*1076 1. Where the Commissioner sent a deficiency notice addressed in the name of a deceased taxpayer and the executors filed a petition with this Board based upon such deficiency notice, they not having filed with the Commissioner prior to the date of the mailing of the deficiency letter a notice that they were acting in a fiduciary capacity, the Board has jurisdiction of the proceeding brought by the executors.
2. Held, upon the evidence, that certain stock received by the stockholders in the reorganization of a corporation did not have a readily realizable market value at the time received by them and that they did not derive taxable gain upon such transaction.
*745 These are proceedings, duly consolidated for hearing and opinion, for the redetermination of asserted deficiencies in income taxes for the calendar year 1923 as follows:
| Docket No. | Amount |
| 36724 | $30,845.42 |
| 36725 | 14,232.92 |
| 36726 | 9,977.99 |
| 36727 | $3,858.72 |
| 36728 | 3,557.81 |
| 36729 | 2,818.49 |
It is alleged in each of the dockets that the*1077 respondent erred in adding an amount to taxable income as capital net gain. Such alleged amount in each docket is as follows:
| Docket No. | Amount |
| 36724 | $357,000 |
| 36725 | 149,800 |
| 36726 | 102,200 |
| 36727 | $35,000 |
| 36728 | 35,000 |
| 36729 | 21,000 |
The petition in Docket No. 36724 also contains assignments of error relating to the propriety of the respondent's examination of the books and records of the petitioner, and as to the statute of limitations, but these assignments of error were waived at the hearing.
The petition in Docket No. 36729 also contains an assignment of error relating to the propriety of the respondent's examination of the books and records of the petitioner, but this assignment of error was also waived at the hearing.
At the hearing upon the merits of these proceedings, respondent amended his answer in each of Docket Nos. 36726, 36727, 36728 and 36729 to affirmatively allege that he erred in treating the income derived from the exchange of stock of the Monarch Leather Co. and/or W. N. E. Leather Co., Illinois corporation, for cash and stock of the Monarch Leather Co., a Delaware corporation, as representing "capital net gain", and that the deficiencies*1078 should be increased by computing the tax on said income at rates applicable to "ordinary net income."
Previous to the hearing on the merits, counsel for petitioners moved that the petition in Docket No. 36724 be dismissed for lack of jurisdiction, and that the hearing in the first instance be confined to the question of the jurisdiction of the Board in that proceeding. *746 Such motion to thus confine the hearing was granted and at such hearing the motion to dismiss for lack of jurisdiction was taken under advisement. Thereafter hearing was duly had upon the merits of the consolidated cases. Our findings of fact are composed of a stipulation entered into between the parties, and other facts adduced at the hearings.
FINDINGS OF FACT.
The parties entered into the following stipulation:
On and after the date of the incorporation in 1904 of the Monarch Leather Company, an Illinois corporation (hereinafter called the Illinois Company) having an authorized and issued capital stock of five hundred shares of the par value of $100.00 each, said corporation was engaged in the business of manufacturers of leather and dealers in leather and hides in the City of Chicago up to*1079 the time of reorganization hereinafter mentioned. The stockholders of the Illinois Company at the time of the reorganization hereinafter mentioned were as follows:
| William N. Eisendrath | 255 shares |
| William B. Eisendrath | 107 shares |
| Edwin W. Eisendrath | 73 shares |
| Marion Eisendrath | 25 shares |
| Rose L. Eisendrath and | 25 shares |
| Edwin W. Eisendrath, as | |
| Trustees for Wm. N. | |
| Eisendrath, Jr. | |
| Isaac M. Bernstein | 15 shares |
At the time of the reorganization hereinafter mentioned, the officers and directors of the Illinois Company were as follows:
| Officers: | |
| William N. Eisendrath | President |
| William B. Eisendrath | Vice-President and Sec'y. |
| Edwin W. Eisendrath | Treasurer |
| Isaac M. Bernstein | Asst. Treasurer |
| Directors: | |
| William N. Eisendrath | |
| William B. Eisendrath | |
| Edwin W. Eisendrath |
Pursuant to a plan of reorganization a new corporation was incorporated under the laws of Delaware on September 10, 1923, with the name Monarch Leather Company (hereinafter called the Delaware Company.) The authorized capitalization of the Delaware Company was 25,000 shares of capital stock of the par value of $100.00 each. The officers and directors of the Delaware*1080 Company were as follows:
| Officers: | |
| William N. Eisendrath | President |
| William B. Eisendrath | Vice-President and Sec'y. |
| Edwin W. Eisendrath | Treasurer |
| Isaac M. Bernstein | Asst. Treasurer |
| Directors: | |
| William N. Eisendrath | |
| William B. Eisendrath | |
| Edwin W. Eisendrath |
*747 Said plan of reorganization contemplated that the Delaware Company would acquire the business and assets of the Illinois Company, and consequently, in order that the Delaware Company might be qualified to do business in Illinois, it was necessary to change the name of the Illinois Company before the transfer of its assets, which change was effected by the change of the name of the Illinois Company to W. N. E. Leather Company, this being a change in name only.
For the purpose of carrying out this plan, on September 17, 1923, the Delaware Company acquired all of the capital stock of the Illinois Company from the stockholders of the Illinois Company, and in exchange therefor the Delaware Company issued all of its capital stock to the stockholders of the Illinois company and paid cash to said stockholders as follows, such stock being issued and cash being paid to said stockholders pro rata*1081 in proportion to their ownership of stock in the Illinois Company immediately prior to said exchange; (in other words, for each share of stock of the Illinois Company, the stockholders of said company received 50 shares of stock of Delaware Company, plus $1,400.00 in cash.)
| Shares of | Cash | |
| Delaware | ||
| Stock | ||
| William N. Eisendrath | 12,750 | $357,000.00 |
| William B. Eisendrath | 5,350 | 149,800.00 |
| Edwin W. Eisendrath | 3,650 | 102,200.00 |
| Marion Eisendrath | 1,250 | 35,000.00 |
| Rose L. Eisendrath and Edwin | 1,250 | 35,000.00 |
| W. Eisendrath, as Trustees | ||
| for William N. Eisendrath, as | ||
| Trustees for William N. | ||
| Eisendrath, Jr. | ||
| Isaac M. Bernstein | 750 | 21,000.00 |
| 25,000 | $700,000.00 |
Pursuant to this plan on September 18, 1923, the Illinois Company changed its name to W. N. E. Leather Company. On the same day the Delaware Company was licensed to do business in Illinois. Pursuant to said plan, on September 20, 1923, the Delaware Company, as the sole stockholder of the Illinois Company (the name of which had been changed to W. N. E. Leather Company) caused the Illinois Company to convey all the assets of the Illinois Company to the Delaware Company in consideration*1082 of the payment of $1.00 and the assumption by the Delaware Company of all the liability of the Illinois Company.
It is further stipulated that petitioners, Marion Eisendrath, Docket No. 36727, Rose L. Eisendrath and Edwin W. Eisendrath, as Trustees, Docket No. 36728, and Isaac M. Bernstein, Docket No. 36729, had acquired by gift in 1922 their stock in the Illinois Company (the name of which was later changed to W. N. E. Leather Company), and that Edwin W. Eisendrath, Docket No. 36726, acquired by gift in 1922 twenty-three shares of the 73 shares of stock of the Illinois Company in 1922. It is further stipulated that the basis for determining gain or loss, if any, of all of the 500 shares of stock of the Illinois Company owned by the petitioners is the March 1, 1913 value thereof.
Respondent in determining the deficiency in tax now in controversy for the said taxpayers who acquired their stock by gift in 1922, as aforesaid, treated the gain that was determined by respondent as capital net gain, whereas if there was any taxable gain derived upon the exchange hereinabove described, said gain should be taxed as ordinary gain in respect of said shares of said taxpayers which were*1083 acquired by gift in 1922.
*748 It is further stipulated that at the time of said reorganization, William N. Eisendrath was the uncle of William B. Eisendrath and the father of Edwin W. Eisendrath, Marion Eisendrath and William N. Eisendrath Jr. and that Isaac W. Bernstein was a faithful and trusted employe who had for many years been associated with William N. Eisendrath. At said time William N. Eisendrath was the managing head of the Illinois Company and was sixty-nine years of age. Edwin W. Eisendrath, the son of William N. Eisendrath and the present president of the Delaware Company was at the time of the reorganization thirty-one years of age. William B. Eisendrath was 44 years of age at the time of said reorganization and had been actively engaged in the leather business for approximately twenty-five years.
It is further stipulated that between March 1, 1913, and the date of said reorganization there had never been any sales of stock of the Illinois Company and that since said reorganization there have been no sales of any stock of the Delaware Company and none of said stock, either of the Illinois Company or of the Delaware Company, has at any time ever been listed*1084 or dealt in on any stock exchange, and has never been held, dealt in or offered for sale by any dealer in stock or securities or by any of the petitioners.
The additions to surplus account of the Monarch Leather Company, Illinois corporation, whose name was changed to the W. N. E. Leather Company on September 18, 1923, during the period from date of organization in 1904 to September 15, 1923, inclusive, represented earned surplus only.
The Monarch Leather Company, Illinois corporation whose name was changed to the W. N. E. Leather Company on September 18, 1923, did not declare or pay any dividends during the month of September, 1923.
The Monarch Leather Co. of Illinois will hereinafter be referred to as the Illinois Co., and the Monarch Leather Co. of Delaware will hereinafter be referred to as the Delaware Co.
The value of each share of the outstanding stock of the Illinois Co. on March 1, 1913, was $1,410.03.
The salaries and expenses of the Illinois Co. were kept at the lowest possible figure and the tendency was to undervalue and to under-capitalize capitalize the assets of the corporation. Representative corporations in similar business paid salaries to executives*1085 far in excess of those paid by the Illinois Co.
The manufacturing plant was located on 76,623 square feet of land, which had complete facilities for water shipping, including docks and docking rights. This land was originally purchased in 1904 by Rose L. Eisendrath for $25,000. In 1910 she conveyed the land to the Illinois Co. at the same price at which she had bought it although in the interim the property had greatly appreciated in value. In 1910 it had a value of at least $1 per square foot. In 1919 and 1920 it was worth more than it was in 1910.
On January 1, 1919, the Illinois Co. had accumulated earned surplus of $1,538,828.20. The trade brands and good will of the Illinois Co. were worth in 1919 and 1920 several hundreds of thousands of dollars. They were never capitalized. The company also charged advertising costs to expense.
*749 It has been the consistent practice of both the Illinois Co. and the Delaware Co. to value inventories at cost or market whichever was lower.
The Illinois Co. carried its assets on its books at cost, but just prior to the reorganization its books were changed and fixed assets were appreciated to values fixed by expert appraisers. *1086 The Delaware Co. simply took over the assets at the values stated on the books of the Illinois Co. as thus changed.
The following tabulation shows the balance sheet of the Illinois Co. on September 19, 1923, before adjustment, and the balance sheet of the Delaware Co. on September 20, 1923, showing the assets as adjusted by the Illinois Co., except that it reflects payment of $700,000 to the stockholders of the Illinois Co.
| Illinois Co. - | Delaware Co. - | |||
| September, 19, 1923 | September 20, 1923 | |||
| ASSETS | ||||
| Current assets: | ||||
| Cash | $363,235.83 | $133,334.47 | ||
| Notes receivable | 2,770.08 | 2,770.08 | ||
| Accounts receivable | $377,126.71 | $377,562.65 | ||
| -Trade | ||||
| Less reserve for | 18,878.13 | 18,878.13 | ||
| discount | ||||
| 358,248.58 | 358,684.52 | |||
| Advances on | 19,092.00 | 19,092.00 | ||
| merchandise un- | ||||
| delivered | ||||
| 377,340.58 | 377,776.52 | |||
| Inventories: | ||||
| Merchandise | 1,031,237.70 | 1,031,237.70 | ||
| Tanning material | 25,000.00 | 25,000.00 | ||
| 1,056,237.70 | 1,056,237.70 | |||
| Investments: | ||||
| Corporation bonds | 9,400.00 | 9,400.00 | ||
| Corporation stock | 39,750.00 | 39,750.00 | ||
| Life ins. policies, | 28,211.40 | 28,211.40 | ||
| surrender value | ||||
| 77,361.40 | 77,361.40 | |||
| Deferred assets: | ||||
| Prepaid insurance | 7,200.00 | 7,200.00 | ||
| Accrued interest | 293.09 | 194.45 | ||
| Fixed assets: | ||||
| Land | 31,753.00 | 76,623.00 | ||
| Buildings | 297,061.60 | 355,879.37 | ||
| Machinery, fixtures, | 287,109.94 | 389,960.63 | ||
| etc. | ||||
| Automobile | 8,546.94 | 3,433.00 | ||
| 825,896.00 | ||||
| 624,471.48 | ||||
| Less reserve for | 393,065.44 | |||
| depreciation and | ||||
| amortization | ||||
| 231,406.04 | 1,200,000.00 | |||
| 2,115,844.72 | 3,660,770.62 | |||
| LIABILITIES | ||||
| Notes payable | 450,000.00 | |||
| Accounts payable | 243,615.45 | 244,051.39 | ||
| Capital stock | 50,000.00 | 2,500,000.00 | ||
| Surplus | 1,822,229.27 | 460,879.62 | ||
| Federal taxes | 1,822,229.27 | 5,839.61 | ||
| accrued | ||||
| 2,115,844.72 | 3,660,770.62 | |||
*1087 The values placed on the books of the Illinois Co. were in accordance with the following resolution adopted by the board of directors of the Illinois Co. on September 14, 1923:
Whereas, it is the judgment of the Board of Directors of this Company that the value of the good will of this Company is at least $1,200,000, and that the value of the land, buildings, machinery and fixtures of this Company is much *750 in excess of the value at which such property is carried on the books of this company.
NOW, THEREFORE, be and it is hereby resolved that the value of the good will of this company shall be carried on the books of this company at $1,200,000 and the value of the land of this company as now carried on the books of this company be increased to the value shown by the appraisal thereof made by J. H. Van Vlissengen and that the value of the buildings, machinery, fixtures and automobiles of this company as now carried on the books of this company be increased to the value thereof as shown by the appraisal thereof made by the American Appraisal Company.
The minutes of the first meeting of the board of directors of the Delaware Co., held on September 15, 1923, stated in*1088 part as follows:
Whereas in the opinion of the Board of Directors of this corporation said five hundred (500) shares of the capital stock of the said Monarch Leather Company (an Illinois corporation) have a value of at least three million two hundred thousand dollars ($3,200,000.) * * *
Those minutes were signed by William N. Eisendrath, chairman of the board, William B. Eisendrath, secretary of the meeting, and Edwin W. Eisendrath as a director.
The Delaware Co. recorded in its books and records the value of $3,200,000 as its investment in the stock of the Illinois Co.
On January 9, 1923, the Illinois Co. authorized a dividend of 50 percent. This dividend was paid. On April 25, 1923, the Illinois Co. authorized the payment of a 50 percent dividend, which was paid on May 1, 1923.
At a meeting of the Illinois Co. held on January 9, 1923, the following yearly salaries were authorized for the year 1923:
| William N. Eisendrath | $36,000 |
| William B. Eisendrath | 24,000 |
| Edwin W. Eisendrath | 15,000 |
| Isaac M. Bernstein | 15,000 |
On April 25, 1923, at a meeting of the directors of the Illinois Co., the following yearly salaries were authorized for the year 1923, *1089 commencing April 1, 1923:
| William N. Eisendrath | $39,000 |
| William B. Eisendrath | 27,000 |
| Edwin W. Eisendrath | 18,000 |
| Isaac M. Bernstein | 18,000 |
At a special meeting of the directors of the Delaware Co. held on September 24, 1923, yearly salaries for the remainder of the calendar year were authorized in the same amounts as just previously set forth. The Delaware Co. also authorized the payment of the same yearly salaries to those officials for the calendar year 1924.
The Federal capital stock tax return filed by the Delaware Co. with the Government showed the fair average value of the stock of *751 the Delaware Co. during the period beginning with its organization in September 1923, to June 30, 1924, as $70.41 per share. This valuation was based upon the value of the assets of the Delaware Co.
The Delaware Co., in its income tax return for that portion of the year 1923 that it was in existence, claimed depreciation upon an amount of $355,879.37, representing buildings, an amount of $402,215.35, representing machinery and equipment, and an amount of $3,433, representing autos.
In its income tax returns for the years 1921 and 1922, the Illinois Co.*1090 reported net incomes of $115,393.95 and $186,867.75, respectively, and in the combined return of the Illinois Co. and Delaware Co. for the year 1923 there was reported a net loss of $38,792.52.
The following tabulation shows the value of the tangible assets, the net income, the Federal taxes and the net income less Federal taxes of the Illinois Co. and the Delaware Co., as carried on the books of those companies - (the items for periods up to September 10, 1923, are from the books of the Illinois Co., while the items for periods after that date are from the books of the Delaware Co.):
| Period | Tangible | Net income | Federal | Net income |
| assets | taxes | less taxes | ||
| 1913 | $378,836.30 | $66,286.14 | $66,286.14 | |
| 1914 | 416,117.72 | 54,365.08 | 54,365.08 | |
| 1915 | 436,274.01 | 4,226.35 | 4,226.35 | |
| 1916 | 429,965.51 | 296,876.76 | $5,951.70 | 290,925.06 |
| 1917 | 697,475.03 | 484,538.70 | 192,904.60 | 291,834.10 |
| 1918 | 1,127,961.08 | 608,019.09 | 346,401.40 | 261,617.69 |
| 1919 | 1,440,278.20 | 663,808.11 | 236,217.87 | 427,590.24 |
| 1920 | 1,608,564.75 | 1 (84,077.86) | None | (84,077.86) |
| 1921 | 1,228,860.86 | 111,896.83 | 11,349.29 | 100,547.54 |
| 1922 | 1,404,565.90 | 181,573.43 | 23,358.47 | 158,214.96 |
| 1/1/23 to | 1,926,641.66 | 13,106.47 | None | 13,106.47 |
| 9/10/23 | ||||
| 9/10/23 | 1,856,989.66 | (36,104.37) | None | (36,104.37) |
| to 12/ | ||||
| 31/23 | ||||
| 1924 | 1,772,003.58 | 179,931.40 | 20,270.85 | 159,660.55 |
| 1925 | 1,902,140.12 | 154,188.84 | 19,811.17 | 134,377.67 |
| 1926 | 2,002,999.33 | 128,998.62 | 13,100.41 | 115,898.21 |
| 1927 | 2,107,439.22 | 434,638.92 | 57,667.96 | 376,970.96 |
During the World War the leather business was stimulated and the prices of raw materials went up, but thereafter there was a great deflation of values in the leather business. In 1921 the value of raw materials had dropped greatly. During the war the facilities of the leather industries had been expanded beyond the ordinary requirements of the industry so that when the deflation came many companies were forced to destroy or abandon some of such facilities. Some of the largest leather companies in the United States sustained losses running into millions of dollars. The Central Leather Co. lost $7,200,000 in 1923. Prior to that time it had embarked upon the policy of actually abandoning its plants. The N. R. Allen Co., of Kenosha, Wisconsin, was completely abandoned by its parent, *752 the Pencil Leather Co., and its machinery was moved to the other plants of the parent. The American Hide & Leather Co., which originally had about 24 plants, concentrated its activities between 1918 and 1923 into three or four plants. The Pfister & Vogel Leather Co., of Milwaukee, Wisconsin, lost $1,700,000 in the year 1923. The Northwestern Leather Co. in 1921 or 1922*1092 went into receivership. The trustees attempted to liquidate the company to the best advantage of the creditors, but did not receive a single offer. The creditors bought the company at the receiver's sale and the stockholders received nothing or only an insignificant amount. That company had capital stock of about $2,000,000 and its sales amounted to millions of dollars per year. The losses suffered by the Northwestern Leather Co. were due principally to the decline in the price of hides and therefore of the finished leather. The National Leather Co., affiliated with Swift & Co., the packers, suffered great losses in the year 1922 and continued to lose money after that. It had a surplus in 1919 of $4,000,000, and in 1921 it had a deficit of $21,000,000. That company had the advantage of more control over the prices of its raw products than an independent leather company would have, because of its affiliation with Swift & Co. None of those leather companies which were forced to close were sold as going concerns, nor was there any demand in the leather industry for the purchase of any of those plants as going concerns. Some of them were offered for sale. One plant in Chicago, *1093 formerly owned by William N. Eisendrath, which was a part of American Hide & Leather Co., was offered for sale by various agencies but could not be sold as a going concern. It was finally, in recent years, sold for some purpose other than leather manufacture. The plant had been held for sale for fifteen years.
To a large extent the customers of the Illinois Co. from 1913 through 1918 were the largest manufacturers of shoes, among them being the International Shoe Co. and the Endicott-Johnson Corporation. However, beginning with 1915 or earlier, those large shoe manufacturers, customers of the Illinois Co., began to make themselves independent of the leather companies to a large extent, by manufacturing their own leather. The independent leather companies were also confronted during the same period by a tendency on the part of the packing houses, which were the source of supply of the raw material for the leather companies, to go into the manufacture of leather. The packing houses created vast facilities and began to tan their own raw material into leather. These factors operated to the disadvantage of the independent leather companies and their securities which were listed*1094 experienced a great shrinkage in value.
*753 In September 1923, securities of leather companies were in great disfavor. That had been so since 1920. They never really recovered.
The success of the Illinois Co. was due principally to the guidance of William N. Eisendrath. In 1923, due to his age, there was little prospect that he would continue active very long. During the ten years prior to the reorganization, he entirely dominated the affairs of the company. He had a prestige in the industry independent of his connection with the Illinois Co. Former associates of William N. Eisendrath in other enterprises in the leather business had attempted to conduct separate business and had failed. The Illinois Co. had to resort to the personal signature of William N. Eisendrath with Chicago bankers and note brokers in order to finance its operations.
William B. Eisendrath was employed by the Federal Government during the World War as an expert consultant with regard to matters relating to shoe leather for Army shoes.
No offers were ever made by any one outside of the members of the Eisendrath family for the purchase of stock of the Illinois Co.
At the time the stockholders*1095 of the Illinois Co. received the stock of the Delaware Co. upon the reorganization, such stock of the Delaware Co. had no readily realizable market value.
The respondent held that the stock of the Delaware Co. received by the stockholders of the Illinois Co. had a readily realizable market value and found capital net gains as follows:
| William N. Eisendrath | $357,000 |
| William B. Eisendrath | 149,800 |
| Edwin W. Eisendrath | 102,200 |
| Marion Eisendrath | 35,000 |
| Rose L. and Edwin W. | 35,000 |
| Eisendrath, trustees for | |
| Wm. N. Eisendrath, Jr. | |
| Isaac M. Bernstein | 21,000 |
The respondent's explanation in the deficiency letter addressed to William N. Eisendrath, which is typical of the explanation to the other taxpayers herein involved, was as follows:
Capital net gain has been computed in accordance with the recommendation of the examining officer.
The total gain being greater than the amount of cash received in the reorganization, ($1,400.00 per share), you have a capital gain limited to and taxable to the extent of the cash received, said amount being $357,000 (255 shares at $1,400.00). See
On March 12, 1924, William*1096 N. Eisendrath filed with the collector of internal revenue his Federal income tax return for the calendar year 1923.
William N. Eisendrath died on December 9, 1926.
On January 27, 1928, the respondent mailed a deficiency letter to "Mr. William N. Eisendrath, Care of W. B. Eisendrath, 1127 W. *754 Division Street, Chicago, Illinois", asserting a deficiency of $30,845.42. This deficiency letter was the basis for the petition in Docket No. 36724.
On February 25, 1928, the executors of the estate of William N. Eisendrath filed with the respondent a certified copy of the letters testamentary issued to Rose L. Eisendrath, Edwin W. Eisendrath and Emanuel M. Lowenstein, appointing them executors of the estate of William N. Eisendrath. Such letters testamentary were issued by the clerk of the probate court of Cook County, Illinois, on January 17, 1927, but the copy submitted in evidence herein was not certified by the clerk of such court until February 20, 1928.
The petition in Docket No. 36724 was filed on March 24, 1928, by the executors of the estate of William N. Eisendrath. The petition was verified by each of the executors of the estate.
OPINION.
MCMAHON: *1097 We must first dispose of the motion of counsel for the petitioners to dismiss the petition in Docket No. 36724. It is the contention of the petitioners that since the taxpayer, William N. Eisendrath, was dead at the time the deficiency notice was mailed, the notice was sent to a nonexistent person and that the "taxpayer" erroneously named in the deficiency letter did not file the petition with the Board. Petitioners therefore contend that the Board does not have jurisdiction because section 274(a) of the Revenue Act of 1926 was not complied with. There are set forth in the margin the applicable provisions of the Revenue Act of 1926. 1
*1098 *755 In so far as we are advised, the respondent, prior to the time he mailed the notice of deficiency, which is the basis for the petition in this proceeding, had received no notice as provided in section 281 of the Revenue Act of 1926. The only notice of which we have any proof, was filed with respondent after the mailing of the deficiency notice. Therefore under subdivision (d) of section 281 the deficiency notice which he mailed to the deceased taxpayer was sufficient for the purposes of section 274(a).
We also consider that the executors of the deceased taxpayer were authorized under section 274(a), supra, to file the petition with the Board, since they stand in the place of the deceased taxpayer.
In
* * * We are inclined to think, *1099 however, that the court below was right in determining that the two actions were substantially between the same parties, inasmuch as a receiver of a national bank, in all actions and suits growing out of the transactions of the bank, represents it as fully as an executor represents his testator. * * * [Italics supplied.]
In
* * * There is nothing in the record which indicates that respondent proceeded under section 280. We have not been favored by a brief from counsel for petitioner but are under the impression that he relies on
See also
Since the parties who filed the petitioner herein on behalf of the estate of William N. Eisendrath were the duly appointed executors *756 of such estate, we conclude that we have*1101 jurisdiction of the proceeding brought by them. See Rule 6 of the present rules of practice before this Board which provides:
The proceeding shall be brought by and in the name of the person against whom the deficiency [or liability, as the case may be], is asserted by the Commissioner, or a fiduciary legally entitled to institute a proceeding on behalf of such person. (Sec. 281, Revenue Act of 1926). * * *
The case of
The motion of counsel for petitioners to dismiss the proceeding in Docket No. 36724 for lack of jurisdiction is hereby denied.
The petitioners having waived other issues raised in the pleadings, the only question left for decision is whether gain was derived by the stockholders of the Illinois Co. upon the reorganization of that company whereby they received, for every share of stock of the Illinois Co. which they owned, 50 shares of the stock of the Delaware Co. plus $1,400 in cash.
There are set forth in the margin applicable provisions*1102 of the Revenue Act of 1921, as amended by the Act of Congress of March 4, 1923. 2
*1103 The stockholders of the Illinois Co. received, in addition to the stock of the Delaware Co., no "other property" upon the reorganization than money. In the instant proceeding under section 202(c) of the Revenue Act of 1921 the gain is to be computed in accordance with subdivisions (a) and (b) of section 202 (that is, by taking into consideration the total amount realized in the disposition of the stock of the Illinois Co. including the readily realizable market value, if *757 any, of the stock of the Delaware Co.), but the gain to be recognized for tax purposes is not in any event to be greater than the amount of money received by the petitioners from the Delaware Co.
It has been stipulated that the basis for the determination of gain or loss upon the disposition of the stock of the Illinois Co. is the March 1, 1913, value thereof, which value was $1,410.03 per share. The respondent apparently determined that the stock of the Delaware Co. received by the stockholders of the Illinois Co. had a value at least equal to the March 1, 1913, value of the stock of the Illinois Co. since he has held that the full amount of the cash received by each stockholder constituted taxable*1104 gain. Petitioners contend that the stock of the Delaware Co. at the time it was received by them had no readily realizable market value and that since the amount of cash received did not exceed the March 1, 1913, value of the stock of the Illinois Co. no taxable gain was derived upon the reorganization.
At the outset it is interesting to examine the intent of the Congress in enacting the provisions of the Revenue Act of 1921 relating to the recognition of gain or loss upon the exchange of property. In the report of the Ways and Means Committee on the Revenue Bill of 1921 there is contained the following:
EXCHANGES OF PROPERTY FOR OTHER PROPERTY
The bill (subdivision (d), p. 6) provides new and explicit rules for determining gain or loss where property is exchanged for other property. Under existing law "when property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *." Probably no part of the present income-tax law has been productive of so much uncertainty and litigation or has more seriously interfered with those business*1105 readjustments which are peculiarly necessary under existing conditions. Under existing law the presumption is in favor of taxation. The proposed bill modifies that presumption by providing that on an exchange of property for property no gain or loss shall be recognized unless the property received in exchange has a*758 definite and readily realizable market value; and specifies in addition certain classes of exchanges on which no gain or loss is recognized even if the property received in exchange has a readily realizable market value. [Italics supplied.]
The Finance Committee Report upon the same bill contains similar language.
We shall first determine what is meant by the term "readily realizable market value."
The word "readily" is defined in Webster's New International Dictionary, 1929, as "In a ready, or prompt manner; quickly, easily."
Article 1564 of Regulations 62, relating to the Revenue Act of 1921, provides in part as follows:
* * * Property has a readily realizable market value if it can be readily converted into an amount of cash or its equivalent substantially equal to the fair value of the property. In other words, the property received*1106 in exchange must be readily marketable at substantially its fair value in order that a gain or loss be recognized. * * *
In
That provision of the regulations was also approved in
* * * There is no question as to the intendment of the statute, or regulations pertaining thereto, which, I conceive, contemplates that property, real, personal, or mixed, shall not be subject to income taxes unless on transfer the property received in exchange has a readily realizable market value; and it is invested with such value if it can be readily converted in an amount of cash or its equivalent substantially equal to its fair value (see article 1564, Reg. 62); and it is stated that whether property has a readily*1107 realizable market value depends upon the facts and circumstances in each particular case.
Tested by this rule, I am constrained to hold that there was no evidence that the oil stock could have been readily sold in the market at approximately its par value. No sales were made of the 250 shares allotted to husband and wife, respectively, and consequently there were no gains or profits. Indeed, at such time the enterprise was involved in uncertainty as to the outcome. It cannot in fairness be regarded as income, in my opinion, until a market value is established or unless it appears that a certain amount of gain is realizable therefrom. * * *
* * * The evidence before me, as I see it, outweighs the prima facie showing of the United States, and the conclusion is not, I think, unwarranted that it preponderatingly appears that the shares of stock received by Mrs. Clarke and her husband did not have a realizable market value, and that no tax is assessable thereon until there is a transfer, exchange, or sale upon a basis of fair market value. [Italics supplied.]
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*759 In *1108
* * * The term "readily realizable market value" has been used in the revenue acts where the recipient of property in an exchange is to be taxed on the gain resulting from the exchange. Before such a transaction is considered to give rise to taxable gain under the statute, the property received in the exchange must have a readily realizable market value, i.e., be practically the equivalent of cash. * * * [Italics supplied.]
To the same effect are
In the instant proceeding the evidence shows that at the time the stock of the Delaware Co. was issued to the stockholders of the Illinois Co., and theretofore, the independent leather companies, such as the Delaware Co., had been subjected to severe competition by the shoe manufacturers and by the packers, who had also gone into the manufacture of leather; that during the war the leather companies had overexpanded and as a consequence in 1923 there was an oversupply of leather-tanning facilities; that many of the larger leather companies had in 1923 and years*1109 just previous thereto suffered tremendous losses; that in September 1923, the stocks of leather companies were in disfavor; that there were no sales of stock of the Illinois Co. from March 1, 1913, until the date of reorganization; that none of such stock has ever been listed or dealt in on any stock exchange and has never been dealt in or offered for sale by any dealer in stock or securities or by any of the petitioners; that there have never been any offers to buy such stock outside of the members of the Eisendrath family; and that in the year 1923 the combined income tax return of the Illinois Co. and Delaware Co. showed a net loss.
Three well qualified witnesses testified as to the marketability of the stock in question.
Edwin W. Eisendrath, one of the petitioners herein, who is now president of the Delaware Co. and who has been in the leather business since 1913, testified that the stock of the Delaware Co. had no readily realizable market value in 1923.
David Stern, who is vice president of A. G. Becker & Co., a general investment banking house loaning money to corporations and selling stocks and bonds as underwriters, and which did business with quite a few leather*1110 companies, including the Illinois Co. and the Delaware Co., testified that in 1923 the securities of leather companies were in great disfavor and that the stock of the Delaware Co. in September 1923, was absolutely not marketable or salable as a whole.
Arthur W. Newton, vice president and loan officer of the First National Bank of Chicago, the largest national bank in Chicago and the second largest bank in size in Chicago, who has been connected *760 with that bank for over forty-four years, testified that the stock of the Delaware Co. did not have a readily realizable market value in September 1923. Newton further stated that the stock of the Delaware Co. would not be acceptable as collateral for a bank loan. The First National Bank of Chicago had been doing business with the Illinois Co. since 1907 and made loans to both the Illinois Co. and the Delaware Co. Annual statements had been furnished by those companies to the bank. Newton, in connection with his duties as loan officer of the bank, has had occasion to accept collateral on loans and has had experience with the sale of stock of close corporations which he received as collateral on loans. Newton was, in 1923, *1111 trustee of the Northwestern Leather Co., referred to in our findings of fact. The object of that trust was to liquidate the company to the best advantage of the creditors. Difficulty was experienced in liquidating that company and the stockholders received little if anything in the liquidation.
The opinions of these witnesses are well corroborated by the other evidence adduced, and their testimony was not contradicted. The opinion testimony of these witnesses is entitled to consideration. In
That the opinion testimony of plaintiff and expert opinions of other witnesses is entitled to consideration is amply supported by the decisions of this state.
In
The proof satisfies us that the notes had no readily realizable market value at the time of their receipt. Two bank officials, familiar with the business and commercial standing of the partnership of Ginocchio, Costa & Co., and the individual credit ratings of its members, stated in no uncertain terms that there was no market for the notes. * * *
*1112 In
* * * The uncontradicted testimony of a real estate dealer, well qualified to testify as to real estate values in and around Miami, establishes that lots in Tatum's Ocean Bay Park had no readily realizable market value. * * *
See
* * * In respect to such value, the opinions of witnesses familiar with the territory and its surroundings are competent. * * * Here as elsewhere, we are driven to ask the opinions of those having superior knowledge in respect thereto. * * *
Considering the testimony of these witnesses together with the other facts adduced, it is our opinion, and we have found as a fact, that at the time the stockholders of the Illinois Co. received the stock in the Delaware Co. such stock had no readily realizable market value within the meaning of the statute.
*761 The respondent contends that there were valuable assets in the Delaware Co. giving the stock of that company a readily realizable market value. *1113 He points to the large values at which the assets were carried on the books of the Delaware Co. He also points to the fact that at a meeting of the board of directors of the Delaware Co. held on September 15, 1923, it was stated that the board of directors of that company were of the opinion that the stock of the Illinois Co. had a value of at least $3,200,000, and that the Delaware Co. reported in its books and records the value of $3,200,000 as its investment in the stock of the Illinois Co. From this the respondent argues that the stock of the Delaware Co., after the reorganization, must have been worth $2,500,000, since the Delaware Co. then owned precisely the same assets as were owned by the Illinois Co. except for the $700,000 paid the stockholders of the Illinois Co. at the time of the reorganization. Respondent further points out that in its capital stock tax return the Delaware Co. showed the fair average value of its stock during the period September 1923 to June 30, 1924, as $70.41 per share. However, these facts do not prove that the stock had a "readily realizable market value." In this respect the instant proceeding is similar to *1114
* * * We are satisfied that under the conditions that prevailed at the time the petitioner received his stock it could not have been marketed for more than a moninal amount and that because of such unusual conditions its fair market value can not be said to be measurable by either its intrinsic value under normal conditions or by earnings of past years.
In
We think our views expressed in that case [
None of the cases cited by respondent are governing. None of them involves the determination of "readily realizable market value" except
Here the petitioners, upon whom rested the burden of proof in the first instance, adduced evidence, which, in our opinion, overcame the presumption in favor of the correctness of the respondent's determination that the stock in question had a readily realizable market value at the time in question. Thereupon the burden shifted to the respondent to go forward with the evidence. This the respondent has failed to do. See
Since we have held that the stock of the Delaware Co. had no readily realizable market value at the time in question and since the amount of cash, $1,400, which the stockholders of the Illinois Co. received in exchange for each share of their stock in the Illinois Co. does not exceed the basis, $1,410.03, of each share of such Illinois Co. stock, no taxable gain was derived by such stockholders upon the transaction in question.
Reviewed by the Board.
Decision will be entered*1117 under Rule 50.
GOODRICH concurs in the result.
VAN FOSSAN, SEAWELL, and ADAMS dissent.
Footnotes
1. William B. Eisendrath; Edwin W. Eisendrath; Marion Eisendrath; Rose L. Eisendrath and Edwin W. Eisendrath, Trustees for William N. Eisendrath, Jr., and William N. Eisendrath, Jr.; and Isaac M. Bernstein. ↩
1. Loss. ↩
1. SEC. 200. When used iv this title -
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(b) The term "fiduciary" means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.
SEC. 274. (a) If in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within 60 days after such notice is mailed (not counting Sunday as the sixtieth day), the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. * * *
SEC. 281. (a) Upon notice to the Commissioner that any person is acting in a fiduciary capacity such fiduciary shall assume the powers, rights, duties, and privileges of the taxpayer in respect of a tax imposed by this title or by prior income, excess-profits, or war profits tax Act (except as otherwise specifically provided and except that the tax shall be collected from the estate of the taxpayer), until notice is given that the fiduciary capacity has terminated.
(b) Upon notice to the Commissioner that any person is acting in a fiduciary capacity for a person subject to the liability specified in section 280, the fiduciary shall assume, on behalf of such person, the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person), until notice is given that the fiduciary capacity has terminated.
(c) Notice under subdivision (a) or (b) shall be given in accordance with regulations prescribed by the Commissioner with the approval of the Secretary.
(d) In the absence of any notice to the Commissioner under subdivision (a) or (b), notice under this title of a deficiency or other liability, if mailed to the taxpayer or other person subject to liability at his last known address, shall be sufficient for the purposes of this title even if such taxpayer or other person is deceased, or is under a legal disability, or, in the case of a corporation, has terminated its existence. ↩
2. SEC. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that -
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(b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but -
(1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market value or price; [Italics supplied.]
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(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized -
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(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization. The word "reorganization," as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form or place of organization of a corporation, (however effected); * * *
(e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2) and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange. ↩