holding that the sale of a “membership certificate” in a non-profit hospital, which represented only the right to participate in management of hospital, was not a sale of “property”
How later courts described this case
- holding that the sale of a “membership certificate” in a non-profit hospital, which represented only the right to participate in management of hospital, was not a sale of “property”
Written by the judges who cited it.
The opinion
Drennen, J., dissenting: I respectfully disagree with the majority opinion insofar as it holds that the $300,000 paid to the certificate holders by Stewards is not taxable as long-term gain on the sale or exchange of a capital asset. I agree that the remaining $410,000 received by the certificate holders which was paid out of funds of Belmont should be taxable as ordinary income.
The majority concludes that the entire amount received by petitioners was ordinary income because petitioners failed to show that what they sold to Stewards was “property” within the meaning of section 117(a), I.R.C. 1939. In my opinion the majority relies too heavily on petitioners’ failure to carry their burden of proof, under the circumstances of this case. When the Commissioner in his notice of deficiency determines that petitioners received ordinary income from the transaction with the explanation that the cash or property received from Stewards is determined to be a distribution of earnings of Belmont and/or compensation for services rendered to Belmont, and then in an amended answer asserts in the alternative and for the first time that the membership certificates in Belmont did not constitute property and were therefore not capital assets, I am very doubtful that any presumption of correctness should attach to the latter assertion. If the transaction was a sale, and it would appear to be, absent any finding that it was a sham, and the $300,000 was from money of Stewards, as has been stipulated, then that amount would not be a distribution of earnings of Belmont nor compensation for services rendered to Belmont. When the Commissioner asserts what to me seems to be a new and inconsistent claim by amended answer, I do not think the allegations of the amended answer should be presumed to be correct or that the petitioners have the burden of proving them wrong.
But in any event, we have in evidence the charter and bylaws of Belmont and evidence as to what rights and duties ownership of all five certificates would provide. From this I think it is clear that by acquiring all five membership certificates Stewards acquired control of Belmont, its physical plant, and all other benefits that might attach to such control. Stewards was willing to pay $300,000 of its own funds for this, and it would appear that it got its money’s worth.
I agree with Judge Forrester that the membership certificates and the intangible rights which attached to them were property within the meaning of section 117(a), and they are no less so because the use of them by petitioners in this manner and for purposes of gaining a profit therefrom might be in violation of Illinois law.
OpteR and FoekesteR, //., agree with this dissent.