DocketNumber： Docket No. 17827.
Citation Numbers： 18 B.T.A. 545, 1929 BTA LEXIS 2018
Judges： Teussell
Filed Date： 12/20/1929
Status： Precedential
Modified Date： 11/20/2020
*2018 GAIN - EXCHANGE OF ASSETS. - The basis determined upon which to compute taxable gain upon an exchange of assets for stock and note of a corporation.
*545 This appeal is from a deficiency of $11,535.92 asserted by respondent in determining petitioner's income-tax liability for the year *546 1919. Petitioner appeals only from $8,409.76 of the deficiency which arises from respondent's use of the fair market value of $75,000 for stock and note of a corporation which were acquired by petitioner in exchange for certain assets, petitioner contending that the assets received in this exchange had a fair market value of only $45,000.
FINDINGS OF FACT.
Petitioner is a resident of Birmingham, Ala., and in 1918 organized a corporation under the laws of that State under the name of the Standard Casket Co., hereinafter referred to as the Alabama corporation. This corporation acquired the assets of a small casket manufacturing business and continued such business until July 31, 1919, with petitioner as its president and manager.
In May, 1919, *2019 the Alabama corporation needed additional space and leased a building in Birmingham and petitioner at the time individually obtained an option to purchase these premises for $35,000, for which option he paid personally $500. The option was executed in the name of the Alabama corporation and had no value in excess of the amount paid therefor.
In July, 1919, the Alabama corporation needing additional capital, petitioner decided to reorganize the business by forming a new corporation and by July 31 of that year he had acquired the outstanding stock of the Alabama corporation at a total cost of $24,810.01, and on that date surrendered this stock and received in return all the assets and assumed all of the liabilities of the Alabama corporation, which was thereupon dissolved. The net book value of these assets on that date was $26,008.11, which was also their fair market value. The corporation's books showed no value for good will or for the option heretofore mentioned. It had no good will of any value.
On or about August 1, 1919, petitioner conveyed these assets to a new corporation of the same name organized under the laws of Virginia, hereafter referred to as the Virginia corporation, *2020 which had an authorized capital stock of $25,000 preferred and $25,000 common stock. The consideration received by petitioner for the transfer of these assets to the Virginia corporation and the assumption by the latter of the liabilities of the Alabama corporation was $30,000 par value stock of the Virginia corporation and its demand note for $45,000. These assets were thereupon set up on the books of the Virginia corporation appreciated in net value from $26,008.11 to $75,000 to balance the sum of stock and note issued therefor.
Shortly thereafter the Virginia corporation secured permission to double the amount of its common and preferred stock and thereafter during August to November, 1919, inclusive, it issued to petitioner *547 $45,000 of its common and preferred stock in addition to the $30,000 par value stock already issued him, this additional issue of stock being in payment of the promissory note for $45,000 held by him. Of the balance of the authorized capital stock of the Virginia corporation, amounting to $25,000 par value, $4,500 par value of preferred stock was sold during August and November, 1919, for cash at par to five friends and associates of petitioner, *2021 no one of whom purchased in excess of $1,000 par value thereof, and the remaining $20,500 par value of stock was purchased by petitioner with cash and his promissory note. Certain of the stock acquired by petitioner in return for the assets transferred to the Virginia corporation and part of the stock afterwards acquired by him in return for the corporation's note and for cash were issued to individuals other than petitioner, this being done for business purposes, the title to such stock being at all times in petitioner.
There was no stock exchange in Birmingham in 1919. The earnings of the Alabama corporation amounted to $2,590.95 for the period from February 11, 1918, to December 31, 1918, and $6,131.67 for the period from January 1, 1919, to July 31, 1919. From the fall of 1918 until the spring of 1919 there was an unusual and abnormal demand for caskets in Birmingham, due to the effect of the influenza epidemic, and that corporation's gross sales were greatly in excess of such sales during the period of normal death rates. The Virginia corporation's tax return for the period of August 1, 1919, to December 31, 1919, showed a net taxable income in the amount of $3,914.10 and*2022 its return for the calendar year 1920 a net taxable income in the amount of $9,353.90. Dividends were declared and paid in 1920.
Respondent, in determining the deficiency here appealed from, has computed a taxable gain of $1,198.10 upon the surrender of all the stock of the Alabama corporation and the receipt by petitioner of the assets of that corporation, this being the difference between the cost of such assets to him, or $24,810.01, and the fair market value of such assets in the sum of $26,008.11. Respondent has also computed a taxable gain of $48,991.89 by petitioner upon the sale of these assets to the Virginia corporation, this computation being upon the basis that the corporation's demand note for $45,000 and the stock of the par value of $30,000 had fair market values in these amounts.
Petitioner admits that the note and stock received by him from the Virginia corporation had together a fair market value of $45,000, but denies that their value was in excess of this amount and contends that the total profit realized upon the two transactions of exchange amounted to $20,189.99.
*548 The $30,000 par value stock of the Virginia corporation and the promissory*2023 note of that corporation for $45,000, received by petitioner in exchange for assets conveyed as above set out, had no aggregate fair market value in excess of $45,000.
OPINION.
TRUSSELL: The question here is one of taxable gain upon an exchange of assets. Petitioner in 1919 was the owner of all of the stock of an Alabama corporation which he in that year liquidated by surrender of this stock and receipt of all of the corporate assets. It is admitted and agreed to by both parties to this proceeding that these assets had a net book value and a fair market value on that date of $26,008.11, that the stock exchanged for them had cost petitioner $24,810.01, and that petitioner realized a gain on this transaction of $1,198.10. It is further shown that petitioner immediately conveyed these assets to a new corporation in exchange for $30,000 par value of its stock and its demand note for $45,000 and that the assets thus conveyed were set up on the books of this new corporation at $75,000 to balance the cost as shown by these books. It also appears that upon the conclusion of this transaction the corporation had nothing other than the assets received and that shortly thereafter and*2024 within the same taxable year $45,000 par value of additional stock was issued to petitioner in exchange for the note in question. The proof indicates that some months after the transfer of these assets to the new corporation there were several sales of the remaining authorized stock of this corporation to certain close business friends and acquaintances of petitioner with little or no knowledge on their part of its value, these sales being in small amounts and amounting to a total of $4,500 of the $100,000 of stock authorized, the balance being already subscribed by petitioner personally.
It will thus be seen that upon the conclusion of the sales of stock $94,500 had been issued to petitioner and $4,500 to certain of his friends. No sales were made on the market and there was no stock exchange in Birmingham.
It is quite evident that the $30,000 of stock and $45,000 promissory note of the Virginia corporation received by petitioner for the assets in question did not have a fair market value of $75,000 on that date. Not only would the collection of the note have deprived the stock of value, but the assets back of the note were worth little more than 50 per cent of its face value. *2025 It is shown that the note could not be discounted or accepted for credit purposes by a bank and it is quite evident to us from the record that there could have been no market for this stock "created by buyers willing to buy and sellers *549 willing to sell." . The few isolated sales to business friends can not be taken as establishing such a market. Cf. .
However, the question submitted to us for determination is the fair market value of the stock and note received in the transaction, at the time of their receipt, only in the event that we find that value to be in excess of $45,000. This is due to the fact that petitioner has specifically, in the pleadings and through his counsel at the hearing, admitted an aggregate fair market value of $45,000 for this stock and note as of the date received, and the realization of a taxable gain upon this basis, and has appealed only from so much of the deficiency determined as arises from the use of a fair market basis in excess of $45,000 in computing the gain derived. By this admission and the limitation of his appeal petitioner is*2026 bound.
Under the proof we have found that the fair market value of these assets at the time of their receipt was not in excess of $45,000 and hold that the deficiency should be recomputed upon that basis as admitted and agreed to by petitioner.