Countway v. Commissioner , 44 B.T.A. 921 ( 1941 )

FRANCIS A. COUNTWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ARTHUR F. BERNHARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

WILLIAM P. JACKSON AND GRACE M. JACKSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Countway v. Commissioner

Docket Nos. 101499, 101500, 101501.

United States Board of Tax Appeals

44 B.T.A. 921; 1941 BTA LEXIS 1259;

July 8, 1941, Promulgated

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In 1930, prior to the taxable years involved in these proceedings, petitioners acquired certain N. V. Unilever preference shares of stock having a fair market value in exchange for so-called partnership certificates in a trust. It is stipulated that the partnership certificates were without capital or market value at any time and had no cost basis to petitioners. Petitioners did not take the fair market value of the shares of stock which they received into income in 1930 and pay taxes thereon. Held, petitioners did not acquire the Unilever shares in 1930 as a gift; held, further, that petitioners acquired such shares in a taxable exchange and that, in the determination of gain or loss upon the sale of such shares of stock in the taxable years, petitioners have failed to prove that the stock had any cost basis to them, and the Commissioner is sustained in his determination that petitioners are not entitled to use any cost basis in the determination of their capital gains resulting from such sales.

Alfred P. Lowell, Esq., for the petitioners.

J. T. Haslan, Esq., for the respondent.

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BLACK

These proceedings, which have been consolidated, involve deficiencies in income taxes determined by the respondent against petitioner Countway for the calendar year 1933 of $8,636.20; against petitioner Bernhard for the calendar year 1935 of $1,306.35; and against petitioners Jackson and wife for the calendar year 1935 of $704.80.

In a statement attached to his deficiency notice to Countway the respondent made five adjustments to net income, only one of which has been assigned as error, namely, "(e) Increase in capital gain $62,726.44." The respondent explained this adjustment as follows:

The Bureau holds that the stock acquired by you in 1930 was not received as a gift from the second Lord Leverhulme but represented additional compensation; a payment for services rendered to Lever Brothers Limited, and therefore taxable income in the year of receipt to the extent of the market value of the securities at date thereof. See Article 53 of Regulations 74, Revenue Act of 1928. Inasmuch as you failed to report that market value of the stock as taxable income in 1930, you are now estopped from claiming as cost the 1930 value of the stock so received, and therefore the entire proceeds from the disposition thereof constituted taxable income in the year of the sale.

In a statement attached to his deficiency notice to Bernhard the respondent made three adjustments to net income, only one of which has been assigned as error. This assignment of error raises the same issue as noted above in the proceeding of petitioner Countway.

In a statement attached to his deficiency notice to Jackson and wife, the respondent made three adjustments to net income, only one of which has been assigned as error. That assignment of error raises the same issue as noted above in the proceedings of petitioners Countway and Bernhard.

The petitioners all allege that the respondent erroneously determined that certain preference shares of N. V. Unilever, a Dutch corporation, received by petitioners in 1930 were not received as a gift; that the respondent erroneously determined that such shares represented additional compensation; and that the respondent erred in determining that because petitioners had treated such shares as a gift in 1930 instead of including the value thereof as income in their respective 1930 income tax returns, the petitioners, in the respective taxable year when the stock was sold, were estopped to claim any basis for such stock.

In each proceeding the respondent by an amendment to his answer has affirmatively pleaded that the respective petitioner is estopped to claim any value as a cost or basis in his computation of gain or loss on the sale during the respective taxable year of the N. V. Unilever stock received during 1930.

FINDINGS OF FACT.

Petitioners are individuals, Countway residing in Brookline, Massachusetts; Bernhard residing in Belmont, Massachusetts; and Jackson and wife residing in Watertown, Massachusetts.

Each of the petitioners seasonably filed Federal income tax returns for the year 1930, and also for the year in respect of which the alleged deficiency has been determined. The returns of each of the petitioners for all years were filed on the cash basis.

In the year 1933 petitioner Countway sold 148,900 florins par value N. V. Unilever preference shares for the sum of $62,726.44. The sale of such stock was not reported by Countway in his Federal income tax return filed for the year 1933, nor was any gain or loss reported in connection with the sale. On an audit of his return, the revenue agent made various adjustments in Countway's income tax liability, and among other things allowed as a capital loss the sum of $6,363.16, being the difference between the amount received for such shares and $69,089.60, the basis claimed therefor by Countway. Thereafter Countway paid the net deficiency shown by the agent's report. The respondent decreased the capital net loss as adjusted by the agent by the amount of $69,089.60, thereby including the entire proceeds of sale as capital gain.

On April 27, 1935, petitioner Bernhard sold 18,100 florins par value of N. V. Unilever preference shares for the sum of $12,318.50 and in his Federal income tax return for 1935 claimed as cost thereof the sum of $8,398.40, reporting a capital gain of $3,920.10. The respondent increased capital gain by the amount of $8,398.40, thereby including therein the total amount of $12,318.50, and under section 117(a) of the Revenue Act of 1934, the respondent determined that 40 percent thereof or $4,927.40 shall be taken into account in computing net imcome.

On June 3, 1935, petitioner Jackson sold 12,500 florins par value of N. V. Unilever preference shares for the sum of $8,497.35 and in his Federal income tax return for 1935 claimed as cost thereof the sum of $5,800, reporting a capital gain of $2,697.35. The respondent increased capital gain by the amount of $5,800, thereby including therein the total amount of $8,497.35, and under section 117(a) of the Revenue Act of 1934, the respondent determined that 40 percent thereof or $3,398.94 shall be taken into account in computing net income, which was $2,320 in excess of what Jackson had taken into account.

Each of petitioners, on January 1, 1930, and for some years prior thereto, was an officer of Lever Brothers Co., a Maine corporation having its principal place of business in Cambridge, Massachusetts. All of the stock of this company was owned by Lever Brothers Ltd., an English company having its principal place of business in Port Sunlight, England. All of the Pound 2,400,000 of ordinary shares of Lever Brothers Ltd. were, from some date prior to May 1, 1909, down to the date of his death in 1925, owned by Sir William Hesketh Lever, later made First Viscount Leverhulme.

Lever Brothers Ltd., in addition to the ordinary shares, had outstanding in 1929 and 1930 six classes of preference shares of an aggregate par value of Pound 54,227,546. Shareholders were entitled to one vote for every Pound 10 capital of any class held by them.

In 1909 Sir William Hesketh Lever, owner of all the ordinary shares of Lever Brothers Ltd., devised a profit-sharing pension scheme for the benefit of officers and employees of Lever Brothers Ltd. and of its affiliated companies, and in order to carry the scheme into effect a trust deed dated May 1, 1909, was executed between Sir William Hesketh Lever (the founder) as first party, Lever Brothers Ltd. (the company) as second party, and five named individuals, who were directors of the company (the trustees) as third party. By this trust deed it was agreed that a trust was to be constituted for the advantage of directors and persons in the employ of the company or its associated companies upon the terms of "the Scheme." All participants in the trust were to have either partnership or preferential certificates. Out of the moneys from time to time received by the trustees, the latter were to pay certain specified dividends to the holders of preferential certificates and the balance in dividends to the holders of partnership certificates. The trust was to continue during the life of the survivor of the issue now living of her late Majesty Queen Victoria and 21 years thereafter. In no sense was the trust agreement to be construed as creating any "partnership in law" between the company and the trustees or between the company and any person interested under the scheme.

The trust deed provided for the issue by the trustees to officers and employees of Lever Brothers Ltd. and its affiliated companies of partnership certificates having a nominal value expressed in pounds, the amount to be issued from time to time to any given officer or employee to be dependent upon term of service in the employ of the company or affiliated company, salary, and merit. Upon retirement or death of a holder of a partnership certificate, such certificate was required to be surrendered, and provision was made for the issue to such retired partnership certificate holder or to the dependents of such deceased partnership certificate holder of preference certificates entitling the holder to a fixed dividend for a period of years, subject to various limitations as provided in the pension scheme. Neither the partnership certificates nor the preferential certificates of the trust were transferable. Such certificates had neither capital value nor market value at any time. Clause 7 of the trust deed, as amended by an indenture dated June 14, 1910, provided in part as follows:

The Company will, out of the moneys proposed to be distributed by way of dividend, duly and punctually pay to the Trustees the dividends on the issued and outstanding Preferential Certificates under the Scheme and the proportion of its surplus profits payable to the Trustees in respect of the total amount of Partnership Certificates for the time being issued and outstanding and entitled to participate in the distribution of dividends as provided by the Articles of Association of the Company for the time being. * * *

Clause 8 of the trust deed, as amended by an indenture dated June 14, 1910, provided that:

Out of the moneys from time to time received by the Trustees from the Company the Trustees, after payment of any costs, charges and expenses which may be due to them, and subject to any alteration of the rights of the Certificate Holders of the Trust which may from time to time be made, shall in the first place pay to the Holders of Preferential Certificates for the time being outstanding a fixed preferential dividend at the rate of 5 per cent. per annum, or at such less rate as may be payable under the provisions of the Scheme, on the nominal amount of their respective Certificates, but such Holders shall not have any further right to participate in any moneys distributed by way of dividend, AND after such payment has been made the Trustees shall distribute the balance of the moneys in their hands from time to time amongst the holders of the Partnership Certificates for the time being outstanding and entitled to participate by way of dividend on the nominal amount of their respective Partnership Certificates.

At the time the trust deed was executed in 1909. Sir William Hesketh Lever caused the articles of association of Lever Brothers Ltd. to be amended. By this amendment provision was made whereby any moneys proposed to be distributed by way of dividend, after the payment thereout of dividends on the preference shares of Lever Brothers Ltd. and a dividend for any period of 5 percent per annum upon the ordinary shares of the company, should be applied in payment of a dividend on the preferential certificates of the trust (the amount of such last mentioned dividend being paid to the trustees for distribution amongst the holders of such preferential certificates), and that the surplus profits proposed to be distributed by Lever Brothers Ltd. by way of dividend should be divided between the holders of ordinary shares of said company and the trustees of the trust, in proportion to the total amount paid up or credited as paid up for the time being on the issued ordinary shares of the company and the total nominal amount of the partnership certificates for the time being issued and outstanding under the scheme hereinbefore referred to.

The amount of the dividends on the preferential certificates and such proportion of the surplus profits of Lever Brothers Ltd. as should be payable to the trustees as provided in the articles of association of the company for the time being constituted the sole asset of the trust.

Clause 2 of the scheme, which was attached as a schedule to the trust deed, as amended by indentures dated June 14, 1910, and November 10, 1916, provided as follows:

Every director of any length of service and/or age and every employee who shall be not less than 22 years of age, be of good character, and shall have a clear record of at least four years' faithful and loyal service with the Company, or any of the Associated Companies, or the Chairman of the Company's Directors or the said WILLIAM HULME LEVER, and who shall agree to be bound by the provisions of the Trust Deed and the Scheme, and also undertakes not to waste time, labour, materials, or money in the discharge of his duties to the Company, but to loyally and faithfully further the interests of the Company, its Associated Companies, and his co-partners, to the best of his skill and ability, may, subject to such provisions have issued to him from time to time Partnership Certificates upon the terms hereinafter mentioned. * * *

The scheme further provided in great detail the manner in which the partnership certificates were to be issued, which was made to depend upon the position held by the employee and the annual salary then being received.

Clause 13 of the trust deed was as follows:

13. It shall be lawful for the Trustees at any time or times hereafter with the consent of the Holder of the Majority Shares of the Company, which such Holder shall have an absolute discretion to give or withhold as he shall think fit, and with the consent of the Holders of Partnership Certificates for a nominal amount of not less than three-fourths of the total nominal amount of the Partnership Certificates for the time being outstanding, and with the consent of the Holders of Preferential Certificates for a nominal amount of not less than three-fourths of the total nominal amount of the Preferential Certificates for the time being outstanding by any deed or deeds revocable or irrevocable to revoke wholly or partially the trusts, powers, and provisions herein contained, and to declare such new or other trusts concerning the property, investments, and funds subject to the trusts hereof as the Trustees, with such consents, shall think fit, and it is hereby declared that the Scheme may at any time or times hereafter be altered or modified by the Trustees with such consents as aforesaid.

The trust deed and/or scheme were amended on June 14, 1910, June 2, 1913, November 19, 1934, November 10, 1916, December 19, 1921, September 28, 1922, and May 18, 1923. Each amendment stated it was done pursuant to authority granted in clause 13 of the trust deed and with the consent, among others, of not less than three-fourths of the total nominal amount of partnership certificates then outstanding under the scheme. Each amendment contained a clause substantially as follows:

The Trust Deed and Scheme as amended by the Supplemental Trust Deeds shall henceforth be read and construed in conjunction with these presents and be regarded as modified accordingly, but save as aforesaid the provisions of the Trust Deed and the Scheme as modified by the Supplemental Trust Deeds shall continue to have full force and effect.

The trustees in years prior to 1930 issued to petitioners as officers or employees of Lever Brothers Co. certain partnership certificates. No one of the petitioners was ever in the employ of Lever Brothers Ltd.; they were all officers or employees of Lever Brothers Co., all the stock of which was owned by Lever Brothers Ltd.

Sir William Hesketh Lever (the first Viscount Leverhulme) died in 1925, and by his will bequeathed one-half of the ordinary shares of Lever Brothers Ltd. to his son, the second Viscount Leverhulme, outright, and one-half thereof to his executors in trust for purposes not material to these proceedings.

In 1929 there existed a Dutch company named N. V. Margarine Unie, the name of which was later changed to N. V. Unilever. This Dutch company was closely affiliated with an English company named Margarine Union Ltd., the name of which was later changed to Unilever Ltd. Between these two companies there existed a so-called equalization agreement, by which provision was made for the equalization of dividends and of capital value on liquidation of the corresponding classes of shares of the two companies.

In 1929 the second Viscount Leverhulme and the executors entered into negotiations with Margarine Union Ltd. for the exchange of all of the ordinary shares of Lever Brothers Ltd. for shares of Margarine Union Ltd. As a part of this transaction Viscount Leverhulme and the executors agreed to put an end to the above described payments by Lever Brothers Ltd. to the trustees of any sums over and above the dividend on the preferential certificates held by former employees or their dependents.

In order to carry out this agreement Viscount Leverhulme and the executors caused an actuarial valuation to be made of the assumed dividend expectancy represented by the outstanding partnership certificates. In order to carry out the program hereinafter described, the contract between Viscount Leverhulme and the executors and Margarine Union Ltd. provided for the issue to Viscount Leverhulme and the executors of ordinary shares of Margarine Union Ltd., plus an amount in preference shares of the company substantially equal to such actuarial valuation. The exchange was consummated as of January 1, 1930, the preference shares then having a fair market value of 115 percent of their face or par value. Lever Brothers Ltd. remained in existence, and no part of its outstanding preference shares was acquired by Margarine Union Ltd. As part of the amalgamation of ordinary share capital of Lever Brothere Ltd. and Margarine Union Ltd., both the latter company and its Dutch affiliate changed their names - the English company to "Unilever Limited," and the Dutch company to "N. V. Unilever."

On January 1, 1930, Viscount Leverhulme and the executors caused a notice to be sent to petitioners and other partnership certificate holders, advising them that Viscount Leverhulme and the executors had made an arrangement which enabled the certificate holders to turn their partnership certificates, which had no capital value, into an investment which had a capital value, viz. , 7 percent cumulative preference shares of Unilever Ltd., and offering to each of the partnership certificate holders the amount of such shares determined by the actuarial valuation in exchange for his partnership certificate, which would be canceled. In the case of persons regularly subject to the British income tax the notice specified Pound 1 shares of Unilever Ltd. Certain employees, holders of partnership certificates, including the three petitioners, were not subject to British income tax, and to avoid subjecting them to the withholding tax provisions Viscount Leverhulme and the executors exchanged a number of preference shares of the English company (Unilever Ltd.) for an equal par value of 7 percent preference shares of the Dutch company (N. V. Unilever). Petitioners and others similarly situated received the said notice early in January 1930, which notice specified 7 percent preference shares of N. V. Unilever. The offer contained in the notice was accepted by each of the petitioners.

On March 26, 1930, a second notice was sent to the partnership certificate holders, stating that because the preference shares of N. V. Unilever were listed on the Amsterdam Exchange, and under the rules of the exchange were required to be in units of 1,000 or 100 florins, the shares which the partnership certificate holders would receive would be in such units, and that fractions would be paid in cash. By the terms of the notices petitioners were to receive shares in N. V. Unilever in the following aggregate amounts of face or par value: Countway, fi. 148,900; Bernhard, fi. 18,100; and Jackson, fi. 12,500.

On April 21, 1930, each of the petitioners received payment in cash for the fraction allotted to him under the above described arrangement, and concurrently with the receipt thereof signed and delivered a receipt, and acceptance bearer certificates for N. V. Unilever preference shares in the amounts specified in the preceding paragraph were sent to petitioners when available for delivery. The shares represented by the certificates are the shares sold by petitioners in 1933 and 1935, respectively.

The market value of N. V. Unilever preference shares as of January 1, 1930, was 115 percent of the face value. The Dutch florin on that date was quoted at $.403491. This market value converted into dollars at the rate of exchange produces a dollar value for the share received by the three petitioners as follows:

Countway, fl. 148,900	$69,089.60
Bernhard, fl. 18,100	8,398.40
Jackson, fl. 12,500	5,800.00

The petitioners received their N. V. Unilever preference shares on April 21, 1930, at which date the fair market value of the shares was 113 7/8 percent of the face value, which, converted into dollars at $.4026, the rate of exchange on that date, indicates the following dollar values as of that date for the shares received by the three petitioners:

Countway, fl. 148,900	$68,264.81
Bernhard, fl. 18,100	8,298.14
Jackson, fl. 12,500	5,730.16

The Lever Brothers Co., the petitioners' employer, for the benefit of such of its employees as were partnership certificate holders under the trust deed, obtained in 1930 the opinion of its general counsel on the status for income tax purposes of the N. V. Unilever preference shares in the hands of the former partnership certificate holders of the trust, and was advised that the shares were gifts to them. The material portion of this opinion is as follows:

It may be contended, and successfully I believe, that the 7% Unilever Shares were a gift from the present Lord Leverhulme and the Executors of the will of the late Lord Leverhulme. The passing over to the recipients of these shares has all of the characteristics of a gift; the donees have given nothing and are not expected to give anything to the donors; there is no employment relationship between the donors and the donees, and the donors were under no enforcible obligation to the donees. The transfer of these shares was, in my opinion, not in any way supported by any exchange or factors that could properly be construed as a consideration for the transfer.

I am well aware that, upon investigation by the Tax Gatherers, the recipients, in sustaining their contention that the Unilever Shares came to them as a gift, would be confronted with some very considerable difficulties. The principal trouble would be in explaining away the statements and terms that are used in the so-called "Release of Co-Partnership Rights" and the accompanying correspondence from London. Certainly the recipients ought not to be bound by these terms and statements. It is to be kept in mind that in the Trust Deed itself and in a great deal that has been said and written about the Co-Partnership arrangement, much of the terminology employed and many of the implications of rights and obligations were intended, and properly so, to be inspirational rather than technical and factual; and so it is that the terminology of the releases and the accompanying statements with the implications of relationships, obligations and rights ought not to be literally interpreted and construed.

The central fact in the whole situation is that the present Lord Leverhulme and the Executors, in order to carry out the intended benefactions of the late Lord Leverhulme transferred their own property to certain individuals, not in satisfaction of any obligation nor in the expectancy of receiving anything in return, but because freely and out of hand they wished to confer certain benefits on those individuals. The right interpretation to be put on this fact is that gifts were made in connection with which there is no incidence of taxation. My advice, therefore, is that the recipients of the 7% Unilever Shares received these shares in January, 1930 as a gift from the present Lord Leverhulme and the Executors of the will of the late Lord Leverhulme and that such receipts should not be reported as taxable income for the reason that gifts are exempt from State and Federal taxation.

Petitioners, in good faith, made their Federal income tax returns for the year 1930, and for the year for which the deficiencies are asserted, in reliance on said opinion. The N. V. Unilever shares were not included at any value in income reported for the year 1930 on which tax was paid, nor was the receipt of those shares mentioned in the returns filed by petitioners for 1930. The statutory period of limitation for making any assessment of any deficiency in income tax against any of the petitioners for the year 1930 has expired.

Petitioners correctly omitted from gross income reported for the years in which the partnership certificates were received any value with respect thereto, because it has been stipulated that "such certificates had neither capital value nor market value at any time."

Distributions made by the trust to the partnership certificate holders and received by petitioners have been included by petitioners in gross income of the years received. No controversy exists between the parties with respect thereto.

The term "partnership certificates" has been used throughout these findings merely as a means of identification and its use is not to be construed as indicative of the existence of a partnership.

Petitioners did not acquire the N. V. Unilever preference shares in 1930 as gifts, but acquired them as property received in exchange for the so-called partnership certificates.

OPINION.

BLACK: The question in these proceedings is the determination of the proper basis for computation of capital gain on the sale during the taxable year involved of the N. V. Unilever preference shares which petitioners acquired in 1930 in the manner set out in our findings. The applicable statute in the case of petitioner Countway is the Revenue Act of 1932; and in the case of the other two petitioners, the applicable statute is the Revenue Act of 1934. Section 113 of the Revenue Act of 1932 provides in part as follows:

SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.

(a) BASIS (UNADJUSTED) OF PROPERTY. - The basis of property shall be the cost of such property; except that -

* * * (2) GIFTS AFTER DECEMBER 31, 1920. - If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *

Section 113(a)(2) of the Revenue Act of 1934 is the same as the above quoted portion of the 1932 Act, except that the last quoted period is changed to a comma and is followed by the words "except that for the purpose of determining loss the basis shall be the basis so determined or the fair market value of the property at the time of the gift, whichever is lower."

Petitioners primarily contend that they acquired the N. V. Unilever preference shares on April 21, 1930, as a gift, and that their basis must therefore be determined under paragraph (2) of subsection (a) of section 113, supra. As an alternative, they contend that if it be held that the shares were not acquired as a gift, then it must be held that they were acquired in exchange for the partnership certificates; that the "cost" of the shares must be regarded as the fair market value of the partnership certificates at the time of the exchange on April 21, 1930, which value petitioners contend was equal to the value of the shares; and that petitioners are not estopped to use the "cost" thus contended for as their basis for determining capital gain or loss.

The respondent contends that petitioners did not respectively acquire the N. V. Unilever preference shares as a gift; that they acquired such shares in exchange for their partnership certificates; that these partnership certificates had been acquired by petitioners by virtue of their employment and were intended under the trust deed and scheme as a means of measuring additional compensation for faithful and loyal services performed; that, since the annual or periodical income received by petitioners on such partnership certificates had been considered by petitioners as income in the year received and had been so reported, the fair market value of the N. V. Unilever preference shares received by petitioners in 1930 was the equivalent of the then value of the aggregate of the anticipated future compensation receivable under such partnership certificates and should have been reported as taxable income in 1930, which petitioners did not do; and that, since petitioners did not report the receipt of the shares in 1930 or any taxable income therefrom, and the statute of limitations within which any deficiency might be assessed for 1930 has expired, the petitioners are estopped from claiming the fair market value of such shares on April 21, 1930, as their basis for computing gain or loss in the taxable years, respectively, and should be limited to a basis of cost, which was zero.

Were the transfers of the N. V. Unilever preference shares to petitioners on April 21, 1930, gifts of such shares to petitioners, or were the transfers made in consideration for and in exchange for the partnership certificates then owned by petitioners?

We are satisfied that the transfers of the N. V. Unilever preference shares to petitioners were not gifts but represented property received in exchange for the so-called partnership certificates, and that the fair market value of such shares when received by petitioners on April 21, 1930, was taxable income to them, since the exchange was a taxable one and not excepted from the recognition of gain or loss by section 112 of the Revenue Act of 1928 and the partnership certificates had a basis of zero for computation of gain or loss at all times. In , the Fourth Circuit, among other things, said: "It is an essential characteristic of a gift, however, that it be a transfer without consideration. If there is a consideration for the transaction, it is not a gift. 28 C.J. 621."

Petitioners devote the greater part of their brief on the question of gift in support of the contention that there was no consideration for the transfers. They point to the provision of clause 7 of the trust deed wherein it was agreed between Lever Brothers Ltd., the first Lord Leverhulme, and the trustees that the partnership certificate holders would be entitled to participate "in the distribution of dividends as provided by the Articles of Association of the Company for the time being" and argue that in view of the phrase "for the time being" it was within the legal rights of Lever Brothers Ltd. to change its articles of association at any time so as to cut off all future benefits theretofore enjoyed by the holders of the partnership certificates, and that Lever Brothers Ltd. could do this without first securing the consent of not less than three-fourths of the total nominal amount of the outstanding partnership certificates, as provided by clause 13 of the trust deed. They further argue that such a change in the articles of association actually occurred when the second Lord Leverhulme and the executors of the will of the first Lord Leverhulme agreed to exchange the ordinary shares of Lever Brothers Ltd. for shares of Unilever Ltd.; that the stockholders of Lever Brothers Ltd. were under no legal obligation to transfer anything to petitioners; and that the transfer to petitioners of the N. V. Unilever preference shares was a pure gratuity.

Although petitioners argue this point in their brief persuasively, we are not convinced by such argument. After a careful consideration of all the facts, we have come to the conclusion that petitioners received the N. V. Unilever preference shares of stock in exchange for their so-called partnership certificates, together with the dividend rights which these certificates carried.

On January 1, 1930, the second Lord Leverhulme and the executors caused an offer to be made to petitioners and others which was accepted by each of the petitioners. This offer was, in part, as follows:

In accordance with such valuation, Lord Leverhulme and the Executors are pleased now to be in a position to offer you the under-mentioned number of 7 per cent. Cumulative Preference Shares of 12 Florins each, fully paid, in N. V. Margarine Unie (or N. V. Unilever, as will be the name of the Company very shortly), and cash in lieu of a fraction of a share, in exchange for your Partnership interest which will be cancelled; * * *. You will, in addition, be entitled to the Co-Partnership dividend of 5 per cent. which is expected to be paid for the year 1929.

* * *

The Trustees of the Co-Partnership Trust consider that the above offer is a very favourable one to you, and they unhesitatingly recommend you to accept it by signing the form attached below and returning it in the enclosed envelope to your Company not later than seven days after receipt hereof by you.

The form of the acceptance was as follows:

I accept the offer contained in your circular of the 1st January, 1930, and I agree that on issue of the shares in N. V. Margarine Unie (N. V. Unilever) to which I am entitled under that offer, my rights to Co-Partnership dividends, whether under Partnership Certificates or Bonuses on 8 per cent. Preferred Ordinary Shares in Lever Brothers Limited, shall cease.

We, therefore, think the surrender by petitioners of their partnership certificates in exchange for the N. V. Unilever preference shares was a good and valid consideration for such shares, and that, since there was a consideration for the transaction, it can not be said that petitioners acquired the N. V. Unilever shares as gifts. We hold, therefore, that petitioners' bases may not be determined under paragraph (2) of subsection (a) of section 113, supra.

Since not any of the exceptions to subsection (a) of section 113, supra, are applicable, it follows that the basis of each petitioner is "cost" of the N. V. Unilever preference shares at the time of their acquisition. What was this cost? Where stock is received in exchange for properties, the cost of the stock is the value of the properties exchanged therefor, unless the transferor is required, under the statute, to retain as the cost of the stock the cost of the properties transferred. See Paul and Mertens, Law of Federal Income Taxation, sec. 18.18.

We have already pointed out that the exchange which took place in 1930 was not one excepted from the recognition of gain or loss under section 112 of the Revenue Act of 1928. Therefore, the cost to petitioners of the stock which they acquired in 1930 was the value of the property which they gave up in exchange for it. If we had no evidence as to what the value of the property given in exchange was, then the presumption would be that it had a value equal to the fair market value of the shares of stock which were received in exchange for it. ; reversed on another point, ; ; affd., , and cases there cited.

But the rule cited in the foregoing cases does not apply in the instant case because we do have evidence as to the value of the property which petitioners gave in exchange for the shares of stock which they received. It has been stipulated that the partnership certificates "had neither capital value nor market value at any time." In view of this stipulation, we think we must hold that the N. V. Unilever preference shares of stock which petitioners received in 1930 had no cost basis to them.

The situation would, of course, be different if they had taken the fair market value of the stock into income in 1930 and had paid tax thereon. In that event, the cost basis of their stock in the years when they sold it would have been the fair market value of the stock which they took into income in 1930. But the facts show that petitioners did not take the fair market value of the stock into income in 1930 and pay tax thereon nor did the property which they gave in exchange for it have either capital value or fair market value. Under these circumstances we think petitioners have failed to prove that the shares of stock which they sold in the respective taxable years had any cost basis to them. Cf. ; certiorari granted and subsequently dismissed by stipulation of counsel, ; ; certiorari denied, , affirming .

Because of the foregoing reasons and under the authorities cited, we sustain the Commissioner in his determination that the shares of stock in question had no cost basis to petitioners.

Decision will be entered for the respondent.