his hand and seal, all as of the day and year first above written.

Mullins Manufacturing Corporation
By- — - Vice President
- — -(L.S.). Employee

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c). 
      
       See Appendix A of the findings of fact for tie complete agreement.
     
      
       26 U.S.C. (I.R.C. 1939) § 435 (1952 Ed.) provides in pertinent part:
      “Excess profits credit — based on income—
      “(a)i Amount of excess profits credit — The excess profits credit for any taxable year, computed under this section, shall be—
      “(1) Domestic corporations. In the case of a domestic corporation the sum of—
      *****
      “(C) 12 per centum of the net capital addition (as defined in subsection (g) (1)) for the taxable year, minus 12 per centum of the net capital reduction * * * for the taxable year.
      *****
      “(g) Net capital addition or reduction.
      “(1)| Net capital addition. The net capital addition for the taxable year shall, for the purposes of this section, be the excess, divided by the number of days in the taxable year, of the aggregate of the daily capital addition for each day of the taxable year over the aggregate of the daily capital reduction for each day of the taxable year.
      * * # # IS
      “(3) Daily capital addition. The daily capital addition for any day of the taxable year shall, for the purposes of this section, be the sum of the following:
      “(A) The aggregate of the amounts of money and property paid in for stock, or as paid-in surplus, or as a contribution to capital, after the beginning of the taxable year and prior to such day.
      “(B) The amount, if any, by which the equity capital (as defined in section 437(c)) at the beginning of the taxable year exceeds the equity capital at the beginning of the taxpayer’s first taxable year under this subchapter.”
     
      
       26 u.S.C. (I.R.C. 1939) § 437(c) (1952 Ed.). “Definition of equity capital.
      "The equity capital of the taxpayer as of any time shall be the total of its assets held at such time in good faith for the purposes of the business, reduced by the total of its liabilities at such time. For such purposes, the amount attributable to each asset shall be determined by ascertaining the adjusted basis thereof (or, in the case of money, the amount thereof) and the adjusted basis shall be the adjusted basis for determining gain upon sale or exchange.”
     
      
       26 U.S.C. (I.R.C. 1939) § 713(g)(3) (1952 Ed.), repealed by Act of Nov. 8, 1945, ch. 453, title I, § 122(a), 59 Stat. 568.
     
      
       The Government cites, as more in accord with its view in the action before this court, the dissent of boardmember Phillips in Haskell & Barker Car Co. v. Commissioner, B.T.A. 1087, 1099 (1928). This dissent was clearly predicated on the fact that its author construed the agreement involved as a subscription and not a sale. As we have indicated, in the action before this court there was a sale.
     
      
       See Bridgeport Hydraulic Co. v. Kraemer, 219 F. 2d 929 (2d Cir. 1955), Graves, Inc. v. Commissioner, 16 T.C. 1566 (1951), aff’d on other grounds, 202 F. 2d 286 (5th Cir.), cert. denied, 346 U.S. 812 (1953).
     
      
       New York Stock Corporation Law § 69 provides in pertinent part:
      “No corporation shall issue either shares of stock or bonds, except for money, labor done or property actually received for the use and lawful purposes of such corporation.”
     
      
       In In re Waterloo Organ Co., 134 Fed. 341 (2d Cir. 1904), cited by the Government in support of its argument, the court held that an unsecured note not recorded on the corporation’s books as a receivable, and apparently not expected to be and in fact not paid, was not “property actually received for the use and lawful purposes of such corporation.” This case came under the predecessor.of section 69 of the New York Stock Corporation Law.
     