*188 Decision will be entered for the respondent.
Gain or Loss -- Basis -- Prior Owner -- Section 112 (b) (4), (5). -- Where one corporation permanently lost all of its properties through a sale to the state for delinquent taxes and another corporation acquired those properties by purchase from the state owners, the basis of the first corporate owner does not carry over to the other corporation.
*122 The Commissioner determined deficiencies in income tax as follows:
| Year | Deficiency |
| 1945 | $ 3,939.02 |
| 1946 | 2,655.87 |
| 1947 | 2,826.86 |
| 1948 | 2,702.06 |
| 1949 | 2,357.05 |
The only assignment of error on which the petitioner relies is that the Commissioner "erred in failing to find that the petitioner sustained a long-term capital loss on the sale of coal lands in 1945."
*123 FINDINGS OF FACT.
The petitioner was incorporated under the laws of West Virginia on October 6, 1930. Its returns for the taxable years were filed with the collector of internal revenue for the twenty-third district of Pennsylvania.
LaFayette Coal & Coke Company, hereafter called LaFayette, was incorporated under the laws of West Virginia on November 27, 1903. It acquired title to 2,732.27 acres of coal situated in Franklin District, Marshall County, West Virginia, with appurtenant mining rights, by two deeds, one dated December 23, 1907, conveying 2,649.52 acres for a recited consideration of $ 159,000, and another dated January 6, 1908, conveying 82 3/4 acres for a recited consideration of $ 4,965.
LaFayette was not an operating company but merely held the coal lands above *190 described. It had 2,732.27 shares outstanding at all times material hereto and at least 30 stockholders. It paid the real estate taxes assessed upon the coal through 1926 by means of annual stock assessments. The assessments ranged from 50 cents to $ 1 per share.
Some of the LaFayette stockholders failed to pay their annual assessments after 1926 and as a result LaFayette thereafter defaulted in the payment of its taxes.
All of the coal and mining rights of LaFayette were sold on December 9, 1929, by the Sheriff of Marshall County to the State of West Virginia for delinquent taxes because LaFayette had failed to pay the 1927 taxes on the coal. The properties could then be sold by the state for the benefit of its school fund and they were certified by the auditor of the state to Everett F. Moore, as Commissioner of School Lands for Marshall County, to be sold by him for the benefit of the state school fund. Moore instituted suit on January 24, 1931, to sell the properties, and the court, on July 15, 1931, directed Moore to make the sale if LaFayette failed to pay the taxes due within 30 days.
A. D. Williams, an attorney of Uniontown, Pennsylvania, who was secretary and treasurer*191 of LaFayette and of the petitioner, sent a letter as secretary of LaFayette to all of its stockholders. LaFayette had no intention and no means at that time or thereafter of redeeming the properties which it had lost through the tax sale. The letter, dated October 2, 1931, was as follows:
On May 12th, 1930, a letter was addressed to all stockholders of the LaFayette Coal & Coke Company calling for a 50 cents contribution, and stating that "a new corporation will be formed by those who pay their assessments and said new company will buy the property, or so much thereof as it wishes to retain, at the tax sale". This letter is being sent to all stockholders of LaFayette Coal & Coke Company, and it is hoped that the delinquent holders, will pay all their delinquencies and become holders in the new company.
*124 The new company, known as Coon Run Fuel Company, was incorporated under the West Virginia laws on October 6, 1930. The capital stock is $ 5,000.00 divided into 5,000 shares of $ 1.00 each.
The coal tract now belongs to the State of West Virginia, and the Commissioner of School Land for Marshall County, representing the State, will soon offer it for sale at public auction. *192 We hope to buy it for considerably less than the taxes against it for the years 1927, 1928, 1929, 1930 and 1931.
The money realized from the 50 cents contributions of May, 1930, was not sufficient to pay the 1929 taxes and was set aside, and after paying the expenses of forming the new company, license tax for 1931, printing and other expenses, there remains a balance available which is insufficient to purchase the property.
Today the board of directors met and instructed me to levy an assessment of $ 1.00 a share or acre, based on your original holding. Please remit at once, sending also your certificate of stock of LaFayette Coal & Coke Company, which is to be cancelled, and I will mail to you your certificate for the same number of shares in the new company. You will then be a stockholder in the new company and eligible to vote at the annual meeting to be held on October 15th next. The new stock will be made out just as this letter is directed, unless you instruct me otherwise. I am enclosing herewith notice and proxy for this meeting and also notice and proxy of the annual meeting of the LaFayette Coal & Coke Company, to be held on the same day. Please sign and return BOTH*193 PROXIES with your remittance. If you come to the meetings I will hand you your proxies and then you can vote in person.
What we need are:
1. A check payable to Coon Run Fuel Company for $ .
2. Your LaFayette Coal & Coke Company certificate for shares.
3. Coon Run Fuel Company and LaFayette Coal & Coke Company proxies, duly witnessed.
Stock of the petitioner was issued, at times not shown by the record, to the subscribers for it when they paid to the petitioner the amounts called for in the letter of October 2, 1931. All of its outstanding stock at the time it acquired the coal properties was owned by persons who then owned shares of stock of LaFayette. The petitioner made annual stock assessments to obtain funds with which to pay taxes on the coal properties and expenses. The petitioner eventually issued 1,453 1/3 shares of stock, all but two of which were issued to persons who also owned LaFayette stock. The two were issued after Williams' death to qualify two persons as officers.
The stockholders of the petitioner adopted the following resolution at an annual meeting on October 15, 1931:
WHEREAS, LAFAYETTE COAL & COKE COMPANY, a West Virginia corporation, *194 owned 2732 acres of coal land situate in Franklin District, Marshall County, West Virginia sold to said state for taxes in December 1929 and not redeemed, said coal land being fully described in two deeds to said LaFayette Coal & Coke Company, one from George Whyel, Trustee et al., dated December 23, 1907, and recorded in said Marshall County in Deed Book 120, page 376, and the other from Dwight E. Hamlin et al., dated January 6, 1908, and recorded in said Marshall County in Deed Book 120, page 412; and
WHEREAS, said coal land is about to be advertised for public sale by said state and sold to the highest bidder on November 9, 1931, or at some subsequent *125 date, and at least 1903.85 acres thereof, comprising a tract or field with frontage on the Ohio River, is necessary for the purpose of this company; and
WHEREAS, the Secretary-Treasurer stated that in order to secure title to said coal land it will be necessary for him to pay certain fees and expenses which cannot be set forth in detail in his treasurer's report, and requested the board to set a maximum price, including attorney fees and costs which he will be allowed to pay for the property.
NOW, THEREFORE, BE IT RESOLVED*195 that the Secretary-Treasurer of this company be, and he is hereby authorized and directed to purchase the state's interest in said coal land, provided the price thereof, including all commissions and attorney fees, shall not exceed $ 3,000.00; and that the treasurer be liable to account for the amount paid in gross but not in detail; and it was also
RESOLVED, that the Secretary-Treasurer be authorized to sell and deliver to the stockholders of Lafayette Coal and Coke Company all or any part of 2732 shares of the capital stock of this company at par, at any time within one year from this date, the money so raised to be used in the purchase of said coal land and the payment of necessary running expenses of the company, that the company borrow a sufficient amount of money to make up any deficiency in the amount required, and that the president and secretary be, and they are hereby, authorized and directed to execute the promissory notes of the company in an amount not to exceed $ 1,500.00; and it was further
RESOLVED, that the Secretary-Treasurer procure, if possible, a deed from LaFayette Coal and Coke Company for any right, title or interest which said Lafayette Coal & Coke Company*196 may have in the said 1903.85 acre tract fronting on the Ohio River, and agree, as consideration therefor, to pay the license fees of said Lafayette Coal & Coke Company to become due on July 1, 1932 and July 1, 1933, unless said Lafayette Coal & Coke Company shall be dissolved or abandoned before July 1, 1933.
Moore offered the properties formerly belonging to LaFayette for sale in November 1931, on January 2, 1932, on March 5, 1932, and on May 7, 1932. Williams at each sale bid $ 700 for the properties in the name of his secretary, Velma Karkosiak. The court refused confirmation after the first three sales because it deemed the price offered inadequate, but no other bid was received and on July 18, 1932, the sale to Velma on May 7, 1932, for $ 700 was confirmed and Moore gave her a deed for the property dated July 20, 1932. The petitioner paid the $ 700 bid price and expenses of the purchase. Velma took legal title to the property for the petitioner.
The following is from the minutes of a special meeting of the stockholders of the petitioner held on August 6, 1932:
The Secretary-Treasurer reported that on May 7, 1932 he purchased the 2732 acres of coal land formerly belonging *197 to Lafayette Coal & Coke Company, from the State of West Virginia through Everett F. Moore, Commissioner of School lands; the sale was confirmed by the Circuit Court of Marshall County, West Virginia, and a deed, dated July 20, 1932, was executed by said Everett F. Moore, as Special Commissioner, to Velma Karkosiak as trustee; that the accumulated taxes and penalties against the property for the years 1927, 1928, 1929, 1930, 1931, 1932 amounted to $ 9,798.16 or about $ 3.50 per acre; that he agreed to pay for the coal, including attorney fees and costs, $ ; that there *126 is still due and owing thereon the sum of $ 865.08. He further explained that the owners of only 1257 shares of Lafayette Coal & Coke Company stock have contributed to the purchase of the coal and that the shortage in the treasury was caused by the failure of the remaining stockholders, owning 1475 shares, to pay.
The treasurer then made the following report:
| Amount collected from prospective stockholders from October 16, 1931 | |||
| to date | $ 1,367.33 | ||
| 1931 | Payments From Treasury | ||
| Nov. 10, | W. H. Farwell Company -- Printing | $ 2.72 | |
| 1932 | |||
| Feb. 8, | Velma Karkosiak -- Notary fees | 2.75 | |
| Mar. 24 | W. H. Farwell Company -- Printing | .90 | |
| June 11, | State Auditor of W. Va. -- License Taxes | 50.00 | |
| Aug. 2, | W. H. Farwell Company -- Printing | 4.75 | |
| Aug. 2, | Maude Riggs -- Recording decree of sale | 1.75 | |
| Aug. 2, | A. D. Williams -- assessment credited on services | 310.00 | |
| On recovery of coal | 950.00 | 1,322.87 | |
| Balance in Treasury | 44.46 | ||
| "due on recovery of coal | 865.08 |
*198 The report of the Treasurer was approved.
On motion, duly carried, the president and secretary were directed to issue and deliver stock to the persons who contributed said money when their stock of the Lafayette Coal & Coke Company is delivered to that company.
Velma Karkosiak and LaFayette, as parties of the first part, executed a deed dated January 19, 1933, conveying to the petitioner 1,903.85 acres of the coal, with mining rights, which had formerly belonged to LaFayette and had been acquired by Velma from Moore.
Williams, as secretary, reported, at an annual meeting of the stockholders of the petitioner held on October 19, 1933, that there were 1,376.33 shares of stock of the company outstanding and that the company owned 2,732 acres. He further reported that the company owed $ 879.33 "on recovery of coal" and that the estimated taxes and other expenses would amount to about $ 550, making a total of $ 1,429.33 which had to be paid. A motion was then carried authorizing and directing the secretary-treasurer to collect 80 cents a share from the stockholders. It was further resolved at that meeting that the board of directors of LaFayette "be requested to execute and deliver *199 a deed to this company for any right, title and interest the LaFayette Coal and Coke Company may have in and to 828.41 acres not heretofore conveyed by it to this company."
Velma Karkosiak and LaFayette executed a deed dated May 14, 1934, conveying to the petitioner 828.42 acres of coal, with mining rights, which had formerly belonged to LaFayette and had been bought by Velma from Moore.
*127 The properties which Velma had acquired by the deed from Moore were transferred to the petitioner in two separate deeds because Williams was not sure that enough stock of the petitioner would be subscribed for to carry all of the coal, so he had the best acreage fronting on the river transferred first, and later, when more shares had been subscribed for he had the less desirable acreage transferred.
The petitioner, after May 14, 1934, sent a letter to its stockholders soliciting purchasers for unissued shares of its stock in order to obtain needed funds without a stock assessment. One paragraph of the letter was as follows:
If all delinquents had paid up we should have had enough money to pay our indebtedness and also this years' taxes, but we have been unable to collect $ 2,501.05 due on*200 old assessments and we owe a balance of $ 865.02 on recovery of the coal, largely attorney fees. The attorneys to whom it is long overdue are insisting upon payment.
LaFayette was dissolved by a decree of court on September 27, 1935, for nonpayment of license tax. The record does not show what happened to the LaFayette stock.
The petitioner sold all of its 2,732.27 acres of coal, with mining rights, in October 1945 for $ 68,300, of which one-fourth, or $ 17,075, was received in 1945 and the balance in later years at the rate of $ 1,138.33 1/2 monthly, with interest. The payments were completed in 1949.
The petitioner attached the following statement to its return for 1945 in which it reported a loss of $ 98,334.90:
The total assets of Coon Run Fuel Company consisted of the coal tract sold during the current year.
Said coal tract was purchased by LaFayette Coal and Coke Company, a West Virginia Corporation, in 1907 and 1908, at a total cost of $ 163,965.00, and was its only asset.
LaFayette Coal and Coke Company had no income and assessments were levied against its stockholders to cover payment of taxes and expenses incidental to holding the coal tract. Many of the stockholders*201 failed to pay their assessments and in order to protect the investment of the stockholders who were willing to pay said assessments, it was deemed advisable to permit the property to be sold for taxes.
The stockholders of LaFayette coal and Coke Company, who wished to continue, formed a new corporation known as Coon Run Fuel Company, and purchased the property at tax sale for an additional expenditure of $ 2,669.90.
| Original cost 1907-1908 | $ 163,965.00 |
| Additional Cost 1932 | 2,669.90 |
| 166,634.90 | |
| Sale price | 68,300.00 |
| Net Loss | 98,334.90 |
*128 The corporation had no other transactions during the year 1945. Expenses in connection with the sale will be disbursed during 1946.
The Commissioner, in determining the deficiencies, explained:
It is determined that you realized a long-term capital gain of $ 63,024.37 on the sale of coal lands in 1945, which long-term capital gain computed on the installment basis is taxable in the amount of $ 15,756.09 for the taxable year 1945.
He held that $ 12,330.89 of the profit was taxable in each of the years 1946, 1947, and 1948 and that the balance of $ 10,275.61 was taxable in 1949.
All facts stipulated by the parties are incorporated*202 herein by this reference.
OPINION.
The parties filed an eight-page stipulation of facts and ten attached exhibits. The stipulation provides that the facts therein "shall be taken as true, provided, however, that this stipulation does not waive the right of either party to introduce other evidence not at variance with the facts herein stipulated * * *." The only witness to testify was Velma Karkosiak Hudoc. She had been secretary to Williams from 1917 until his death on January 13, 1936, and thereafter became secretary of the petitioner. She gave some testimony for the petitioner which must be disregarded in so far as it may be at variance with facts stipulated. Furthermore, although she testified from memory to many details, she pointed out that the events had taken place many years ago and her recollection of them was not perfect, as was amply demonstrated. Thus, where her testimony bears upon facts shown by the stipulation, the latter appear to be far more reliable. Her testimony on some matters not covered by the stipulation is too uncertain to justify findings based thereon.
The petitioner contends that the properties which it sold in 1945 had cost LaFayette $ 163,965, that*203 cost was LaFayette's adjusted basis for gain or loss on the properties and the petitioner is entitled to use that same basis in computing the gain or loss from its sale of the properties in 1945. Section 113 (a) of the Internal Revenue Code, applicable to the year 1945, provides that the basis of property for the purpose of determining gain or loss in a case like this shall be the cost of the property to the taxpayer, with certain exceptions. One of the exceptions is in section 113 (a) (7) which provides that if property was acquired by a corporation, at the time this property was acquired by the petitioner, "in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them * * * 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 *129 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." The petitioner, relying upon that exception, refers to the Revenue Acts of 1932 and 1934 as the law applicable to the *204 year in which the transfer was made. The provisions of those laws to which it refers are identical and reference herein is to the Revenue Act of 1932. The tax sale deprived LaFayette of all of its properties without any compensation whatsoever and a pertinent inquiry is whether that loss was recognized "under the law applicable to the year" in which the loss occurred. If the loss was recognized it would wipe out LaFayette's basis on the properties and there would be nothing to carry over to the petitioner.
The general rule of section 112(a) of the Revenue Act of 1932 is that the entire amount of gain or loss sustained upon the sale of property shall be recognized. There are exceptions to that rule in subsection (b), but none of them applies to the facts in this case. The petitioner, in order to make out its case that it is entitled to use LaFayette's basis, necessarily contends that LaFayette made the transfer or exchange and received the stock of the petitioner. The petitioner never issued any of its stock to LaFayette, and that alone would render the exceptions in (b)(4) and (5) inapplicable. LaFayette did not, as a party to a reorganization, exchange the property here in *205 question pursuant to any plan of reorganization solely for stock or securities of the petitioner, another party to the reorganization. Subsection 112(b)(5) does not apply since it relates to property 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 and the amount of stock received by each is substantially in proportion to his interest in the property prior to the exchange. Other exceptions in subsection (b) need no discussion. The conclusion is inescapable that none of the nonrecognition provisions applies and whatever loss LaFayette had from the sale of its property for taxes was recognized and none of its basis would be left for the petitioner. Cf. Adwood Corporation, 15 T. C. 148, affd. 200 F. 2d 552; Helvering v. Nebraska Bridge Supply & Lumber Co., 312 U.S. 666">312 U.S. 666, following Helvering v. Hammel, 311 U.S. 504">311 U.S. 504; McCarty, et al., Executors v. Cripe, 201 F. 2d 679.*206
The evidence shows that LaFayette lost its properties completely through the tax sale and thereafter neither LaFayette nor its stockholders had any interest in the coal properties which could be exchanged or transferred. The petitioner did not acquire the coal properties either from LaFayette or the stockholders of LaFayette by exchange or transfer within the meaning of section 112(b) of the Revenue Act of 1932 but, on the contrary, purchased its properties *130 from Moore. Its basis for those properties is their cost to the petitioner. The Commissioner has determined that amount and the petitioner does not question that it is the correct cost of the properties to it. The record does not show whether or not the petitioner paid LaFayette anything for the doubtful advantage of having LaFayette join in the deeds, but the inclusion of any such amount in cost is not in issue.
The Commissioner contends that there are several other fatal defects in the argument of the petitioner that it is entitled to use LaFayette's basis, and that that basis has not been shown, but it is not necessary to consider those arguments since it is clear from what has been said above that there is no *207 merit in the petitioner's contention and the Commissioner's determination must stand.
Decision will be entered for the respondent.