*1074 1. Four individuals transferred property to petitioner in exchange for all of its capital stock. The variation between the percentage of the value of assets transferred and the percentage of stock received by each is less than 1 percent in each instance. Held, each transferor received stock in the petitioner corporation in an amount substantially in proportion to his interest in the property prior to the exchange: the exchange came within the provisions of section 112(b)(5), Revenue Act of 1928.
2. The petitioner sold in 1930 certain notes it had received in the exchange, at a loss. Held, the basis of the notes to petitioner is the same as it would have been in the hands of the transferors pursuant to section 113(a)(8), so that petitioner sustained a loss in the taxable year in the amount claimed.
*174 This proceeding involves a deficiency in income tax for the year 1930 in the amount of $14,944.63, which results from action of the Commissioner in disallowing a claimed loss of $134,334, resulting from the sale of five notes of International*1075 Coal Products Corporation. The amount of the loss disallowed was added to the petitioner's taxable income with the above stated deficiency resulting.
This matter was first heard by this Board in May 1934, and a memorandum findings of fact and opinion was entered May 21, 1936. It was then determined that the petitioner, in 1930, sold five notes of International Coal Products Corporation of the total face amount of $134,400, for a net amount of $66. It was also determined that the sale was bona fide. Decision was entered for the respondent, however, on the grounds (1) that the cost of the notes to petitioner was not shown, and (2) that the notes had become worthless prior to the time of the sale.
On appeal to the Circuit Court of Appeals for the Second Circuit the decision of this Board was reversed, the Circuit Court holding that the notes had not become worthless prior to their sale and that the matter should be remanded to this Board for determination of the basis to petitioner of the notes involved.
Pursuant to the mandate of the Circuit Court there was a further hearing in this proceeding in November 1937.
FINDINGS OF FACT.
A stipulation of facts, together with*1076 certain schedules, has been filed by counsel for the respective parties in this proceeding and testimony *175 has been received in evidence. The stipulated facts and schedules are incorporated herein by reference and are adopted as part of the findings of fact. The material facts are as follows:
In the latter part of the year 1926, four daughters of C. Ledyard Blair, Mrs. Clark, Mrs. Pyne, Mrs. Gambrill, and Mrs. Hamilton, hereinafter referred to as the "transferors", each deposited in a joint fund with the Equitable Trust Co. of New York, securities and cash owned by each to be transferred later to the Gladstone Corporation in exchange for its capital stock. The Gladstone Corporation, the petitioner, was organized under the laws of Delaware in the latter part of 1926 and was authorized to issue 1,000 shares of capital stock without par value. Certain amounts of cash were paid out of this fund to C. Ledyard Blair on account of indebtedness to him by the transferors and certain amounts were paid from the fund to the transferors. These payments were made to adjust the respective contributions of each party in an effort to equalize the transfers to be made from each to the*1077 Gladstone Corporation.
Thereafter, as of January 1, 1927, all of the capital stock of petitioner corporation, 1,000 shares, was issued to the four transferors, 250 shares being issued to each transferor in consideration for the securities and cash transferred to petitioner corporation by each. The securities transferred, as shown in Exhibit A attached to the stipulation, had respective values as of January 1, 1927, as are set forth in the exhibit. The total value of the cash paid and securities transferred to petitioner, as of January 1, 1927, is $5,237,743.13. The value of the assets transferred by each transferor, as of the above date, is as follows:
| Mrs. Clark | $1,257,232.56 |
| Mrs. Pyne | 1,331,057.33 |
| Mrs. Gambrill | 1,335,303.32 |
| Mrs. Hamilton | 1,314,149.92 |
| 5,237,743.13 |
At the time of the transfer to petitioner of the securities and cash, the petitioner had no other assets and it had no liabilities.
Included in the securities transferred to petitioner were five notes of International Coal Products Corporation, one in the face amount of $96,000 and four in the face amount of $9,600, total, $134,400. The cost of these notes to the individual transferors*1078 was the face amount of each note; total cost, $134,400. The petitioner sold these five notes in 1930 for a net amount of $66.
The stock of the petitioner corporation has never been listed on any stock exchange or traded over the counter. There have been no transfers of any shares of Gladstone Corporation stock and the original stockholders still hold all the stock of petitioner. As for the *176 securities owned by petitioner after transfer to it of assets by the stockholders, many of those securities are not listed on any exchange nor traded in over the counter but are stocks of corporations closely held.
The petitioner claimed a loss in 1930 of $134,334 resulting from the sale of the five notes of International Coal Products Corporation. Respondent denied the claimed loss and there resulted a deficiency of $14,944.63.
OPINION.
HARRON: The question involved in this proceeding is, What is the correct basis to the petitioner corporation of the five notes of International Coal Products Corporation which were sold in the taxable year for determining the amount of the loss resulting? The petitioner contends, first, that the cost to the petitioner of the "International" *1079 notes is the same as the cost of the notes to the stockholders of petitioner, relying upon sections 112(b)(5) and 113(a)(8), Revenue Act of 1928. 1 In the alternative, petitioner contends that the cost base of the notes in question is the actual value of such notes at the time of transfer to petitioner under section 113(a) and the petitioner contends that the actual value of the notes was $134,400, relying on the stipulation that if the president of International Coal Products Corporation were called upon to testify he would testify that the notes had at least the value of the face amounts of the notes as of January 1, 1927.
*1080 All of the capital stock of the petitioner corporation was issued to its stockholders in return for the assets they transferred so that immediately after the exchange they were in control of the corporation as "control" is defined in section 112(j).
*177 Determination of the issue in this proceeding turns on whether the exchange came within the provisions of the last part of section 112(b)(5), which reads:
* * * but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
The table set forth below shows in the case of each transfer the value of the assets to each transferor at the time of the transfer; the percentage of the interest of each transferor in the total assets transferred to the petitioner by each; the percentage of stock in the petitioner corporation received by each in the exchange.
| Value of assets at time of transfer | Percentage of total | Percentage of Gladstone stock issued | Difference between percentages | |
| Percent | Percent | Percent | ||
| Mrs. Clarke | $1,257,232.56 | 24.0033 | 25 | -.9967 |
| Mrs. Pyne | 1,331,057.33 | 25.4128 | 25 | +.4128 |
| Mrs. Gambrill | 1,335,303.32 | 25.4939 | 25 | +.4939 |
| Mrs. Hamilton | 1,3 4,149.92 | 25.0900 | 25 | +.0900 |
| 5,237,743.13 | 100.0000 | 100 |
*1081 The above figures show that the amount of the stock in the petitioner corporation received by each transferor is substantially in proportion to his interest in the property prior to the exchange. The variations between the percentage of the value of assets transferred by each of the transferors and the percentages of stock received by each, are slight and the variation is less than 1 percent in each case. It therefore appears that the exchange of certain assets for stock in the petitioner corporation came within the provisions of section 112(b)(5). The slight variation in the percentage of the value of the assets transferred by each and the percentages of stock received by each does not here result in any material disproportion between the value of the assets owned by separate transferors, prior to the transfer, and the value of their respective beneficial interests in the combined assets after the transfer. Cf. . While it appears that there is a slight variance in each case of the interest in assets, before the transfer and after, it was the intention of the transferors, as appears from the testimony of the*1082 secretary of the Gladstone Corporation, that by certain adjustments made before the exchange of assets for stock took place, the proportionate share of each transferor in the total assets to be transferred should be equalized. To achieve this objective, certain payments were made out of the cash paid into a joint fund, to C. Ledyard Blair, the father, in payment of the *178 indebtedness of the transferors to him and other payments were made to certain of the transferors. When these adjustments had been made and the assets transferred to the petitioner, in exchange for all of its capital stock, it appears that the condition of the transferors was substantially the same after as before the exchange, so that the condition set forth in section 112(b)(5) has been met and it is so held.
It is accordingly also held that the petitioner received on January 1, 1927, property in exchange for its stock, pursuant to an exchange within the provisions of section 112(b)(5) and that since the notes of International Coal Products Corporation were part of the property received, the cost basis for determining the loss resulting from the sale thereof is the same for the petitioner as it would*1083 be in the hands of the transferors, namely, $134,400, pursuant to the provisions of section 113(a)(8).
Having so held, it is not necessary to consider the alternative contention of the petition that under section 113(a) the cost base to it of the notes in question is the actual value of such notes at the time of transfer to petitioner.
Decision will be entered for the petitioner.
Footnotes
1. SEC. 112. (b) Exchange solely in kind. -
* * *
(5) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR. - No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
* * *
SEC. 113. (a) Property acquired after February 28, 1913. - 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 -
(8) SAME - CORPORATION CONTROLLED BY TRANSFEROR. - If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112(b)(5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. ↩