Parker v. Commissioner ( 1929 )

HELEN PITTS PARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

GEORGE A. MOORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DIVIE B. DUFFIELD AND HELEN PITTS PARKER, EXECUTORS OF THE LAST WILL AND TESTAMENT OF ARTHUR M. PARKER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Parker v. Commissioner

Docket Nos. 14186, 14953, 14954.

United States Board of Tax Appeals

14 B.T.A. 1185; 1929 BTA LEXIS 2972;

January 11, 1929, Promulgated

---

1. A new corporation was formed by the consolidation of two other corporations. Upon the evidence, held that the stockholders of the old corporations received stock in the new corporations in exchange for stock of the old corporations in 1919 instead of 1918.

2. The common stock so received by petitioners held to have had no fair market value at the time received.

3. Held that, the burden of proof being upon the petitioners, it is not sufficient that they allege that the respondent made an incorrect determination, but they must affirmatively show what the correct determination should be.

4. Where all the increment and gain of an estate has been attributed to the life tenant, such being represented by 1,177 shares of stock of the new corporation, held that the estate, when it received stock of the new corporation in 1919 for stock in one of the old corporations, received nothing more than it had received in 1914, at the time of the death of the testator, and no taxable gain was realized upon the exchange.

J. S. Y. Ivins, Esq., R. H. Berry, Esq., F. C. Goddard, Esq., and E. S Kochersperger, Esq., for the petitioners.

J. E. Marshall Esq., for the respondent.

---

SIEFKIN

These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income taxes for the calendar year 1919, determined by the respondent as follows:

Helen Pitts Parker	$57,316.95
George A. Moore	2,215.15
Est. of Arthur M. Parker	17,758.30

It is alleged that the respondent's addition to income of $117,700, $16,500 and $72,810 of Helen Pitts Parker, George A. Moore and the estate of Arthur M. Parker, respectively, was erroneous.

In Docket No. 14186, it is alleged that the respondent erred in including in the gross income of the petitioner the amount of $5,547.84 as having been a part of the petitioner's distributable interest in the income of a trust.

FINDINGS OF FACT.

The Detroit Range Boiler Co., a Michigan corporation, prior to the World War manufactured range boilers, bilge tanks, and steel drums. In the summer of 1918, it entered into negotiations with the Toledo Steel Barrel Co. to acquire the plant of the latter which had not been operating for some time. At that time the United States Government was in need of a large number of steel drums in which to ship gasoline to France in the prosecution of the war, and those interested in the Detroit Range Boiler Co. were of the opinion that if they entered into the manufacture of steel drums, they would be rendering a patriotic service and the Government contracts would afford a benefit to all concerned.

The Toledo Steel Barrel Co. offered to sell its assets, including an inventory of materials on hand, to the Detroit Range Boiler Co. for $125,000 cash, but since this offer was not acceptable to the Detroit Range Boiler Co., and since the president of the Toledo Steel Barrel Co. expected that the plant of the Toledo Steel Barrel Co. might be commandeered by the Government, a new corporation was proposed which would issue its stock for the assets of both the Detroit Range Boiler Co. and the Toledo Steel Barrel Co. The Toledo Steel Barrel Co. wanted $100,000 par value of preferred stock and $100,000 par value of common stock in the new corporation for its assets, exclusive of the inventory of materials on hand. The stockholders of the Detroit Range Boiler Co., believing that the assets of the Toledo Steel Barrel Co. were valued at too high a figure, believed it necessary then to increase the value of its own assets for the purpose of the consolidation, by undivided profits and other gains. An appraisal of the assets of the Detroit Range Boiler Co. was made and machinery and equipment were assigned values proportionate to the values placed upon the assets of the Toledo Steel Barrel Co. A contract was executed on September 27, 1918, between the Detroit Range Boiler Co. and the Toledo Steel Barrel Co., which provided as follows:

1. It is agreed that the properties of said two corporations, except that part of the property of second party hereinafter reserved for sale for cash, shall be consolidated into a new corporation to be created under the laws of a State and under a corporate name hereinafter to be agreed upon between the parties hereto, having an authorized capital stock of One Million Dollars ($1,000,000,) of which $250,000 par shall be Seven Per Cent Cumulative Preferred and $750,000 shall be Common Stock.

2. First party hereto shall convey and transfer to said new corporation, by good and clear title, all of its property, real, personal and mixed, of all kinds whatsoever, and shall receive therefor, as full-paid and non-assessable, Eighty-three Thousand Seven Hundred Dollars ($83,700) par of said preferred stock, and an amount of common stock at par equal to the net actual book value of the stock of first party on October 1, 1918, as established by the inventory taken at that date, less $83,700, being the amount of said preferred stock. In arriving at said book value, it is agreed that the buildings of first party shall be put in at their present replacement value and also that the equipment and machinery of first party shall be put in on the same basis as that established by the Rau Appraisal Company, of Milwaukee, in their late appraisement thereof, said appraisement to be brought down to date, and that the patents and manufacturing rights controlled by and the good will of first party shall be treated and taken to be of the value of Seventy-five Thousand Dollars ($75,000), provided, however, that if the aggregate value for which first party is as above to receive common stock exceeds Four Hundred and Twenty-five thousand Dollars ($425,000), then second party is to have the right to have the proper amount equitably determined and adjusted. It is understood and agreed that the new corporation is to assume the bills and accounts payable of the first party up to and not exceeding an aggregate of Two Hundred and Twenty-five Thousand Dollars, ($225,000), and further, first party states and represents that it has outstanding no contracts or liabilities other than those made in the ordinary course of its manufacturing business, including one lease of land upon which it operates, which lease is to be assumed by the new corporation.

3. Second party shall transfer and convey, by good and clear title, to said new company, all of its property of all kinds, real, personal and mixed, except all its cash on hand at the date of settlement, all its bills and accounts receivable, its unexpired insurance, all its raw materials and parts of and goods on hand in process of manufacture or finished at the date of the conveyance by second party hereto to the new corporation. Said excepted materials, goods and parts in process of manufacture shall be inventoried at their market value and shall be separately taken and paid for in cash to the second party by the new company at the time of transfer. For that part of the property to be conveyed to the new company hereunder and not paid for in cash as aforesaid, the second party shall receive as full-paid and non-assessable, One Hundred Thousand Dollars ($100,000), par of said Seven Per Cent Preferred Stock and One Hundred Thousand Dollars ($100,000) par of the Common Stock of said new corporation. Part of the buildings of second party stand upon leased land and it is agreed that the new corporation shall assume and hold the second party harmless from the lease thereof.

4. It is agreed that said preferred stock of the new corporation shall be without any voting powers until default in payment of dividends for at least twelve months.

5. It is understood and agreed that the new company shall sell to Mr. George A. Moore, in consideration of his expected efforts in directing the management of the company, Fifty Thousand Dollars ($50,000) of the common stock of the new company, to be placed in his name upon the completion of the reorganization and to be paid for out of dividends received by him thereon or in any other way satisfactory to him, but without interest, at a price to be fixed by the Directors of the new company.

6. The remainder of the preferred and common stock of the new company shall be left unpaid in its treasury, to be sold under the orders of the Board of Directors as its future requirements may render expedient.

7. It is understood that the Board of Directors of the new company shall consist of not less than four members and that one member thereof shall be a person to be selected by the stock which goes to the second party, and further it is understood and agreed that the present officers of the first party shall be elected to the offices of the new company, with the exception of the Vice-President. The office of Vice-President shall be filled by a person to be selected by the holders of the stock which goes to the second party.

8. It is agreed that the right to make the consolidation and new stock issues hereby contemplated will be subject to the approval of the Government Capital Issues Commission and possibly to State Commissions and that if for any reason the permission of such Commissions to make the consolidation of properties and stock issues hereby contemplated cannot be obtained within sixty (60) days from the date hereof, then this contract shall be and taken to be null and void at the election of either party hereto.

9. All steps, methods and proceedings for and in relation to the organization of the proposed new corporation and for transfers of the properties of the respective existing corporations and for the issue and distribution and the forms for and provisions of the new stocks shall be such as to be satisfactory to counsel for both parties hereto.

10. It is understood and agreed that the new corporation will pay all of the expenses of the making of this contract and of said new incorporation, and all attorneys' fees for both parties in making and completing the consolidation of property and reorganization hereby contemplated, but if it becomes necessary before completion of the incorporation that any State or other organization fees be paid, the first party will temporarily advance the money therefor.

11. Owing to the present necessity that the manufacturing plant of second party be put into operation at once by first party in order that first party may be able to apply for and take forthwith Government contracts, it is expedient and agreed that second party shall and it does hereby lease to first party the manufacturing plant of second party located upon leased property in Toledo, Ohio (exclusive, however, of all goods, materials and parts of goods now on hand in said plant), to be held and used as lessee until the property is either turned over upon the completion of the reorganization hereby contemplated or this contract is at end under its terms and provisions, at a rental of One Dollar ( $1) the receipt of which is hereby acknowledged.

The second party expressly agrees in consideration of said leasing, that if the reorganization and consolidation of properties hereby contemplated is for any reason whatever not completed within Ninety (90) days from the date hereof, then said lease of said manufacturing plant shall at the end of said ninety (90) days from date hereof become and be forthwith terminated and at end, without the giving of any notice or notices whatever, and in such case the first party agrees to return the leased property to second party in as good condition and repair as the same now is, and with respect to said return of said leased property and all the other provisions hereinabove and hereinafter contained, time is and shall be taken to be of the essence of this contract.

12. It is agreed that the new corporation shall pay the United States Income Tax of first party for the year 1918, provided, however, and it is agreed, that if the amount held in reserve for taxes by the first party on the date of consummation hereunder is over or below an amount sufficient to pay all the taxes against first party, then any deficiency or surplus for that purpose in such reserve shall be deducted or added, as the case may be, from the amount for which under this agreement first party is entitled to receive common stock, a reasonable amount of common stock to be left in escrow by first party to await and secure such adjustment.

13. It is expressly agreed and made a condition hereof, that this contract shall take the place of and cancel the option now outstanding on the property of first party running from Mr. Charles H. Wacker to Mr. George A. Moore, and that if for any reason whatever, not due or attributable to the act or default of one of the parties hereto, this contract and said consolidation of said properties shall not be entirely consummated and completed on or before ninety (90) days from the date hereof, then at the option of the party hereto not in default, this contract shall be wholly null and void, without the giving of any notice or notices whatever, and further, it is expressly agreed that if an essential part of the tools and machinery now owned by either party hereto shall be seized or taken over by the act of the United States Government, then this contract shall also be terminated and at end.

14. During the lease of said Toledo plant hereunder, the first party shall stand and pay the wages and salaries of the present force at said plant of second party.

15. If the consent of the Lessor, Lake Shore and Michigan Southern Railway Company to the assignment of second party's Toledo lease can not be obtained within sixty (60) days from the date hereof, then at the option of either party hereto, this contract shall become null and void.

On December 26, 1918, the Michigan Securities Commission addressed a letter to Divie B. Duffield, which stated in part:

* * * We advise stock could be issued in payment of assets of another corporation without violating the Michigan Blue Sky Law, but if you wish to sell the treasury stock in the course of continued and successive sales, or if the stockholders wish to dispose of their holdings, it would be necessary to make application to this Commission and secure its approval before offering such securities for sale in this State. It will not be necessary to make application to us before a foreign corporation can be admitted to do business in this State. The jurisdiction of this Commission is confined entirely to governing the sale of securities in Michigan.

As a result of the agreement of September 27, 1918, a new corporation, the name of which was Detroit Range Boiler & Steel Barrel Co., was formed under the laws of Maine, on October 19, 1918, with an authorized capital stock of $1,000,000 par value; $250,000 being 7 per cent cumulative preferred stock and $750,000 being common stock. The par value of the stock was $100 per share.

The inventory of materials on hand at the plant of the Toledo Steel Barrel Co. was sold to the Detroit Range Boiler Co. on September 30, 1918, for about $30,000, and pending the consummation of the purchase of the assets of the two old corporations by the new corporation, the plant of the Toledo Steel Barrel Co. was operated by the detroit Range Boiler Co. as lessee under the provisions contained in the agreement of September 27, 1918. The Toledo Steel Barrel Co. transferred its assets to the Detroit Range Boiler & Steel Barrel Co. on February 27, 1919. The Toledo Steel Barrel Co. did not have a valuable good will, but it did have about 30 valuable patents.

On December 4, 1918, at a special meeting of the stockholders of the Detroit Range Boiler Co., the following resolution was adopted:

FIRST - That this corporation do and it does hereby accept the offer of the said DETROIT RANGE BOILER & STEEL BARREL COMPANY, a corporation under the laws of Maine, to purchase all the property real, personal and mixed of this corporation at a full and fair price of $498,500.00 payable and to be fully paid to this corporation by the issue and delivery to it of $83,300.00 par Cumulative Preferred Stock of the Maine corporation and to assume all the obligations of this corporation.

SECOND - That the lease of lands upon which a portion of this corporation's plant is located, be assigned and transferred to said Maine Corporation.

THIRD - That the Preferred and Common Stock of said Maine Corporation coming to this corporation on account of said sale, shall be appropriated among the stockholders of this corporation as follows:

NAME	PREFERRED	COMMON
A. M. Parker Estate	833	1,272
Helen P. Parker		1,177
I. W. Stoddard		1,414
G. A. Moore		265
E. C. Parker		8
E. C. Parker - Guardian		15
D. B. Duffield		1
		4,152

FOURTH - That the proper officers of this corporation be and they are hereby authorized and directed to execute the necessary instruments of conveyance for the purpose of transferring to said Maine Corporation, all the property of this corporation of whatever kind indluding lease-hold interests, patents, buildings, machinery and equipment.

On December 5, 1918, at a meeting of the directors of the Detroit Range Boiler & Steel Barrel Co., the following resolutions were adopted:

THEREFORE BE IT AND IT IS HEREBY RESOLVED that this corporation do, and it does hereby accept said offer of said Detroit Range Boiler Company to sell and convey to this corporation the property hereinabove described, which said property this Board of Directors does hereby adjudge and declare to be of the full and fair value of said sum of Seven Hundred Forty-Three Thousand Nine Hundred Twelve and 75/100 Dollars ($743,912.75) and to be necessary and requisite for the business of this dorporation; that this Company do and it does hereby assume the payment of the bills and accounts payable of said Detroit Range Boiler Company to said aggregate of Two Hundred Forty-Five Thousand Four Hundred Twelve and 75/100 Dollars ($245,412.75), and that the proper officers of this Company issue, sign and deliver to said Detroit Range Boiler Company, or its order, as full-paid and non-assessable, the Preferred and Common Stock of this Company required and necessary to make payment as aforesaid to said Detroit Range Boiler Company for the property, business and business good-will so offered to be sold and conveyed to this corporation, and that said stock when so issued shall be and shall be taken to be full-paid and non-assessable stock of this corporation, provided first and always that said purchase from said Detroit Range Boiler Company and the issue of said stock therefor shall be subject to the prior approval of said Federal Capital Issues Commission and of any State Commissions which may be legally necessary, and that due conveyance of the property purchased be made to this corporation.

* * *

THEREFORE BE IT AND IT IS HEREBY RESOLVED that this corporation do, and it does hereby accept said offer of said Toledo Steel Barrel Company; that said property so proposed to be conveyed by said Steel Barrel Company is and is hereby adjudged and declared to be of the full and fair value of Two Hundred Thousand Dollars ($200,000) and necessary and requisite for the business of this corporation; that the proper officers of this company be and they are hereby directed to issue, sign and deliver, as full-paid and non-assessable, to said Toledo Steel Barrel Company, or its order, in payment of its said property, said One Hundred Thousand Dollars ($100,000) par of the Seven Per Cent Cumulative Preferred Stock of this Company and said One Hundred Thousand Dollars ($100,000) par of the Common Stock of this Company, and said Two Hundred Thousand Dollars of stock so to be issued to said Toledo Steel Barrel Company is hereby declared to be and be taken to be full-paid and non-assessable stock of this corporation, provided first and always that said purchase from said Toledo Steel Barrel Company and the issue of said stock therefor shall be subject to the prior approval of said Federal Capital Issues Commission and of any State Commissions which may be legally necessary, and that due conveyance of the property purchased be made to this corporation.

Fifth: That in order to carry out said purchase from said Toledo Steel Barrel Company (if consummated) in accordance with said terms and conditions thereof, the proper officers of this Company are authorized on its behalf to take over from said Toledo Steel Barrel Company and pay it in cash for said excepted materials, goods and parts in process of manufacture, at their market value, and also to sign, seal and deliver, in the name of this corporation, a written instrument of agreement whereby this corporation shall assume said Toledo lease and agree to hold the said Toledo Steel Barrel Company harmless therefrom and from said switchtrack contract.

* * *

RESOLVED that in accordance with the agreement between the Detroit Range Boiler Company and the Toledo Steel Barrel Company that 500 shares of common stock of the Detroit Range Boiler and Steel Barrel Company be sold to George A. Moore for Seventy-Five Dollars ( $75) a share, to be paid for by him by note for the purchase price, without interest; the stock to be carried in his name but to be held by the Detroit Range Boiler and Steel Barrel Company until fully paid; that any dividend on such common stock declared by the company before the stock is fully paid for shall apply on the purchase price, reserving to said George A. Moore the right to pay upon said purchase at any time such amounts as he may desire in the return for which payments a proportionate amount of stock to be at once released.

Moore never exercised the right to purchase the stock as provided in the resolution set forth above. He executed a note and the stock certificates were issued in his name but were held in escrow and he did not receive them.

The Detroit Range Boiler & Steel Barrel Co. declared dividends in 1919 on preferred stock, but no common stock dividends were ever declared.

On December 31, 1918, the Detroit Range Boiler Co. executed a bill of sale of its personal property to the Detroit Range Boiler & Steel Barrel Co., and on the same date executed a deed to the Detroit Range Boiler & Steel Barrel Co. transferring its realty. Both instruments were delivered on this date. A lease held by the Detroit Range Boiler Co. was assigned to the Detroit Range Boiler & Steel Barrel Co. after 1918, and the patents owned by the Detroit Range Boiler Co. were also assigned to the Detroit Range Boiler & Steel Barrel Co. after 1918. The actual transfer of these was delayed to attend to the proper assignment. In the case of the patents, the assignment had to be recorded in the United States Patent Office to afford protection to the assignees.

The Detroit Range Boiler Co. continued to do business throughout 1918. The Detroit Range Boiler & Steel Barrel Co. began business January 1, 1919, and used the books which, in 1918, had been used by the Detroit Range Boiler Co. On March 1, 1919, it opened a new ledger.

On February 4, 1919, the Detroit Range Boiler Co. filed with the Department of State of the State of Michigan, a notice of dissolution dated January 27, 1919. This notice stated that the corporation had been dissolved by sale of its assets.

Certificates of stock of the Detroit Range Boiler & Steel Barrel Co. were made out dated March 1, 1919, representing 833 shares of preferred stock and 1,272 shares of common stock to the estate of Arthur M. Parker, 1,177 shares of common stock to Helen P. Parker, 1,414 shares of common stock to E. W. Stoddard, 265 shares of common stock to George A. Moore, 8 shares of common stock to Eleanor C. Parker, 15 shares of common stock to Eleanor C. Parker, as guardian, and one share of common stock to Divie B. Duffield. Receipts for such certificates were given by the stockholders dated August 5, 1919. The stock was transferred direct to the holders. The common stock had no fair market value at the time of receipt.

Arthur M. Parker died in 1914, leaving a will by the terms of which he devised and bequeathed to his widow, Helen Pitts Parker, the use and enjoyment of all his estate, both real and personal, and the income therefrom for her natural life, subject to certain legacies, the rest, residue and remainder, at her death, after all legitimate charges and legacies had been paid, to go to the surviving children of the testator's brother.

The executors of the estate, regarding the distribution of the stock of the Detroit Range Boiler & Steel Barrel Co. to the stockholders of the Detroit Range Boiler Co. as equivalent to a stock dividend, for purposes of determining the rights of the widow and remainderman, considered the increase in book values of the assets of the Detroit Range Boiler Co. from 1914 to 1918, including the entire increase effected by the write-up made for the purpose of the sale of assets to the Detroit Range Boiler & Steel Barrel Co., as belonging under the Michigan law to the life tenant, and believed that the estate was entitled to retain for the remainderman only so much of the stock of the Detroit Range Boiler & Steel Barrel Co. as represented the assets of the Detroit Range Boiler Co. at the time of Arthur M. Parker's death. Accordingly, they attributed 1,177 shares of the common stock of the Detroit Range Boiler & Steel Barrel Co. to Helen Pitts Parker, and 833 shares of preferred and 1,272 shares of common stock of the Detroit Range Boiler & Steel Barrel Co. to the estate of Arthur M. Parker.

On September 24, 1918, the estate of Arthur M. Parker entered into an agreement with Edward M. Stoddard and George A. Moore which provided in part as follows:

FIRST - The Estate agrees to sell thirty-five hundred (3,500) shares of stock of the Detroit Range Boiler Company; twenty-five hundred (2,500) to Edward W. Stoddard for Twelve Thousand Five Hundred ($12,500) Dollars and one thousand (1,000) to George Albert Moore for Five Thousand ($5,000) Dollars upon the distinct understanding that said certificates of stock shall not share in any dividends which may be hereafter declared by the Company ouy of the surplus of January 1st, 1918, or until the equivalent of the surplus of January 1st, 1918 has been distributed to the stock as held prior to the date of the sale evidenced by this agreement.

SECOND - Edward W. Stoddard agrees to pay Twelve Thousand Five Hundred ($12,500) Dollars for twenty-five hundred (2,500) shares of stock and George Albert Moore agrees to pay Five Thousand Dollars ($5,000) for one thousand (1,000) shares of stock under the express conditions as set forth in sub-division One above, the receipt of which stock is hereby acknowledged.

THIRD - The purpose of this arrangement is to enable the said Stoddard and Moore to acquire an interest in the future business of the Company upon easy terms for which purpose the shares purchased by them are not to participate in any dividends declared from surplus on hand January 1st, 1918, or until the equivalent of that surplus has been distributed in dividends. The endorsement of this Agreement to be concisely stated upon the certificates of stock issued in compliance with this Agreement.

The executor sold the stock to Moore because he believed it wise to have Moore connected with the business, since he had been manager of the Detroit Range Boiler Co. and knew the business. The executor also wanted to raise money to pay a guarantee of the estate so that two pieces of property in the estate might be left intact. The sale to Stoddard was never consummated. The stock was never paid for.

At the time this contract was executed, the parties thereto knew that the contract between the Detroit Range Boiler Co. and the Detroit Range Boiler & Steel Barrel Co. was about to be executed. Moore knew at the time that for the stock of the Detroit Range Boiler Co. which he received he would get about 265 shares of stock of the Detroit Range Boiler & Steel Barrel Co.

Immediately after the Armistice was signed on November 11, 1918, all Government contracts were canceled and the steel-barrel business was much depressed. The market value of machinery and equipment such as had been used by the Detroit Range Boiler & Steel Barrel Co. was very much less after the Armistice.

The stock of the Detroit Range Boiler Co. was closely held in the Parker and Stoddard families, and there was no sale thereof after the death of Arthur M. Parker in 1914, except the sale to George A. Moore. In 1918 the Detroit Range Boiler Co. had outstanding common stock of $120,000, par value $10 per share. This stock had been acquired by the Parker and Stoddard families prior to 1913. Stoddard, on March 1, 1919, owed the Detroit Range Boiler & Steel Barrel Co. $44,760.47. He turned back to the treasury of the Detroit Range Boiler & Steel Barrel Co. stock of par value of $38,500, and was given credit for that amount against his indebtedness. In 1919 Stoddard was 75 or 76 years old and his only source of income was from the Detroit Range Boiler & Steel Barrel Co. The claim of the Detroit Range Boiler Co. against him was not worth its face value.

Arthur M. Parker had pledged the entire assets of his estate to secure notes of the Detroit Range Boiler Co. amounting to about $93,000, which were held by a bank. These notes were proved as tentative claims against the Arthur M. Parker estate, and the estate took over a part of the notes, leaving $50,000 of notes of the Detroit Range Boiler Co. still outstanding. The amount was transferred to another bank. This bank required the executor of the estate to apply to the probate court and secure authority for the estate to continue the guarantee to this bank. This was done on June 8, 1918, and when the Detroit Range Boiler & Steel Barrel Co. was formed it was necessary to have the guarantee cover it. The necessary authority was secured and was filed with the bank. The guarantee covering the notes of the Detroit Range Boiler Co. was canceled by the bank on January 9 or 10, 1919.

The income and profits-tax returns of Helen Pitts Parker, George A. Moore, and the estate of Arthur M. Parker, for the calendar year 1919 were filed with the collector of internal revenue at Detroit, Mich.

The respondent added to the taxable income of the petitioner, Helen Pitts Parker, for 1919, $117,700 as a liquidating dividend received upon dissolution of the Detroit Range Boiler Co. at March 1, 1918, such dividend being paid in capital stock of the Detroit Range Boiler & Steel Barrel Co., amounting to 1,777 shares at $100 par value each. The respondent held that since she was left a life income in all of Arthur M. Parker's estate, she was chargeable with all the income of the estate, and that the amount to be included in her income is the total par value of the stock she received.

The respondent held that George A. Moore received a liquidating dividend in 1919, paid by 265 shares, par value $100 per share, of the stock of the Detroit Range Boiler & Steel Barrel Co. He subtracted from this the cost ($5,000) of the stock of the Detroit Range Boiler Co. which Moore bought on September 24, 1918, and found that Moore received an income from this source of $21,500.

In the same computation the respondent subtracted from $26,500, the par value of the Detroit Range Boiler & Steel Barrel Co. stock which Moore received, the par value of the 1,000 shares of the Detroit Range Boiler Co. stock ($10,000), which Moore exchanged and found that the income was $16,500, and since this amount was lower than the amount arrived at by the previous calculation, he relied upon article 1569 of Regulations 45 and held that this was the taxable net income to Moore on the transaction.

The respondent held that the estate of Arthur M. Parker received a liquidating dividend upon the dissolution of the Detroit Range Boiler Co. on March 1, 1919, such dividend being paid in capital stock of the Detroit Range Boiler & Steel Barrel Co. He calculated the par value of 1,272 shares of stock to the Detroit Range Boiler & Steel Barrel Co. to be $127,200, and subtracted therefrom $27,195, representing 5,439 shares of stock of the Detroit Range Boiler Co. which the estate owned at February 28, 1919, at a value of $5 per share, and found the income to the estate to have been $100,005. He then calculated the par value of the 1,272 shares of stock of the Detroit Range Boiler & Steel Barrel Co. which the estate received to be $127,200, and subtracted therefrom the par value of the 5,439 shares of the Detroit Range Boiler Co. which were exchanged ($54,390), and found that the excess of the par or face value of the new stock received over the par of face value of the old stock was $72,810. He then relied upon article 1569, Regulations 45, and took the smaller of the two accounts calculated as the income to the estate under the transaction.

OPINION.

SIEFKIN: The respondent in his determination increased the amount representing income of Helen Pitts Parker from dividends upon stock of the Parker Estate Company, Ltd., by $5,547.84. Petitioner had reported as dividends from this source $21,000, but she actually received $21,615. The parties at the hearing agreed that the amount taken by the respondent was erroneous and that the petitioner is subject to normal and surtaxes on $21,615 instead of only surtaxes on $21,000. The respondent also increased the petitioner's taxable income for the year 1919 by the amount of $117,700, claiming it to be taxable as a liquidating dividend paid in capital stock of the Detroit Range Boiler & Steel Barrel Co. upon the dissolution of the Detroit Range Boiler Co.

We must first determine whether the petitioners received this stock in 1918 or in 1919.

At the time the Detroit Range Boiler Co. transferred its assets to the Detroit Range Boiler & Steel Barrel Co., on December 31, 1918, neither the Detroit Range Boiler Co. nor the Toledo Steel Barrel Co. was under any obligation under the contract of September 27, 1918, to proceed with the consolidation, since the period provided in the contract had expired. There is no evidence that the Toledo Steel Barrel Co. had given any assurance that it would proceed. It was not certain that the Detroit Range Boiler Co. would not retract its action as it was legally entitled to do. The principal object of the agreement entered into between the Detroit Range Boiler Co. and the Toledo Steel Barrel Co. was to effect a consolidation of the two companies, and this had not been accomplished in 1918.

The above conclusions are based upon our opinion that the evidence is clear that the distribution of stock to petitioners and others was calculated upon and in contemplation of a consolidation of the assets of the Detroit Range Boiler Co. and the Toledo Steel Barrel Co. The certificates of stock were received by the petitioners after the assets of the Toledo Steel Barrel Co. were transferred to the Detroit Range Boiler & Steel Barrel Co. and we have no doubt that such issue of stock was different in amount and value from stock which petitioners might have received from the Detroit Range Boiler & Steel Barrel Co. in 1918, since it represents different assets and it would have been based upon a situation which neither the corporations or the stockholders contemplated, i.e., the mere transfer of the assets of the Detroit Range Boiler Co. to the new company. The participation of the Toledo Steel Barrel Co. was an indispensable element in the transaction. At no time in 1918 was it certain that the Toledo Steel Barrel Co. would come into the deal.

It is our opinion that the stock in question was received by the petitioners in 1919.

The petitioners contend that since the statute contemplates the use of market value of the received stock in the calculation of gain, and since the respondent has referred only to the par value of the received stock, the deficiencies determined thereby can not be sustained by the Board. We can not agree with this contention. We can not assume that the respondent has determined deficiencies contrary to the provisions of the law. His determinations are prima facie correct and it is not sufficient for the petitioners to show an erroneous method, but they must affirmatively prove what the correct determinations should be.

The petitioners further contend that the stock which they received had no fair market value at the time it was received.

The evidence discloses that when the Detroit Range Boiler Co. and the Toledo Steel Barrel Co. first started negotiations for a consolidation of the two corporations, the Toledo Steel Barrel Co. offered to sell all its assets, including the materials it had on hand, for $125,000 cash. It later did sell the inventory to the Detroit Range Boiler Co. for about $30,000, and for the remainder of its assets it received $100,000 par value of 7 per cent cumulative preferred stock and $100,000 par value of common stock of the Detroit Range Boiler & Steel Barrel Co. At the time the negotiations were started there was a large demand for steel barrels. We may assume that the assets of the Toledo Steel Barrel Co. had no greater value than $125,000, since such offer was refused by the Detroit Range Boiler Co. Since the inventory was later sold to the Detroit Range Boiler Co. for about $30,000, it will be seen that for a property of a value of about $95,000, the Toledo Steel Barrel Co. received stock of the Detroit Range Boiler & Steel Barrel Co. to the amount of $200,000 par value. The evidence discloses that the Detroit Range Boiler Co. valued its assets for the purpose of the consolidation at a proportionately inflated value. The record further shows that the Detroit Range Boiler Co. increased the value of its assets by undivided profits and other gains.

The stock of the Detroit Range Boiler Co. had been closely held in the Stoddard and Parker families since before 1913, and thereafter there were no sales of stock except those to Stoddard and Moore. The sale to Stoddard was not consummated and the sale to Moore was under such circumstances that it could not be deemed a basis for the valuation of the stock. The evidence shows that Stoddard turned in $38,500 par value of stock to the Detroit Range Boiler & Steel Barrel Co. to cancel that amount of his indebtedness to the corporation, but the evidence further discloses that the claim against him was not worth its face value, and that this transaction could not be the basis for determination of the value of the stock. The Detroit Range Boiler & Steel Barrel Co. passed a resolution authorizing the transfer of $50,000 par value of its stock to Moore at $75 per share, to be paid out of future earnings of the corporation, but this stock was never received by Moore and it is our opinion that this transaction is entitled to no consideration in valuing the stock.

The evidence further discloses that following the signing of the Armistice the Government canceled its contracts, there was a depression in business, and the value of machinery and equipment such as was used by the Detroit Range Boiler & Steel Barrel Co. decreased.

John R. Bodde, vice president of the largest banking institution in the State of Michigan, testified that the bank had dealings with both the Detroit Range Boiler Co. and the Detroit Range Boiler & Steel Barrel Co. The bank loaned the Detroit Range Boiler Co. $50,000, and this credit was guaranteed by the estate of Arthur M. Parker. After the Detroit Range Boiler & Steel Barrel Co. was formed, the estate continued to guarantee the indebtedness. The bank would not have loaned money to either the Detroit Range Boiler Co. or the Detroit Range Boiler & Steel Barrel Co. without this guarantee. Bodde stated that the bank had the financial statements of both the Detroit Range Boiler Co. and the Detroit Range Boiler & Steel Barrel Co. and that he, as a banker, would not have accepted the common stock of either as collateral for loans. He said that the stock had no market value and that the bank would not rely on the stock to liquidate the loan in case of of default in payment.

A stockbroker, specializing in unlisted securities in Detroit, testified that he never came in contact with the stock of the Detroit Range Boiler Co. or the Detroit Range Boiler & Steel Barrel Co. He testified that, as a general thing, in 1919 there was not a ready market for securities of closely held corporations. He said that there would be no ready market for stock of a corporation held by members of one or two families and upon which no dividends had been paid for a number of years.

From all the evidence we conclude that the common stock which the petitioners received had no fair market value at the time it was received by them. See . It follows that under section 202(b) of the Revenue Act of 1918, the petitioners received no taxable gain upon the receipt of such stock.

With regard to the estate of Arthur M. Parker, since all the income and increment of the estate from the time of the death of Arthur M. Parker to 1918 was attributable to Helen Pitts Parker, and this was represented by the $117,000 par value of stock which she received, it seems obvious that when the estate received stock of the Detroit Range Boiler & Steel Barrel Co. in 1919, it received nothing more than it had in 1914 when the stock of the Detroit Range Boiler Co. was received by it, and, therefore, no gain was realized on the transaction.

Reviewed by the Board.

Judgment will be entered under Rule 50.

PHILLIPS and VAN FOSSAN concur in the result.