Category: Sales & Exchanges Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background You asked me to confirm that TP will be taxed at the time of sale on the value of the unregistered shares received in the transaction. It seems very clear to me that TP will be indeed by taxed on the value of the unregistered stock at the time of receipt. Discussion Since the promulgation of Burnet v. Logan, the IRS and subsequent court decisions have made it very clear that only in extraordinary circumstances will property lack an ascertainable fair market value. McShain v. Commissioner 71 T.C. 998; Regulation Section 1.1001-1(a); and Rev. Rul. 58-402, 1958-2 C.B. 15. Specifically in the area of stock, there is a rather peculiar case, Helvering v. Tex-Penn Oil Co. 300 U.S. 481, 37-1 USTC ¶9194 (1937), in which the Supreme Court held that the value stock received in an otherwise taxable exchange was so highly speculative as to lack an ascertainable value at the time of the transaction. This case involved stock of a brand-new company engaged in the wide-scale acquisition of unproven oil and gas properties. The recipient of this stock was forbidden to sell it for a period of 180 days. By the time the restrictions lapsed, the company was a complete failure. It seems to me the facts at hand are very much different from those of the Tex-Penn Oil Company case; thus, the reasoning and the holding of this case are unavailable to us in this matter. The Tex-Penn case is often cited, but few taxpayers are successful in convincing a court that their facts warrant the same holding as in Tex-Penn. While the stock TP is getting in this transaction may possess a good deal of risk, it seems fair to say (based on your representations to me) that the stock is far from highly speculative, certainly not on the same order as dealing in unproven oil and gas properties. In addition, the stock is regularly traded on a national exchange. It seems to me that regular trading of the same shares as are involved in this transaction (even though TP's shares are unregistered) takes us far away from the argument that the shares are so highly speculative as to lack a value altogether. Investors establish a value for the stock every time the shares trade on the stock exchange. It seems to me the fact that the shares in question are unregistered simply increases the amount of time TP's investment is exposed to market fluctuations. In the alternative, lack of registration could be viewed as imposing an additional cost (the cost of registration) on the disposition of TP's shares. These constraints increase the holding risk and/or the disposition cost associated with these shares, but I think the lack of registration falls far short of removing the stock from the realm of assets which can be valued. There are a few cases in which taxpayers have received unregistered shares in a taxable exchange. The issue in these cases is not the taxability of the receipt, but rather the valuation of these shares. In essence, to what extent is it appropriate to value unregistered shares at a discount from the price at which the shares trade on an established stock exchange. See, for example, Wheeler v. Commissioner 37 TCM 883 (1978).  |