Kirkland v. Commissioner

JOHN L. KIRKLAND, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kirkland v. Commissioner

Docket No. 31948.

United States Board of Tax Appeals

20 B.T.A. 309; 1930 BTA LEXIS 2159;

July 22, 1930, Promulgated

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">*2159 Where it is impracticable to apportion the total cost of preferred and common stock when purchased, but subsequently, upon a reorganization, petitioner receives stocks having known values in exchange for said preferred and common stocks, an apportionment of the original cost should then be made, using such known values as a basis for the allocation.

Harvey D. Jacob, Esq., for the petitioner.

D. A. Taylor, Esq., for the respondent.

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MORRIS

">*309 This proceeding is for the redetermination of a deficiency in income tax of $16,834.29 for the calendar year 1925. The petition alleges the following errors:

(a) The Commissioner is in error in his interpretation and application of the law and regulations governing the determination of the tax liability resulting from the subsequent sale of securities received in a non-taxable exchange; that is to say, the Commissioner is in error in allocating the cost of United Baking Company preferred stock over the total number of shares of Continental Baking Corporation stock received in exchange for the above United Baking Company preferred stock and bonus no-par-value common stock received therewith.

(b) Assuming">*2160 the cost of the United Baking Company preferred stock should be allocated over the total Continental Baking Corporation shares received in the exchange, then -

1. The Commissioner is in error in his method of allocation in that the exchange has not been properly followed out and the allocation made in accord therewith.

2. The Commissioner is in error in using the "Market" value of the Continental Baking Corporation shares at the time of the exchange as a fair measure of the relative values and the basis of the allocation.

">*310 The proceeding was submitted upon the pleadings and a stipulation of facts.

FINDINGS OF FACT.

1. During the calendar year 1922 and prior to February 28, 1923, the petitioner acquired as an original subscriber for cash, 3,300 shares of United Baking Co. preferred stock with a par value of $100, at a cost of $330,000.

2. With the purchase of the preferred stock mentioned in paragraph 1, the petitioner received as a bonus stock 3,300 shares of no-par value common stock of the United Baking Co.

3. The United Baking Co. was reorganized during the year 1924 under the name of the Continental Baking Corporation, authorizing the issue of">*2161 three classes of stock, namely, preferred, class "A," no-par value common and class "B," no-par value common. At the time of the reorganization the petitioner exchanged all of his stock of the United Baking Co. acquired as set forth in paragraphs 1 and 2 for Continental Baking Corporation stock upon the following basis.

For each share of the United Baking Co. preferred stock the petitioner received one share of Continental Baking Corporation preferred stock and one share of Continental Baking Corporation class "B" no-par value common stock, and for each share of the United Baking Co. no-par value common stock the petitioner received one share of Continental Baking Corporation class "A" no-par value common stock and two shares of Continental Baking Corporation class "B" no-par value common stock, receiving in exchange a total of 3,300 shares of preferred, 3,300 shares, class "A," and 9,900 shares of class "B" of the Continental Baking Corporation. The above mentioned exchange was one contemplated by section 203(b)(2) of the Revenue Act of 1924 and no gain or loss was recognizable in the exchange.

(4) During the year 1925 the petitioner made the following sales of stock of the">*2162 Continental Baking Corporation:

	Number of	Amount
	shares	received
Preferred stock	100	$9,158.50
Preferred stock	200	19,452.00
Preferred stock	3,000	285,000.00
Class "A"	1,200	140,227.00
Class "B"	2,000	54,152.00
Class "B"	1,700	48,710.00
Total		556,699.50

">*311 5. The market values of said stocks per share at the time of the exchange were:

Preferred	$92.50
Class "A"	109.75
Class "B"	20.75

6. The Commissioner of Internal Revenue, in determining the gain realized from the aforesaid sales, apportioned the cost, or $330,000, among the classes of stock received in exchange, using as a basis therefor the market values of said stock so received in exchange. In so doing the Commissioner apportioned the original cost of one share of preferred and one share of common stock of the United Banking Co., or $100, among one share of preferred, one share of class "A" common and three shares of class "B" common of the Continental Baking Corporation, the stock received in exchange therefor, in the same ratio, respectively, that the market value at the time of the exchange of one share of preferred, one share of class "A" ">*2163 common and three shares of class "B" common have to the total market values of said number of shares of the Continental Baking Corporation, resulting in the following apportionment of cost:

		Cost
	$92.50
1 share preferred		or $34.972
	$264.50
	$109.75
1 share class "A" common		or $41.493
	$264.50
	$62.25
3 shares class "B" common		or 1 $23.535
	$264.50
Total		$100.000

7. It was impracticable to apportion the purchase price of the United Baking Co. stocks between the preferred and common stock purchased from the United Baking Co. at the time of such purchase.

In reporting income for 1925 petitioner reported a profit on the sale of Continental Baking Corporation stock in the amount of $226,699.50. The respondent computed the profit on the sale of said stock as $362,473.80.

OPINION.

MORRIS: Although the petition alleges two errors, we have but one issue before us, namely, the amount of taxable profit derived by petitioner from the sale of Continental Baking Corporation stock">*312 in 1925. No question of fact being presented, we have only to apply the relevant provisions of the taxing statute.

">*2164 The Revenue Act of 1926 provides that:

SEC. 1200. (a) The following parts of the Revenue Act of 1924 are repealed, to take effect (except as otherwise provided in this Act) upon the enactment of this Act, * * *: Title II (called "Income Tax") as of January 1, 1925 * * *.

SEC. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that -

* * *

(6) If the property was acquired upon an exchange described in subdivision (b), * * * of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made.

Section 203(b)(2) of the Revenue Act of 1924 provides that:

(2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another">*2165 corporation a party to the reorganization.

In article 39 of Regulations 65 and 69, the respondent provides as follows with respect to items to be included in gross income:

* * * Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.

Petitioner, relying on the above article of Regulations 65, and on the decision of the Circuit Court of Appeals, Sixth Circuit, in , contends that he is entitled to deduct the total cost before any taxable profit is realized. Respondent has allocated the original cost among the three classes of stock received upon the exchange by using the market values of such classes of stock at the time of the exchange as a basis, his computation">*2166 being set forth in the stipulated facts. The effect of this apportionment was to increase petitioner's profit from sales made in 1925 from $226,699.50 as reported by petitioner to $362,473.80, as determined by respondent upon an allocation of the original cost.

Under the above quoted sections of the taxing statute the basis for computing profit in this particular case is cost, since the stock was acquired subsequent to February 28, 1913. It is stipulated, however. that at the time of purchase it was impracticable to apportion the cost ">*313 between the preferred and common stock then acquired, which stipulation, in view of article 39 of Regulations 65, would at first seem to be conclusive. Such a contention ignores entirely the possibility that some future event might afford a practical and equitable basis upon which an apportionment could be made. It is our opinion that the exchange occurring in 1924, although a nontaxable transaction under section 203(b)(2), nevertheless, affords a basis for allocating the original cost among the shares obtained by the exchange.

The Collins case, supra, does not support the petitioner's position on this question. The">*2167 court clearly pointed out that there were not sufficient data or facts in the record upon which to base an apportionment of cost as between the two classes of stock and remanded the case for further hearing. The court clearly indicated that only in case a further hearing failed to provide sufficient data or facts upon which to make a fair apportionment would the taxpayer be permitted to recover the entire cost before being chargeable with any profits. In this case we have facts upon which apportionment of cost may be predicated, an apportionment which upon principle stamps itself as fair and equitable. Where, therefore, it becomes practicable to make an apportionment, we believe that the decision in the Collins case supports the proposition that such apportionment should be made. It follows that with this apportionment the language found in article 39 of Regulations 65 is inapplicable.

Petitioner points out in particular that portion of section 204(a)(6), hereinabove set forth, which states "the basis shall be the same as in the case of the property exchanged," and contends that the word "same" should be literally construed, thereby permitting him to recover his total cost">*2168 before reporting any profits. The answer to this contention is that no question is raised as to petitioner's right to recover cost, but only how and when such cost shall be recovered. We believe this question has been settled by our discussion in the foregoing paragraphs of this opinion.

Decision will be entered for the respondent.

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Footnotes

• 1. $7.845 per share. ↩